The latest in a string of strong economic indicators suggests the Canadian economy has pulled out of its 2015 skid – probably not enough to silence the talk about a first-half recession, but possibly setting course for a second-half resurgence.
Statistics Canada reported that, month-over-month, retail sales rose 0.6 per cent in June, adding to May's 0.9-per-cent rise. While the gain was entirely a result of price increases – on a volume basis, sales were flat in the month – the solid retail performance caps a run of impressive growth from several key components of the Canadian economy. Together, they add up to a rebound in gross domestic product in June, after the first-quarter GDP contraction of 0.6 per cent annualized was followed by further negative readings in April and May.
Forecasters are now pegging June's month-over-month GDP growth in a range of 0.2 to 0.4 per cent, which would make it the first month of positive GDP since the end of 2014.
Still, most economists say it won't be enough to pull the second quarter out of the hole the economy dug itself into in April and May. They believe Canada is still poised to post its second consecutive quarter of economic contraction – a commonly used definition for what is referred to as a "technical recession."
"I think the mild rebound in June is simply too late in the quarter to save Q2," said Douglas Porter, chief economist at Bank of Montreal.
The impressive run of June growth indicators started with the merchandise trade report released early this month, which showed a stellar 6.3-per-cent surge in exports over May – a gain so big it wiped out all the declines from the first five months of the year. Since then, the prospects for a strong June GDP number were bolstered by last week's report of a 1.2-per-cent month-over-month rise in manufacturing sales, and news this week that wholesale sales gained 1.3 per cent.
Statscan's next GDP report, for June and for the second quarter as a whole, comes out Sept. 1 – almost precisely in the middle of the lengthy federal election campaign leading up to the Oct. 19 vote. Even with the strong June data, economists think second-quarter GDP likely contracted by at least as much as it did in the first quarter, and probably a little more. The prospect of a two-quarter GDP slump has already been a political hot button, as opposition parties have been quick to blame the ruling Conservatives for presiding over Canada's slide into another recession, while the government has tried to defend its economic record.
The downturn has also kicked off spirited discussions in Canadian economic circles about how to properly define a recession. Most economists agree that the two-consecutive-quarters rule of thumb relied on by laymen is overly simplistic, and that true recessions show evidence of broad-based economic decline beyond the GDP numbers. At the very least, most economists' criteria for identifying a recession include a downturn in employment – and the Canadian economy has added more than 100,000 jobs this year.
But, regardless of how the 2015 first-half slump is labelled, June's apparent rebound is fuelling optimism that the Canadian economy has turned a corner, setting the tone for a much improved second half of the year. Importantly, the strong June performance means the economy entered the third quarter running at a brisk pace – which may give it crucial momentum to exceed expectations. So, while the second-quarter contraction could be a little worse than the Bank of Canada's most recent estimate in mid-July of 0.5 per cent annualized, third-quarter growth may already be on track to handily beat the central bank's forecast of 1.5 per cent.
"A strong end to the second quarter has a bigger impact on the trend heading into the third quarter, and the hand-off suggests that growth in Q3 can come in around 1 per cent higher than the Bank of Canada currently expects," said Canadian Imperial Bank of Commerce economist Nick Exarhos.
While Canada's newfound momentum has benefited from the acceleration of the U.S. economy, economists are keeping a wary eye on intensifying economic headwinds elsewhere – most notably the deepening slowdown in China. Since that country is a major consumer of natural resources, concerns about its economy are driving down global prices for key Canadian commodity exports, especially oil – which threatens to weigh on Canada's fragile turnaround.
But most economists remain confident that the growth of the huge U.S. economy, by far Canada's largest export market, will prove resilient to the slowdown in China and other emerging markets, helping keep Canada's expected second-half rebound on track.
"The U.S. is a relatively closed economy, and it sailed through the 1998 emerging-market crisis with flying colours. And, U.S. domestic demand fundamentals look quite solid, with consumers in robust shape and housing continuing to grind ahead," Mr. Porter wrote in a research note.
And strong consumer-spending numbers could continue to underpin Canadian growth in the month ahead. Economists noted that household consumption looks to have accelerated to an annualized pace of nearly 3 per cent in the second quarter.
"The current low-interest-rate environment remains supportive of consumer spending, particularly for categories related to big-ticket items such as autos and housing. And despite the challenges that the Canadian consumer faces, particularly in oil-producing regions, it is poised to be a key driver of economic growth yet again this year," said Toronto-Dominion Bank economic analyst Admir Kolaj.