Canada in a recession: analyst

Dollar to fall to lowest level in decade, Bank of America report predicts

Sapped by the oil slide, Canada’s economy appears headed toward recession, economists warn — and one says we’re already there.

Emanuella Enenajor of Bank of America Merrill Lynch says the Canadian economy appears to have shrunk by 0.6 per cent in the second quarter after a drop of the same amount in the first, “suggesting a recession.”

Enenajor also predicts the Canadian dollar will tumble to 70 cents US by the end of the year.

Other analysts are being more cautious, though many say a surprise contraction in gross domestic product in April brings the risk of recession closer and could force Bank of Canada Governor Stephen Poloz to again cut interest rates.

Canada’s economy has shrunk for four straight months for the first time since the last recession in 2008-2009. Lingering damage from the oil plunge, with few signs of the positive effects of a weaker currency and cheaper fuel means Poloz will probably cut rates again this year, said economist Andrew Grantham at Canadian Imperial Bank of Commerce.

Kash Pashootan said the sharp drop in oil prices over a short period is causing a domino effect beyond the energy sector.

“That certainly increases the probability of the Bank of Canada having to cut rates more than we thought two months ago,” said Pashootan, a portfolio manager at First Avenue Advisory of Raymond James Ltd. in Ottawa.

Bank of America’s Enenajor said she expects that the downturn will hammer the Canadian dollar — knocking it down to 70 cents US by the end of the year, the lowest level in more than a decade.

“The economy has surprised to the downside this year, and appears to have entered a recession in (the first half of ) 2015, even after policy easing in January,” she said in a note to clients.

Poloz on Sunday compared his interest-rate cut earlier this year to surgery made necessary by plunging oil prices. Any increase in household debt would be a side effect, he said.

“If the doctor says you need surgery to avoid death, the side effects usually don’t deter you, you just go ahead and manage them somehow,” Poloz said.

The April GDP decline was a surprise to all 20 economists in a Bloomberg survey and countered the Bank of Canada’s view that the damage from lower oil was probably “front-loaded.”

The possible need for more stimulus comes before a federal election in October, in a year when Prime Minister Stephen Harper says his main fiscal goal is tighter policy to balance the budget. Harper has also said past tax cuts will aid business and consumer spending.

There were weak spots beyond the energy industry in April. Retailing declined 0.2 per cent after a 0.3 per cent gain in March and manufacturing fell 0.2 per cent.

The Bank of Canada’s April 15 economic forecast predicted GDP would grow at a 1.8 per cent annualized pace between April and June.

Before the next rate decision on July 15 Poloz will also see the bank’s own quarterly report on business sentiment, and Statistics Canada reports on the trade balance and employment.

Many economists view consecutive quarterly declines in output as a benchmark for recession.

However, Paul Ferley, assistant chief economist at Royal Bank of Canada, said the case for a true recession is weakened because Canada’s declines aren’t widespread enough and there is strength in the labour market.