Is Canada Next? Recession Is “Quite Contained”

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“In the current context, if you look at the growth numbers, the recession is effectively in the goods sector, it’s in the oil industry, it’s weak growth in manufacturing, weak growth in construction,” explained Kevin Page, Canada’s former parliamentary budget officer, a watchdog role charged with analyzing the state of the economy and government finances.

“It’s quite contained,” he told CBC radio, with an eerie echo of the Fed’s description of the US housing bust in the early stages of the Financial Crisis. There’s “still lots of growth in the service sector,” he said.

That’s what everyone is hoping. And it would just be a technical recession – two consecutive quarters of negative growth – rather than an official recession.

There wasn’t a lot of room for optimism. The economy shed 6,400 jobs in June, according to Statistics Canada, with gains in full-time jobs and losses in part-time jobs. The unemployment rate remained at 6.8%, same since February. But there are numerous indications that contractors, which do much of the work in the oil patch, are still working, but a lot fewer hours, and that this deterioration, in Calgary for example, hasn’t been fully captured by unemployment statistics.

“If you look at the job picture, it’s gotten progressively weaker through the summer,” Page said. “I think that would be a concern for the government and a concern for the overall strength of our economy.”

“The economy’s weak, you can’t deny that,” Page added. “It will be pretty hard for Minister Oliver to keep that line that we’re not in a technical recession.”

Which is exactly what Finance Minister Joe Oliver has been “adamant” in denying, according to CBC. He referred to the 96,000 full-time jobs created so far in 2015 and cited, of all things, the IMF, which “confirmed what I and numerous independent analysts have been saying – the Canadian economy will grow this year.”

In fact, the IMF, after lowering global growth, had slashed Canada’s growth from 2.2% just three months earlier to a measly 1.5% for the whole year.

“I think the government had a similar difficulty back in 2008, right after an election where they said there’d be no recession and we wouldn’t run deficits,” Page said. “They had a hard time changing the tone. It sounds a little similar to me, that even after four months of declining growth, they have a hard time admitting that basically we’re likely going to have two quarters of decline.”

BofA Merrill Lynch was the first major bank to be vocal about a technical recession. In a note in early July, Economist Emanuella Enenajor said that Canada’s economy shrank 0.6% in the second quarter, and 0.6% in the first half. Despite a rate cut in January, she wrote, the “economy has surprised to the downside this year, and appears to have entered a recession.”

But wait…. The declines in GDP are largely based on a “massive contraction” in the energy sector, Stéfane Marion, Chief Economist at Economics and Strategy of National Bank Financial, wrote in a note.

Canada’s monthly GDP growth has been negative for five of the last six months. But just how much does Canada’s energy sector, rattled by the oil price plunge, weigh in the equation? In this gloomy chart by NBF, the black bars represent overall monthly GDP “growth” – in quotes because it’s mostly negative. The dotted red line represents GDP growth without the energy sector. But it doesn’t look particularly appetizing either:

Canada-GDP-2014-11_2015-04

And it has been a very mixed bag:

Consumer confidence outside the oil patch is holding up, supported by rising disposable income in Q4 last year and Q1 this year. But confidence has collapsed in Alberta, the epicenter of Canada’s oil bust. Housing starts “rebounded” in May and June, after having plummeted in February.

The job market is “resilient,” Marion wrote, though Alberta and British Columbia have been shedding jobs this year. Retail spending is up. So it’s “not a recession for consumers” overall, though it may well be a recession for consumers in the oil patch.

Business investment, which has been weak for a while, has plunged in recent months, not only in industrial machinery where the oil industry weighs heavily, but also disconcertingly in electronic and electrical equipment. Exports have dropped sharply and a “widening of the volume trade deficit was subtracting from quarterly GDP growth.” Marion concluded:

The recent poor showing is neither Canada-wide nor economy-wide. The downturn is in energy and was concentrated in Alberta in Q2. Though GDP may have edged down for a second consecutive quarter, it would be hard to call this a recession.

Hence, the title of his note: “Canada’s second quarter: Two divergent economies.”

