Canada Economy Shrinks for 2nd Straight Quarter on Oil Shock

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Canada’s economy shrank again in the second quarter as plunging oil prices triggered a drop in investment, with fresh debate about a recession dealing a blow to Prime Minister Stephen Harper’s bid for re-election.

Gross domestic product declined at a 0.5 percent annualized pace from April to June, Statistics Canada said Tuesday in Ottawa. The agency revised the first-quarter contraction to 0.8 percent from 0.6 percent.

The Group of Seven’s biggest crude oil exporter is struggling as a global commodity slump guts business spending. The consecutive output declines, a so-called technical recession, are expected to shift into a slow expansion over the rest of the year, giving Bank of Canada Governor Stephen Poloz scope to avoid cutting rates Sept. 9.

“I wouldn’t say this is a big red light saying this economy is in recession. Undeniably it slowed in the first half of the year, there is no way to sugar coat that,” said Dawn Desjardins, assistant chief economist at Royal Bank of Canada in Toronto. Output may grow at about a 2 percent pace in the second half and Poloz likely won’t need to cut rates, she said.

The second-quarter contraction matches the Bank of Canada’s forecast from July, when Poloz predicted a rebound to growth of 1.5 percent in the current quarter. Economists surveyed this month by Bloomberg predict a gain of 1.9 percent.

Rate-Cut Odds

Canada’s dollar depreciated 0.3 percent to C$1.3173 per U.S. dollar at 11:55 a.m. Toronto time. The currency is down about 12 percent this year. Swaps trading showed the odds of a rate cut next week fell to about 21 percent after Tuesday’s report, down from 24 percent Monday and 36 percent a week ago.

The consecutive GDP declines are milder than any back-to-back contractions since at least 1981, including the last recession in 2009 which saw drops of 3.6 percent and 8.7 percent. The job market also suggests there’s no broad-based slump in the world’s 11th largest economy. The jobless rate of 6.8 percent for July is down from 7 percent a year ago. August labor data is due Sept. 4.

The economy has dominated Canada’s election campaign in recent days, as opposition parties try to chip away at Harper’s long-held advantage on economic issues. Recent polls suggest a tight three-way race between Harper’s Conservatives, Tom Mulcair’s New Democratic Party and Justin Trudeau’s Liberals.

‘On Track’

Harper declined to use the word recession at a stop near Toronto on Tuesday morning, focusing instead on June data, which showed output grew after five prior declines. “The Canadian economy is back on track,” Harper said, adding the driver of future growth won’t be “permanent deficits, higher taxes.”

On a monthly basis, Canada’s gross domestic product rose 0.5 percent in June, the fastest since May 2014, led by the mining, quarrying and oil and gas extraction category. Economists predicted an expansion of 0.2 percent.

Trudeau, son of a former prime minister, says the economy needs three years of deficits and infrastructure spending to boost an economy he argues Harper has neglected.

“Stephen Harper is completely out of touch with the reality that Canadians are going through,” Trudeau said in Gatineau, Quebec, when asked about a recession Tuesday. “Canadians have known for a long time that his economic approach isn’t working.”

R-Word Debate

Business investment fell by 7.9 percent in the second quarter after a 10.9 percent decline in the prior three months, partly because of a drop in mineral exploration. GDP was also curbed as companies slowed their investment in inventories to C$7.1 billion from C$12 billion, Statistics Canada said.

“Our most common definition here in Canada of what a recession is has been two quarters of decline so I guess you can call this a recession,” said Pedro Antunes, deputy chief economist at the Conference Board of Canada in Ottawa. “What is most concerning about all of this is we have gone through almost two years now of very weak capital investment,” and “that is the key to future production and employment.”

Canada’s economy got a boost in the second quarter from international trade and continued support from consumer spending. Household consumption growth quickened to 2.3 percent from 0.5 percent in the first quarter, led by automobiles. Exports rose for the first time in three quarters with a 0.4 percent gain, while imports fell by 1.5 percent.

“While not yet a recession, since employment hasn’t declined, Canada’s first half was about as weak as advertised,” Avery Shenfeld, chief economist at CIBC World Markets said in a note to investors. “The momentum registered in June is consistent with our view that Q3 will provide a breather as the economy, at least for a quarter, returns to growth.”

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