Interest rates could face fall
Shrinking economy brings ‘R’ word to mind, concerned analysts believe
Economic analysts can be relentless in their quest for balance. Not too hot, not too cold.
Just-right growth — tempered by balanced risks to inflation and a slim margin between a country’s production output and its potential ability — makes for a healthy economy.
That said, it might be time for those forecasters to put their overcoats back on. The temperature has been heading lower and could stay there for while.
And now, some of those analysts are starting to think of the “R” word to describe the four straight months of below-zero GDP so far this year. It’s the first time a string of declines like that has happened since the 2008-09 recession began winding down.
A couple more months of the same and Canada could, indeed, be in one again. In other words, two back-to-back quarters of contraction equals recession.
So, given that scenario, could interest rates be the next to drop?
It’s starting to look a lot more likely.
“With the fallout from the oilprice shock far from over, we now expect the Bank of Canada to cut rates by 25 basis points,” said David Madani, Canada economist at Capital Economics, although a cut is not the consensus view.
Whatever the decision, the central bank will let us know on July 15.
Cold comfort for Canadians that the labour market has eked out some net gains in recent months, and that the jobless rate seems to have stabilized around 6.8 per cent over the same period.
For one thing, while overall inflation is still mild, prices for core items — what we need for everyday life — are still too high, especially for those at the Bank of Canada who follow such gyrations and aim for a happy medium of two per cent for both readings to determine where interest rates should land to keep prices on target.
And then there’s our overbearing neighbour, and biggest economic partner, who isn’t pitching in as much as we had hoped. The United States has had its own problems firing up gross domestic product, what with harsh winter weather and port strikes clogging output.
With the first quarter of 2015 done, and another one just begun, any economic growth — even mild — would serve Canada and the U.S. well.
Trouble is, the rest of the world isn’t helping us much either. China’s economy, the second-largest after the U.S., is cooling and cashstarved-Greece is threatening to choke Europe’s growth, and perhaps ours.
That’s just for starters. Developing nations are also scraping for growth after some impressive gains following the global recession.
For this country, of course, the collapse in global oil prices set the table for the “atrocious” start to the year, as Bank of Canada governor Stephen Poloz famously warned — even before we started getting the firm numbers — and pre-emptively, and surprisingly, cut the central bank’s key interest rate in January to drive home his point.
“It looks like that may have been the appropriate adjective after all — even though he got plenty of abuse for using that word,” said Douglas Porter, chief economist at BMO Capital Markets. “It’s beginning to look like it was bang-on.”
But what Poloz didn’t anticipate was the prolonged impact and damage to the economy that the energy rout would deliver.
“The hit from oil to the Canadian economy doesn’t appear to be as ‘front-loaded’ as the BoC and governor Poloz had expected,” said Andrew Grantham, an economist at CIBC World Markets.
On Tuesday, Statistics Canada said GDP declined 0.1 per cent in April, while most economists had expected the economy to actually grow by the same amount.
In the previous month, GDP eased back 0.2 per cent, while February produced a 0.1 per cent decline and January output fell 0.2 per cent.
“After the 0.6 per cent annualized contraction in Q1 GDP, the incoming data suggest that the economy contracted by a similar margin in Q2, much weaker than the Bank of Canada’s forecast of positive 1.8 per cent annualized growth,” said Madani, at Capital Economics.
The hope has been for manufacturing pulling up its socks — thanks in large part to a lower Canadian dollar — and for the U.S. economy to keep churning out enough growth to support exports south of the border.
“At the start of the year, we thought there would be two opposing forces in the Canadian economy — the downward pull from energy on the weak side. And on the strong side, we thought manufacturing would get a nice lift from a recovering U.S.,” BMO’s Porter said.
“Well, we certainly got the negative and we’re still waiting for the positive.”
Cold comfort indeed.