And hence Kevin Page’s hope that what he sees as a technical recession is “quite contained,” and that, beyond and above all, the housing bubble, particularly in Vancouver and Toronto, doesn’t implode just when the oil patch is wheezing, exports are plunging, and business investment is swooning.

Now hopes are rising in some corners that the Bank of Canada will announce another rate cut on July 15, after its surprise rate cut from 1% to 0.75% in January. The cut would further inflate Canada’s debt-funded housing boom that is already flying in the rarefied air that few other housing bubbles have ever reached, with all the mega-risks that come with it, though while it lasts, it might keep economic growth from tanking altogether. That’s the hope.

Worry of “full-fledged contagion to the rest of the country?” Rear…  Canada’s Oil Patch Goes Into Convulsions, Business Confidence Plunges to Financial Crisis Lows 

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  10 comments for “Is Canada Next? Recession Is “Quite Contained”

  1. Tone
    Jul 14, 2015 at 7:01 pm

    I am in office furniture manufacturing in Toronto and we are extremely busy after a slow Winter/Spring. We are currently using temps, but I can see them turning into FT. With the Canadian dollar swooning, I would anticipate an uptick in manufacturing destined for the U.S.

  2. cocoabean
    Jul 14, 2015 at 7:32 pm

    I live in a small city on Vancouver Island. If falling living standards were used to denote a “recession”, we’d be in one….and we have been in one for many years.

    I make determinations not from government aggregate statistics but from what one sees on the street.

    SOME people are doing very well indeed. If you are in the lumber or fishing industries, you have monopoly government-granted access to natural resources and usually union protection from job competition. These people have all the toys: big mortgages, $400,000 houses, boats, campers, quad bikes, I-gadgets for the entire family, NFLX subscriptions, new F150 pickup trucks. They are the big spenders in my community.

    Pensioners are actually quite well off too. They have regular, reliable incomes. If from the forest industry, those incomes are quite generous. One living two or three houses away from me has a 40-foot motor home parked outside.

    Ditto for government employees of all kinds, though they gripe about “low pay”. Next door are two government teachers, with two cars, two houses and loads of time off.

    But it is a sick economy overall, very, very dependent on government spending. Physiotherapists, dentists and sellers of mobility aids are all de facto paid by government social services spending. We had the ridiculous example of taxi drivers complaining that, because door-to-door mail delivery is being curtailed, their income from transporting postal employees was under threat!

    Schools are being closed. Road and sewer upgrades prove too costly to undertake and are delayed endlessly. Property taxes are rising. The fire department alone consumes 31% of the City tax take, and the police another 23%. Some – most – firemen make over $100,000/year, as do all senior city bureaucrats….including, ironically, the one titled “Economic Development Officer”. Sometimes it seems that we are all becoming Detroit…

    Small business? I honestly wonder how they make ends meet. “For lease” and “for sale” signs abound and without big spenders even 7-11 (expensive!) would go under. You hardly ever see a customer in there anymore and I’ve noticed a drop off in traffic there since last summer. For several months, I’ve also noticed a larger number of shoppers at the discount supermarkets instead of the more costly “Whole Foods”-type full-service ones.

    People everywhere are quietly and perniciously reining in their spending.

    Yes, oil and gas. There have always been a goodly number of younger men who work in Alberta oil and gas and leave their families on the Island. With those massive paychecks under threat, this will no doubt be quite a blow to the local economy too. But it won’t show up month-by-month in government statistics.

    Living standards are falling, likely faster than ever, and it is *NOT* going to show up in government figures. Neither will the media report it.

    • Mike R.
      Jul 14, 2015 at 8:33 pm

      Thanks for this insight. I look forward to comments that are local.

    • Mark
      Jul 15, 2015 at 12:24 am

      It’s the same thing here in Ottawa with the Tax hikes. They have been steadily increasing Taxes by 1.8 – 2% each year for the past 20 years and then they go and give themselves a big cheer and pat on the back for keeping it under the 2% mark. Meanwhile all the citizens never stop to think to add up all those 2% hikes each year. And our illustrious Mayor Watson self proclaimed King of the Socialists pays himself over 168,00 a year, while Kent Kirkpatrick our City Manager ” The man who really runs Ottawa and not Watson ” pays himself 341,000 a year.

      http://ottawa.ctvnews.ca/ottawa-s-sunshine-list-includes-1-079-police-staff-1.2300844

      And the best part is here in Ottawa they are so Delusional (notice how I capitalize Delusional ) That they think they will never wind up like Detroit because it’s a Gov’t City. Sorry folks you will !

