Politicians Miss Call as Canada Suspended Between Slump, Growth

Canadian Economy on the Fence

With Canadians headed to the polls Oct. 19, the country’s economic downturn has unsurprisingly become campaign fodder for opposition leaders Tom Mulcair and Justin Trudeau, who claim the country has fallen into recession. Prime Minister Stephen Harper counters the economy is expanding nicely outside of the energy sector.

Both may be wrong.

According to one measure, the economy is actually in a state of suspension, neither growing nor shrinking. Of the 20 sectors tracked by Statistics Canada in its GDP reports, five averaged monthly growth rates of more than 0.1 percent between January and May. Seven are contracting by more than 0.1 percent. The eight others are little changed.

While not the widespread contraction suggested by Harper’s critics, it’s also hardly good news for the country. It reveals an economy deeply impacted by falling oil prices and as sluggish as it can be outside of a recession.

“The tentacles of the oil price weakness really spread pretty far throughout the economy,” said Mark Chandler, head of fixed income research at Royal Bank of Canada.

A stalled Canadian economy that is sitting on the fence between expansion and contraction is something that rarely happens. If gross domestic product data due Tuesday show this trend continued through June, it would mark the first time since at least the early 1980s that stalled sectors outnumbered both growing and shrinking sectors during a half-year period.

Mid-90s Comparison

Another measure of economic dispersion -- the difference between growing sectors and shrinking sectors -- also suggests the economy has stalled. Usually, growing sectors outnumber shrinking sectors by a large amount. In recessions, it’s the reverse. Right now, they’re about even.

The last time that happened was in 1995 and 1996, which should give Harper some comfort. Then, like today, Canada experienced a sudden slowdown and a stalled economy only to rebound on the back of a weaker dollar and a pick-up in U.S. demand.

“I think there are parallels there,” Chandler said.

Harper certainly is making the case. Even if, as many economists forecast, Tuesday’s report shows declining overall output -- putting Canada in a technical recession -- it will simply reflect deep cuts by oil producers, not widespread contraction, the prime minister has been arguing.

“There has been a contraction in the first few months driven exclusively or largely through the energy sector,” Harper told reporters Aug. 26.

Either that, or the data will show more conclusive evidence the slump has spread, the economy has tilted toward recession, and the glass was indeed half empty.

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