Canada officially in a recession as GDP shrinks 0.5% in second quarter

A technical recession, but not an “outright recession.”

That is the verdict from economists Tuesday after Statistics Canada reported that the Canadian economy shrank at an annual rate of 0.5 per cent in the second quarter, following a 0.8 per cent decline (revised from an earlier figure of 0.6 per cent) in the first three months of the year. A technical recession is defined as two consecutive quarters of negative growth.

While growth overall for the first half was weak, the second quarter ended with a strong handoff â€" GDP grew by 0.5 per cent in June, the strongest monthly reading since May 2014. At the same time, strength was seen in a number of areas of the economy, including the labour market, the services sector and consumer spending â€" all signs that Canada’s economy is healthier than the Q2 reading is suggesting, say economists.

“The lack of a net drop in employment over the same period meant that this was not yet an outright recession, and a solid gain in June GDP points to at least a one-quarter breather, with the economy likely to return to growth in Q3,” said Avery Shenfeld, chief economist at CIBC World Markets.

Whether the worst is behind Canada has become a focal point of the federal election, which has made use of the R-word contentious.

Two quarters of negative growth is considered a technical recession, but economists judge an actual recession by the length, depth and breadth of weakness. Given that the unemployment rate has remained steady and wages continue to grow, most economists say Canada is not currently experiencing what would be seen as a true recession.

Most of the damage in the second quarter can be blamed on declines in both business spending (which plunged at an annual rate of 12 per cent) and inventory accumulation. The declines did not catch economists off guard, however, given the collapse in oil prices and spending cuts in the energy sector had foreshadowed the drops.

The declines were offset, however, by strong gains in consumer spending, the housing market and government spending. When looking at the non-energy portion of gross domestic product â€" roughly 90 per cent of the economy â€" GDP actually expanded by 0.6 per cent in the second quarter,  with 17 of 20 industries reporting higher output in June alone.

Those readings lend support to the idea that the so-called technical recession is likely in the rearview mirror, said Stéfane Marion, chief economist for National Bank of Canada.

“So far, industrial production is the only sector that has seen a significant decline in activity in Canada,” he said. “We need to see economic weakness spread to the service sector to confirm the end of the economic expansion.”

Dana Peterson, economist at Citi, notes that while the June data is encouraging, the Canadian economy faces a number of obstacles that don’t guarantee a third quarter rebound.

“Downside risks related to an extended period of low oil prices (oil prices declined again in Q3), slowing Chinese growth, and financial market volatility are intensifying, which could thwart a Canadian revival ,” she said.

And while consumers helped prop up the economy in the second quarter, with spending rising 2.3 per cent, they did so while drawing down their savings â€" the savings rate declined from 5.2 per cent to four per cent during the period. Real disposable incomes also dropped by 2.9 per cent.

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“For consumption spending to maintain the pace of growth in the second half, the labour market will have to remain resilient,” said Krishen Rangasamy, senior economist at National Bank Financial.

This week will see the release of further data from Statistics Canada which will help paint a clearer picture of where the economy is heading. July trade figures are set to be released on Thursday, while the employment report for August will be released on Friday.

The data comes ahead of the Bank of Canada’s interest rate announcement next week. The central bank has already cut its benchmark rate twice this year, from 1 per cent at the start of the year to 50 basis points after the latest cut in July.

Markets are not pricing in a high chance that the Bank of Canada will trim its rate again next week, with Peterson of Citi noting that bets have declined with the better-than-expected Q2 reading.

Charles St-Arnaud, economist at Nomura, said the GDP figures should add confidence to the bank’s view that the Canadian economy rebounded in the third quarter following a disappointing first half of the year.

“Today’s number is in line with what the Bank of Canada (BoC) expected in the July MPR, and we do not believe that it materially changes the BoC’s view of the economy,” he said. “We continue to expect that the BoC will leave its policy rate unchanged at next week’s meeting.”