‘R’ word challenges economists and politicians
Canada sank into what’s technically considered a recession in the first half of the year, but some economists are hesitant to throw around the “R” word, worried that doing so could erode consumer confidence and lead to a self-fulfilling prophecy.
Data released Tuesday by Statistics Canada for the second quarter of 2015 (April to June) show the Canadian economy shrank for two consecutive quarters, generally considered to be the definition of a recession.
But a number of other economic indicators often used when categorizing recessions — such as job numbers and consumer spending — raise some doubt about the latest economic slump and suggest that if Canada did slide into recession, it was very mild.
With an election underway in which the economy looms large, it’s enough to leave voters scratching their heads about the state of the economy and where it’s heading — let alone wondering who should lead the government that must grapple with it.
“I’ve been very reluctant to jump on the bandwagon and call it a recession because it can have a bit of self-reinforcing effect,” said Doug Porter, chief economist with BMO Financial Group.
“If everybody starts throwing around the R-word, then it can actually be a self-fulfilling prophecy where consumers can become much more cautious, and business can even become a bit more cautious and it can kind of feed off of itself.”
Here’s what the hard numbers look like: Canadian real gross domestic product contracted 0.5 per cent on an annualized basis in the second quarter amid a slump in oil prices, StatsCan reported, following a 0.8 per cent decline in the first quarter.
While much of the pain is being felt in the oil and gas sector, several other industries saw negative growth at various periods of the second quarter, including manufacturing, construction and utilities.
There is, however, some positive news. After shrinking for five consecutive months, the economy grew 0.5 per cent in June on a monthly basis — the largest increase since May 2014 — though it wasn’t enough to produce positive growth for the second quarter.
So, if there was a mild recession, the Canadian economy may have already pulled out of it.
Here’s what you need to know: How do you define a recession?
Porter said he’s more inclined to define a recession as “a sustained period of broad-based economic decline,” than to rely on two consecutive quarters of shrinking real GDP.
The economic slide in the first half of 2015 “barely clears that hurdle” of declining GDP for two consecutive quarters, he said, and doesn’t actually meet it in a number of other areas.
Spending and employment have held up so far in 2015, with about 102,000 net jobs created in Canada in 2015. Porter said he’s anxious to see the jobs data for August when this information is released on Friday.
Mike Moffatt, assistant professor at Western University’s Ivey Business School, said using two straight quarters of declining growth as a definition provides “realtime analysis” and an “objective measure.”
The C.D. Howe Institute, an economic think-tank, has its own Business Cycle Council made up of experts from across Canada to determine exactly when the country slips into and emerges from recession, and the severity of it based on a classification system.
The council defines a recession as “a pronounced, pervasive and persistent decline in aggregate economic activity” that factors in the duration, amplitude and scope of a downturn. Do experts think we’re in one?
“I don’t think it quite qualifies personally” (as a recession), Porter said.
Moffatt said he believes the economy was, indeed, in recession because it met the two-quarters standard.
Derek Holt, vice-president with Scotia Economics, said Canada was not in a recession in the first half of the year.
“Back-to-back quarterly contractions in GDP are a necessary but not sufficient condition for a recession call. The contractions — if they occur — are tracking at a small pace, and they are not coincident with a broadbased collapse in the economy,” Holt said in a research note.
The C.D. Howe’s council won’t come to a determination on whether it was a recession until all of the data have been revised and finalized, which could take several months.
Craig Alexander, co-chair of C.D. Howe’s council and former chief economist for TD Bank, said the “jury is out” on whether Canada was in a recession because some of the broader Statistics Canada data on important economic metrics “is not strongly compelling.”
“If this is a recession, boy this is really a strange recession,” Alexander said. Should Canadians worry?
The economic downturn is very much a regional story, Moffatt said, with Alberta and its oil-based economy (which are definitely in a recession) being battered, with Newfoundland and Labrador, and Saskatchewan also feeling some pain.
“If you live in Toronto, Montreal or Vancouver, you’re probably not noticing it as much,” Moffatt said.
There are a handful of important areas where Canadians could feel the pain of a downturn, whether or not it’s considered a recession, he said.
Job losses in some sectors, especially in oil and gas and spinoff industries, will have a direct impact on many Canadians, while eroding confidence from others who worry about their jobs, he said.