Startling Near-Halt to Economy Stokes Fear of Canadian Recession
(Bloomberg) -- Canada is on recession watch after its economy almost stalled at the end of last year.
Gross domestic product grew by just 0.1 percent in the fourth quarter, or 0.4 percent annualized, Statistics Canada said Friday. It’s a weak enough number that could easily be revised into a contraction as new data come in.
And there may be no immediate relief to start 2019. Most economists have been expecting the first three months of this year will be even weaker, because of the impact of oil production cuts mandated by Alberta’s government.
While the slowdown was expected, the picture is much bleaker than anyone anticipated with weakness extending well beyond the battered energy sector -- reflecting a confluence of headwinds from the impact of higher interest rates to global trade tensions denting business and household confidence. Though the labor market is still quite strong, Friday’s numbers suggest Canada may have few reserves to weather any new shocks.
“Judging by the employment numbers, we’re not close to a recession but we’re in a sluggish growth environment where one more piece of bad news that isn’t currently out there could certainly send us there,” Avery Shenfeld, chief economist at CIBC Capital Markets, said in a telephone interview.
The economic accounts data released Friday were bad all around. Consumption spending grew at the slowest pace in almost four years, housing investment fell by the most in a decade, business spending dropped sharply for a second straight quarter, and domestic demand posted its largest decline since 2015. The only thing that kept the nation’s economy from contracting was a build-up in inventories as companies stockpiled goods -- which doesn’t bode well for future growth.
The question now is what the weaker-than-expected data suggests about the economy’s ability to rebound to more normal growth levels. Most economists expect it will.
There are clear transitory factors at play, such as the decline in oil prices at the end of last year and Alberta’s temporary production cuts. Prices for crude have recovered this year, and the mandatory curtailments are being dialed back.
Another thing giving policy makers comfort is a robust jobs market, with employment up more than 300,000 over the past year. A contraction in output -- if there is one -- isn’t sufficient to be classified as a recession without job losses. For example, Canada’s economy shrank for two straight quarters in 2015 -- what some call a “technical recession” -- but the weakness wasn’t broad-based enough to be designated as recessionary.
Elephant Next Door
The U.S. economy, meanwhile, is doing well, with annualized growth of 2.6 percent in the fourth quarter, and that should continue providing a lift to Canadian exports. While growth rates in the two countries can diverge in any one quarter, Canada’s economy usually keeps pace with the American one over time. Canada hasn’t slipped into a recession without the U.S. also contracting since 1951.
Which is why most economists are still expecting the current soft patch will come to an end this spring, with growth forecast to accelerate closer to 2 percent for the rest of the year.
“There is no denying that Canada is facing a perfect storm at present,” Brian DePratto, a senior economist at Toronto-Dominion Bank, said in a report Friday on why an outright recession is unlikely. “It remains most likely that the current slump will give way to a modest growth recovery in the second half of 2019,” he said, while acknowledging a technical recession is a possibility.
One effect from the slowdown will probably be for the Bank of Canada -- which has raised interest rates five times since 2017 -- to rethink further hikes from here, economists said. This may help to bolster confidence. Other reasons to believe underlying growth will remain robust include a recent acceleration in population, DePratto said.
No one, however, expected the economy would need to come back from such a low point.
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