David ParkinsonKevin Van Paassen
Canadians will find out this week if their economy slipped into a so-called "technical recession" in the first half of the year. But more importantly, they will also see how fast the economy is pulling out of it.
On Tuesday, Statistics Canada releases Canada's gross domestic product figures for both June and the second quarter. In all likelihood, it will report that the economy shrank slightly in the quarter, just as it did in the first quarter of the year – thus meeting the criteria for one commonly used indication of a recession, two consecutive quarters of GDP contraction.
Other more precise observers prefer to call that a "technical recession," saving the unqualified "recession" designation for more widespread declines in economic activity beyond the mere GDP numbers. Indeed, many argue that with much of Canada's non-resource (and non-Alberta) economy doing relatively well and with national employment still growing, this slowdown doesn't look like a true recession at all. Nevertheless, a second straight quarterly drop in GDP will mark the weakest half-year stretch since the Great Recession, no matter what label we slap on it.
On the other hand, Tuesday's numbers will also likely showcase the first positive monthly GDP reading of the year – evidence that the growth slump, whether you call it a recession or not, may be in the rear-view mirror.
The consensus estimate from economists is that Canada's economy dipped at an annualized rate of 0.8 per cent in the quarter as a whole, adding to the first quarter's 0.6-per-cent drop. But they believe June itself put a distinctly silver lining on the quarter, with an estimated 0.2-per-cent month-over-month growth – and the strength seen in previously released economic indicators for the month suggests that the number could be even higher.
While it almost certainly won't be enough to escape a second successive negative quarterly reading, the turnaround at the end of an otherwise dismal first half of the year will provide optimism about the second half.
"A solid June report should give way to modest growth in [the third quarter]," Bank of Nova Scotia economist Derek Holt said in a research report. "While energy [capital spending] is likely to undergo another round of cuts in the wake of the sharp drop in oil prices over the past couple of months, its share of the economy is in the low single digits, and alone cannot sustainably destroy growth.
"There is considerable resilience elsewhere in the economy," he said.
With much of Canada's economic hopes for this year pinned on U.S. demand for Canadian non-energy exports, it's notable that the U.S. second-quarter growth estimate was revised upward to a 3.7-per-cent annual rate last week, higher than even the most optimistic expectations. It suggests the environment for a resurgence in Canada's non-energy exports is even healthier heading into the third quarter than many exports had expected.
And economists note that even within the second-quarter numbers, there should be evidence that the economy looked healthier than it did in the first quarter.
"Unlike the [first quarter] decline, which was more than accounted for by a 1.6-per-cent drop in final domestic demand, much of the [second quarter] weakness is expected to reflect a sizable pull-back in the pace of inventory building," Royal Bank of Canada's economics team said in a research note. It said it expects that final domestic demand – a combination of household and government spending and business investment – rebounded to a 0.7-per-cent gain in the second quarter, thanks to strong gains in consumer spending and residential investment. And while business investment probably suffered another steep drop in the continued fallout from the oil shock, it should be only about half as severe as the 15.5-per-cent plunge in the first quarter.
As if the recession debate of the second-quarter GDP report weren't enough to chew on this week, Canadians will also get a couple of key looks at how the third-quarter economy is evolving.
Friday's release of the August Labour Force Survey will provide an update on the critical question of the health of the job market. Indeed, the fact that employment has maintained modest growth this year is the key reason why many economists say Canada hasn't experienced a true recession, despite the first-half GDP slowdown.
However, economists expect the labour market may have taken a breather in the dog days of summer, as market turmoil dragged down commodity prices and fuelled renewed uncertainty. The consensus estimate is that the economy shed about 2,500 net jobs in the month, after adding 6,600 in July – essentially flat readings in both cases.
The July merchandise trade report comes out Thursday. After a stellar trade report in June, in which exports surged 6 per cent and the trade deficit shrank to a seven-month low of $476-million, economists believe the deficit widened to about $1.4-billion in July, giving back a bit of June's strong growth. While the renewed drop in oil prices are expected to weigh on the value of energy exports, further declines in the Canadian dollar likely helped non-energy exporters.
David Parkinson