The International Monetary Fund has slashed its projection for Canadian economic growth this year, the latest sign of how badly the country's prospects have buckled under the weight of its first-half slowdown and lingering oil shock.
In its quarterly World Economic Outlook update released Thursday morning, the IMF forecast that Canada's real gross domestic product would grow just 1.5 per cent this year, down sharply from 2.2 per cent in its April outlook. It's the third successive quarter that the global financial body has reduced its 2015 forecast for Canada, and by far its most drastic reduction – reflecting mounting evidence that the Canadian economy dramatically underperformed expectations in the second quarter of the year.
The cut in the IMF's Canadian outlook comes as senior Bank of Canada officials begin their deliberations on next week's interest rate decision. The central bank will issue the latest of its eight-times-a-year rate announcements on Wednesday, amid growing speculation that the bank may cut its key rate by another one-quarter percentage point, to 0.5 per cent, to try to stimulate an economy that appears to have failed to rebound meaningfully from the oil shock woes that dragged it into decline in the first quarter.
While the IMF didn't provide much detail on its revised Canada outlook (its summer and winter updates are much shorter documents than the full World Economic Outlook reports it issues each spring and fall), it did highlight a North America-wide slump in the first several months of the year that has taken a serious bite not just out of the region's growth prospects for 2015, but the entire world's. In addition to the Canada cut, it slashed its U.S. forecast for 2015 to 2.5 per cent from 3.1 per cent – and lowered its global growth projection to 3.3 per cent from 3.5 per cent.
"The unexpected weakness in North America, which accounts for the lion's share of the growth forecast revision in advanced economies, is likely to prove a temporary setback," the report said. It blamed the downturn on a series of "one-off factors, notably harsh winter weather and [U.S.] port closures," as well as "a strong downsizing of capital expenditure in the oil sector."
"The underlying drivers for a gradual acceleration in economic activity in advanced economies – easy financial conditions, more neutral fiscal policy in the euro area, lower fuel prices, and improving confidence and labour market conditions – remain intact," it said.
Still, the IMF warned that the impact from the plunge in oil prices continues to linger. It said that while oil prices have rebounded, it still sees an average price for crude of $59 (U.S.) a barrel this year, in line with its April assumptions. Meanwhile, the drop in investment in the oil sector has been deeper than forecasters had anticipated, while the expected boost to consumers from lower fuel costs has been slow to materialize.
The oil slump's damage was evident earlier this week in the release of Canada's international trade numbers for May, which showed a near-record trade deficit of $3.3-billion. Exports of energy products, which made up nearly one-quarter of Canada's exports by value last year, are down 35 per cent for the year to date compared with the same period a year ago. Meanwhile, non-energy exports, which had been on the rise last year, posted their fourth decline in the first five months of this year.
The poor May trade numbers convinced economic forecasters to conclude that Canada's GDP likely contracted again in the second quarter, making for two consecutive quarterly drops – the traditional technical definition of a recession. That's a far cry from the Bank of Canada's most recent forecast, in April, that the economy would rebound to a 1.8-per-cent annualized growth rate in the second quarter.
The weaker-than-expected economic performance has fuelled a growing belief that the Bank of Canada will cut rates again, on top of its surprise quarter-percentage-point cut in January. The bond market is now pricing in a 50-50 chance that Bank of Canada Governor Stephen Poloz will announce a rate cut Wednesday (and an 80-per-cent chance that he'll do so by the following rate decision in September); economists at five of the country's six major banks now see a cut next week as more likely than not.
But National Bank of Canada's economics team argued that while a rate cut is a distinct possibility, the country's economic woes are being overstated by the problems of a single sector.
"The recent poor showing is neither Canada-wide nor economy-wide. The downturn is in energy and was concentrated in Alberta in [the second quarter]. Though GDP may have edged down for a second consecutive quarter, it would be hard to call this a recession," it said in a research report Thursday.
"Though the Bank of Canada could cut its policy rate once more on July 15 … that would be a matter of beefing up insurance coverage. The Canadian economy is not moribund."