Last week’s economic growth report from Statistics Canada casts a cloud over the country’s economic outlook for 2015 (see this TD Economics report). Real GDP fell by 0.6% (annualized) in the first quarter, considerably worse than even forecasters of a pessimistic bent were expecting. Digging into the details, it is clear that the slump in global oil prices is taking a measurable toll on Canada’s energy-centric economy. Non-residential investment plunged by 15% in Q1, led by sharp cuts in capital-spending by the oil and gas industry. (In recent years, the energy sector has accounted for more than one-third of all non-residential investment spending in Canada.) Harsh winter weather also played a role in the gloomy Q1 report -- consumer spending came in below consensus, as many Canadians apparently decided to stay indoors.
Economists define a “recession” as two consecutive quarters of declining real GDP. We are half way there, and some recent economic data signal further softness into the second quarter.
For one thing, the US economy has also disappointed: real GDP contracted by 0.7% (annualized) in Q1 (bad winter weather and a west coast port strike contributed to this outcome), and the growth rate for Q4 of 2014 was revised down.
Second, the epic oil and gas downturn has by no means run its course, with Canadian energy companies likely to announce more large-scale spending cuts and layoffs in the coming months – a trend that will hurt many other industries as well as households that depend, directly and indirectly, on a robust energy sector.
Third, the Canadian labour market has clearly lost steam, buffeted by job losses in eight of the last 17 months. Overall employment growth is running at less than 1% on an annual basis. The US job market is now much perkier than our own.
Finally, Canada has seen a significant deterioration in its trade and current account deficits amid plummeting oil prices and soggy markets for other commodities like natural gas, coal and base metals. The current account deficit widened dramatically in Q1, reaching a near record level of almost $18 billion. Looking ahead, it is unclear to what extent stronger growth in non-energy exports – including service exports but also manufacturing, forestry and agri-food – will offset the weakness stemming from low oil prices. The Bank of Canada and private sector forecasters have been calling for a revival of non-energy exports, but achieving this depends on solid and sustained economic momentum in the United States.
At this point, Canada looks to be headed for a year of very tepid GDP growth, well below 2% and possibly dipping to 1%. Although we do not expect a second quarter of shrinking economic output in Q2 (which would constitute a “technical” recession), such a scenario cannot be entirely ruled out, given the dismal Q1 result and the ongoing struggles in the energy sector.