Hit by cheap oil, Canada's economy falls into recession

Gross domestic product contracted at an annualized 0.5 percent rate in the second quarter, Statistics Canada said on Tuesday. That was better than forecast, though revisions showed the first quarter’s contraction was steeper than first reported.

Two consecutive quarters of contraction are typically considered the textbook definition of a recession. The confirmation of a modest recession is likely to figure heavily into the election campaign as Canadians head to the polls next month.

Some economists and members of the Conservative government have argued that such a definition is too narrow and that other economic measures should be taken into account, such as unemployment, which has remained relatively subdued.

Encouragingly, the economy grew in June for the first time in six months, suggesting the recession may be short-lived. While the price of oil and other natural resources have weakened since June, many expect non-commodity Canadian exports to benefit from a strengthening U.S. economy.

The Canadian dollar pared losses after the data. [CAD/]

“Despite the technical recession materializing, it does look like the Canadian economy is jumping back, is rebounding strongly in the third quarter,” said Derek Burleton, deputy chief economist at Toronto-Dominion Bank.

The last time Canada was in recession was in 2008-09, when the U.S. housing market meltdown triggered a global credit crisis.

In the second quarter, Canadian business investment sank by an annualized 7.9 percent as spending on non-residential structures, machinery and equipment fell. Inventory accumulation slowed by C$4.91 billion ($3.74 billion).

Activity in the goods-producing industries declined 2 percent on a quarterly basis, with a 4.5 percent drop in the mining, quarrying and oil and gas extraction component. But a rebound in that same sector helped the economy perk up by a better-than-expected 0.5 percent in June.

Following the data, traders saw a slightly lower probability the central bank will cut rates again next week. The Bank of Canada has cut interest rates twice this year in an effort to revive the economy. BOCWATCH

“They’ll wait and see how the third quarter’s unfolding to get more information,” said Burleton. “But it does look like the weakness in the first half is in the rear view mirror.”