Negative 2nd Quarter Triggers Canadian Recession Fears

Wednesday’s release by Statistics Canada revealed that for the three months ending in June, the Canadian economy contracted by 0.1 percent. With a recession typically defined as two or more consecutive quarters of negative growth, Canada is already half way back to a recession.

Like most of the industrialized world, Canada suffered through a recession triggered by economic events in late 2007 and 2008. For Canadians, the recession lasted from the final quarter of 2008 to the end of the second quarter of 2009. While growth as measured by Gross Domestic Product (GDP) during the recession declined by more than 3 percent, this was still better then most other G7 countries where losses were much more pronounced. Canada also was one of the first to emerge from recession returning to positive growth by the third quarter of 2009.

These realities helped the country garner a reputation as somewhat of a fiscal prodigy. Hoping to continue to build on this legacy, Finance Minister Jim Flaherty downplayed the GDP result noting that Canada’s economic and fiscal fundamentals remain “sound and sustainable”.

“The weakness in Q2 was largely due to external factors — the tsunami and earthquakes in Japan in the second quarter had a very strong effect on the auto sector, particularly auto imports,” he said. “And of course there was some slowness in U.S. growth, so that affected our exports. The domestic situation is much stronger.”

As much as Canadians may wish to believe it, the ability of Canadian monetary policy to manage the economy is often overpowered by a much stronger force – the huge market lurking below the 49th parallel. For most of its existence, Canada has been an exporting nation and remains so to this day. An abundance of resources combined with an educated and skilled workforce situated within sight of the world’s largest consumer market has for the most part, served Canadians positively for well over a century.

However, there is a downside to this arrangement; today, about 75 percent of Canada’s exports find their way to the American market. When times are good and American consumers feel confident regarding their economic future, Canada enjoys a trade surplus that prior to the last recession, averaged more than $70 billion a year. In 2009 and 2010 the surplus declined sharply to $20 billion a year.

Should the U.S. economy tip back into recession and force consumers to cut back even further on their spending, this will certainly impact Canadian export sales. It may even push Canada’s economy to recession. Already the Bank of Canada has noted that Canadian growth is likely to ease in the final two quarters of the year and all talk of an interest rate hike appears to now be a thing of the past.

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