PM avoids recession talk
Mulcair says plan isn’t working
OTTAWA — It’s a potentially pivotal moment in the federal election that had federal leaders pirouetting on the campaign trail on Monday.
Statistics Canada is to release the second-quarter gross domestic product figures this morning and they are expected to show negative growth, which would meet the technical definition of a recession.
On Monday, as the fifth week of the campaign opened, Stephen Harper dodged questions about the definition of a recession. The Conservative leader, running on his party’s economic stewardship, said he won’t get into a discussion of economic technicalities.
NDP Leader Tom Mulcair appeared to hedge his bets Monday, allowing for possibility that even if the statistics agency doesn’t confirm a technical recession, that’s no reason to let the prime minister off the hook for what he says is the country’s weak financial situation.
Meanwhile, a leading economist questioned all of the political posturing over the economy that’s taken place in the last week.
Don Drummond, the Stauffer-Dunning Fellow at the School of Policy Studies at Queen’s University and a former chief economist at TD Bank, said the partisan parsing of economic indicators is misleading.
Whether the economy contracted or grew by a small fraction of a percentage point, or whether the federal budget is in or out of deficit by a few billion dollars, doesn’t matter in the terms of the bigger economic picture, he said.
“I think it’s a real travesty because it makes us miss the main point,” Drummond said in an interview Monday.
“The biggest point is: The world, not just Canada, is entering a period of sustained lower growth. Everybody seems to have missed that. You wonder how many times it takes for people to get with that program.”
For Drummond, that means accepting that the annual growth rates of four or five per cent of the last decade won’t be on the hori- zon any time soon. Get used to two per cent growth and that economy is now weaker overall, he said.
Liberal Leader Justin Trudeau has said he would run what he called modest deficits to 2019 in order to pay for new infrastructure investments that he deems necessary to grow the economy.
Harper and Mulcair promise balanced budgets and are critical of Trudeau.
But both Mulcair and Trudeau accuse Harper of driving the country into a recession, basing their attacks on the most recent Statistics Canada monthly figures that showed negative growth in the first five months of the year.
Harper wasn’t interested Monday in talking about how he defines a recession.
“I haven’t got into that debate,” Harper told reporters in Ottawa.
He reiterated his stay-the-course message, insisting that the overall economy is strong because the weakness is only in the energy sector.
“The question for Canadians is what do you do with that? Because of this temporary effect, do we now plunge our country into a series of permanent deficits and tax hikes? We think that is precisely the wrong answer,” Harper said.
According to the most recent figures, several other sectors declined between May 2014 and May 2015, including durable manufacturing industries, which fell by 4.8 per cent, and industrial production, which fell by four per cent.
Mulcair reiterated two statistics that he said show Harper’s approach is not working: 200,000 more unemployed since the 2008 recession and the loss of 400,000 manufacturing jobs.
Trudeau had no campaign events scheduled on Monday. Green Leader Elizabeth May held a rally at the Maritime Museum of the Atlantic in Halifax.
Economists say data out this week is likely to show Canada slipped into a technical recession in the second quarter, but the contraction should be short-lived.
“A number of positive elements are coming through,” said TD Bank chief economist Beata Caranci. “Even if, like we’re expecting, we get a contraction in the second quarter, the consumption numbers are likely to be fairly healthy.”
According to Thomson Reuters, economists expect Statistics Canada to report today that the economy contracted at an annualized rate of 1.0 per cent in the second quarter. Among other data expected from Statistics Canada this week are July trade figures on Thursday and the jobs report for August on Friday.
The Bank of Canada cut its key interest rate by a quarter of a percentage point to 0.5 per cent in July amid concerns about the impact falling oil prices and weak exports on the economy. In its July monetarypolicy report, the central bank estimated the Canadian economy contracted at an annual pace of 0.5 per cent in the second quarter, but predicted things would pick on in the second half of the year.
Caranci said the benefit of the lower loonie to Canada’s export sector should boost growth in the third quarter. Although exports were supposed to see a boost sooner, Caranci says the sector’s sensitivity to the loonie has diminished over the past decade as the U.S. — Canada’s biggest trading partner — has been importing more from China and Mexico.
“For every percentage point of deprecation you get to the Canadian dollar you’re getting less of a lift to exporters,” Caranci said. “You’re getting not only less sensitivity but also a more delayed response, so it’s coming in much later than we had been forecasting.”
TD is forecasting economic growth in the two to 2.5 per cent range in the third quarter — more optimistic than the Bank of Canada’s 1.5 per cent prediction for the three-month period.
Caranci said that would make another rate cut from the Bank of Canada unlikely. “If we get momentum picking up in the third quarter, and we get the economy expanding more than the Bank of Canada is expecting, which is a low bar ... then the probability of a Bank of Canada cut gets less and less,” she said.
“If you’re going to pull the trigger and take rates pretty much effectively close to zero, you need the economy to show that weakness in order to justify it.”
However, Capital Economics economist David Madani says he anticipates growth in the third quarter to be “unspectacular.”
“Most of the forwardlooking indicators are pointing to further weakness,” says Madani, noting that business confidence indicators suggest the economy will continue to struggle during the latter part of the year.
“We are expecting a return to positive growth, but I think it’s going to be growth that’s fairly weak — well below the economy’s potential growth rate of two per cent.”
The Toronto Stock Exchange ended the day down slightly despite a boost in oil prices
The S&P/TSX composite index closed down 5.95 points at 13,859.12, with the utilities subsector the biggest loser on the day.
Norman Raschkowan, senior partner at Sage Road Advisors, said Canadian investors are less concerned about recent talk of recession than they are about the volatility that struck the market last week as Chinese equity markets tanked.
“People are just reducing their risk exposure a little bit because nobody really knows,” he said.
Last Monday, the recent downward spiral in Chinese shares accelerated as the Shanghai composite index fell 8.5 per cent. Worldwide markets reacted to the news with a broad sell-off, and the TSX fell more than 420 points on the day.
Yet those losses were offset by gains for both the TSX and the Shanghai indexes later in the week, and other major markets also showed significant volatility.
The widely watched Dow Jones industrial average shed 1,900 points early in the week before recouping almost 1,000 points in a two-day span, including a 619-point gain Wednesday that was its third-largest of all time and the biggest since October 2008. “People aren’t accustomed to the sort of volatility we saw last week and that’s making them a bit more cautious,” Raschkowan said.
The Dow Jones industrial average closed down 114.98 points on Monday at 16,528.03, while the broader S&P 500 index fell 16.69 points to 1,972.18. The Nasdaq dropped 51.81 points to 4,776.51.
The Shanghai Composite Index closed down 0.8 per cent after being down 2.6 per cent earlier in the session.
On the commodity markets, natural gas fell 2.6 cents to US$2.689 while gold fell $1.50 to US$1132.50 an ounce. Oil advanced $3.98 to US$49.20. Raschkowan said oil was rebounding off the lows it has hit as investors get a clearer picture of where big producers like Saudi Arabia will draw the line and begin to cut production. “I wouldn’t expect those prices to be sustained as we’re approaching winter,” he said.
The advance in oil prices came after the U.S. Energy Department cut its estimate for U.S. oil production, citing cutbacks in Texas. That helped make the energy sector the biggest gainer on the TSX, rising 3.1 per cent on the day.
It also benefited the oil-sensitive Canadian dollar, which ended that day up 0.34 of a U.S. cent at 76.01 cents US.