Recession would be short-lived

The Canadian economy contracted in Q1 2015, which has dimmed its growth outlook for the year, according to the Conference Board of Canada, which expects the economy to grow by just 1.6% in 2015.

That would be Canada’s worst showing since 2009, and part of the reason is lower oil prices, a near-record trade deficit and uncertainty in global markets.

“There has been much speculation on whether the Canadian economy has dipped into recession,” says Matthew Stewart, associate director of National Forecast for the Conference Board of Canada.

“We expect the numbers to show economic growth tracking close to zero in the second quarter, as the economy flirts with recession. But even if Canada slips into mild recession, we expect it to be small and short-lived, with the economy picking up through the rest of the year.

“There are also positive signs of growth as the economy added 16,000 jobs a month on average over the first half of the year, which is better than what we saw through most of 2014.”

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In 2015, says the Conference Board, business investment will be the weakest part of the economy. It will be held back by deep cuts in the energy sector, as oil and gas firms are expected to chop their investment by almost one-third—plunging from $68.8 billion last year, to $52.5 billion this year.

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Firms outside of the energy sector also remain hesitant to invest, with purchases of machinery and equipment suffering a substantial decline in the first quarter of the year. Plus, there was a decline in building permits in Q1 that suggests a downturn in commercial construction.

Overall, business investment will drop by close to 7% this year.

And household spending is expected to weaken throughout 2015, despite savings for consumers at the gas pump and federal tax cuts. That’s due to:

soft employment growth;
weak wage gains;
high level of household debt; and
job losses in oil-producing provinces.

Altogether, those factors will limit growth in consumer spending to 2.1% in 2015.

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The silver lining

One of the bright spots in the Conference Board’s outlook is the expected performance of the trade sector. Despite disappointing numbers to date, Canada’s trade sector may make a significant contribution to overall economy growth.

Meanwhile, the U.S. economy is forecast to show momentum through the rest of 2015. So, with the Canadian dollar trading well below US$0.80, exports could manage growth of 3.1%.

Economic growth should improve next year, says the Conference Board. But, with Canada’s potential output growth slowing due to an aging population and lackluster investment, real GDP growth isn’t expected to exceed 2.3% at any point over the next five years.

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