Calls Grow for Rate Cut With Canada on Recession Brink

Canada’s economy needs a doctor.

A surprise contraction in gross domestic product in April leaves the country facing a possible recession, even after Bank of Canada Governor Stephen Poloz performed what he called emergency surgery in January by cutting interest rates to spur growth. More surgery may be needed.

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 Commerce, which had previously predicted no change.

“When you have such a significant drop in oil prices over such a short period of time, there’s a domino effect above and beyond simply the energy sector,” said Kash Pashootan, a portfolio manager at First Avenue Advisory of Raymond James Ltd. in Ottawa. His firm manages about C$225 million ($190 million). “That certainly increases the probability of the Bank of Canada having to cut rates more than we thought two months ago.”

The economy probably shrank at a 0.6 percent pace in the second quarter, “suggesting a recession” Emanuella Enenajor, senior Canada economist at Bank of America Merrill Lynch in New York, wrote Tuesday 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.

Avoid Death

“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 during a panel talk at the Bank for International Settlements.

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 oil price decline, while it has an impact on western and offshore Canada, it is having a spillover effect across the whole country,” said Greg Stringham, vice president of markets and oil sands at the Canadian Association of Petroleum Producers. “It really still is very challenging for the sector with the current commodity prices.”

Capital spending in the Canadian oil and gas sector will fall 40 percent in 2015 to about C$45 billion with lower crude prices, the energy group predicts. Stringham credited the central bank for seeing weakness earlier than most, and said it may still need to offer more stimulus because troubles will persist into June when Alberta forest fires knocked out about 200,000 barrels a day of production.

Stimulus Push

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.

Finance Minister Joe Oliver’s office didn’t respond to requests Tuesday for comment on the GDP report. Nathan Cullen, a lawmaker for the opposition New Democratic Party, said the government has done a poor job picking the best investments to expand the economy. “The Conservatives’ plan isn’t working,” he said. “The proof is in the numbers.”

Oil and gas, mining and quarrying fell 2.6 percent in the month, the sixth consecutive decline as crude’s slide continued to hammer Canada’s resource-rich economy.

Lower crude oil prices and a lack of pipelines are prompting producers from Suncor Energy Inc. to Imperial Oil Ltd. to accelerate a shift to smaller projects. Crude oil is Canada’s top export.

Manufacturing Decline

There were weak spots beyond the energy industry in April. Retailing declined 0.2 percent after a 0.3 percent gain in March.

Manufacturing fell 0.2 percent, with the fourth consecutive decline led by non-durable goods such as food and paper. Canada’s factories have struggled to recapture orders they lost in the 2008-2009 recession, even with the aid of a weaker currency, cheaper energy and signs of a U.S. recovery.

The Bank of Canada’s April 15 economic forecast predicted gross domestic product would grow at a 1.8 percent 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 figures on the trade balance for May and employment for June.

“Growth still remains flat in the second quarter,” said Paul Ferley, assistant chief economist at Royal Bank of Canada in Toronto. “Indications the weakness is more long-lived could prompt them to respond” at the central bank, he said.

Recession Looms

The April contraction raises the possibility that output shrinks for a second straight quarter, which many economists use as a benchmark for a recession.

Ferley said the case for a true recession is weakened because the output declines aren’t widespread enough and there is strength in the labor market. The unemployment rate of 6.8 percent has fallen from a peak of 8.7 percent in 2009.

Poloz still needs to cut rates twice this year, recession or not, says David Watt, chief economist at HSBC Holdings Plc’s Canadian unit in Toronto.

“Though we do not expect the Canadian economy to slip into a technical recession, the lack of traction in the economy and the lingering negative impact from weak oil and other commodity prices into the second quarter reinforce our view that the Bank of Canada will cut rates further,” he said.

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