Canada's economy has chalked up its longest slump since the Great Recession amid trouble from the oil patch to the factory floor.
The economy contracted 0.2 per cent in May, Statistics Canada said Friday, marking the fifth consecutive month of decline. It also showed a surprise drop in manufacturing of 1.7 per cent.
The Bank of Canada is projecting a GDP loss of 0.5 per cent for the second quarter, following a 0.6-per-cent loss in the first quarter.
But the hope is that the weaker Canadian dollar and lower interest rates will still spark a rebound in the second half of the year, one Canadians have been waiting on despite anticipation since January of stimulated exports and manufacturing activity.
Soft American demand in the first quarter proved a drag on expected growth while the oil and gas sector further demonstrated heavy influence on manufacturing.
"The oil and gas sector accounts for 25 per cent of all of our capital spending. It's not the largest driver of manufacturing activity in Canada, but it's been responsible for a lot of the growth in recent years," said Mike Holden, director of policy and economics at Canadian Manufacturers and Exporters, an industry association. "You cut out that growth driver and suddenly you're left in a situation that looks like this."
Manufacturing has disappointed expectations this year. The sector has grown only once so far, by 0.2 per cent in March, and has overall seen a 2.3-per-cent decline from the same period last year.
"There's been a lot of cancelled or delayed oil sands projects and energy sector projects in Alberta and across the country," Mr. Holden said. Those projects would have fed demand in manufacturing for machinery and equipment, all of which has disappeared because of the poor outlook for energy and mining. The durable manufacturing sector is down by 4.8 per cent from last May, tracking a 6.9-per-cent decrease in the energy sector.
Though manufacturing had the biggest decline, it wasn't the only sector hurting. May numbers saw three out of five goods-producing industries and 11 out of 15 service industries post declines.
"What's notable is the breadth of weakness in May," said Douglas Porter, chief economist at BMO. "It was spread across a number of sectors and we can't just point to the resource sector. Some of the other declines are tough to explain away."
And yet analysts remain optimistic for a positive showing in June, though perhaps with less emphasis on manufacturing.
"We think it will be a solid month for GDP in June," said Mr. Porter, citing strong auto and home sales and robust hours-worked employment numbers. "We don't want to exaggerate the numbers, but June should be positive."
It won't be enough to reach the 1 per cent needed to swing the second quarter as a whole into the positive, however, which still leaves Canada with two consecutive quarters of economic contraction. By one technical definition, that would place Canada in a recession.
"What we are experiencing now would be a mild recession," said Randall Bartlett, senior economist at TD. He points to a classification system used by the C.D. Howe Institute's Business Cycle Council, which unofficially acts as a deciding body on business cycle dates in Canada. The system ranks recessions on a scale of 1 to 5, where category 1 recessions are defined as having only a short, mild drop in GDP and no decline in quarterly employment. "We would be in a category 1 recession right now," he said.
But most economists agree brighter times are around the corner, with the economy moving past the negative effects of a host of temporary factors, ranging from bad weather to plant closings to wild fires. Increased spending for the coming federal election, the recent $3-billion payout in government childcare benefits and the continuing low run of the loonie are expected to provide stimulus.
"We expect to see growth of 1.5 to 2 per cent for the second half of 2015 and roughly 2 to 2.5 per cent for next year," Mr. Bartlett said. "It's not stellar growth, but it's definitely better than what we are seeing right now."
With files from Ahmad Hathout