      Public Sector overspending, back room deals, corporate welfare and corruption is ruining the Democracy and Capitalism of our Western world.

      If I was Mayor of Ottawa the first thing i’d do is cut half the city counsellors and merge wards saving the city millions in salaries. There is no reason for Ottawa to be employing nearly 17,000 jobs (from what I have heard) .

      For those who couldn’t watch the Vid.

      Tom Mitchel CEO Ontario Power Generation 1.5 Million
      Jack Kitts Ottawa Hospital 630,000
      Kent Kirkpatrick Ottawa City Manager $341,000
      Charles Bordeleau, Chief of Ottawa Police $274,000
      John Manconi, OC Transpo General Manager $234,000
      Dr. Isra Levy, Chief Medical Officer of Health $324,000
      Jim Watson, Mayor of Ottawa $168,000

      Over 100,000 people on the Ontario Gov’t payroll make over 100,000 a year from Police officers.. to *cough cough Bus Drivers !

      Now I know here in coo coo land Canada we have to give back nearly 50% of our Pay in Taxes so scale back that 100,00 a year salary with Taxes. Then factor in the rate of inflation. But still its way to much. A bus driver should not be making 100,000 a year.

      What’s even worse is when you start looking at other public sector salaries in Canada. Like high school teachers who top out at 98,000 a year in Alberta and Ontario. And here in Ontario the public school teachers have been going on strike year after year for the past 30 years and the result is always the same a pay hike !

      Now don’t get me wrong because iam part of the private sector with our family business and we made our money a long time ago and have seen the good times and bad in Retail and Manufacturing . But still, I just don’t see how a Gov’t can survive with these kinds of salaries anywhere in the world? To me every city in North America will wind up like Detroit if they are not careful about spending and corruption.

      In my opinion they never should have bailed out corporations with tax payer dollars. Let the companies go bankrupt. There are always rich people around who will start up new ones. Out with the old blood and bring in new blood. Iam not a fan of corporate welfare nor a fan of gov’t over spending in the public sector.

      Sorry for being long winded.
      Cheers !

  3. yon
    Jul 14, 2015 at 8:08 pm

    I can say that the Toronto housing market can’t get any more crazy than it already is and should the BOC decide to lower interest rates again tomorrow….get ready to declare ‘hyperinflation’!

    With oil at below $50, but pump prices at near historic levels of $124 per litre, I think the Canadian government has given the oil companies the green light to “charge as much as they want” to make up for the losses at the oil sands production.

    And this extra tax being levied at the gas pump only takes away from the consumers’ ability to spur the economy.

    Lowering interest rates never worked in the US and will not work here to spur the economy. It will only result in asset hyperinflation of houses, which seems to me to be reckless at best.

  4. interesting
    Jul 14, 2015 at 10:08 pm

    “If you look at the job picture, it’s gotten progressively weaker through the summer,”

    the summer started 3 weeks ago?

  5. mick
    Jul 14, 2015 at 10:48 pm

    The only sectors doing well are govt workers and those benefiting from low rates. The housing frenzy is as much fear driven as faith. People without jobs are trying to buy houses, thinking it wil give them security.

    2nd homes and cottages are on the block all over BC, because they are an extra cost. This is the true economy peaking its head through the window. In Alberta, literally tens of thousands are living off a severance package, praying for higher oil prices soon.

    Reality will strike sooner than most expect, and when it does, it’ll be with a vegeance.

  6. Mark
    Jul 14, 2015 at 10:59 pm

    Well real estate in Toronto is just going crazy. Tear down 2 bedroom houses built in early 1950 going for $850000. I am planning to sell my house and move to city two hours west of Toronto buy big newer house for $400000, invest some money and keep the difference. This is great opportunity for me and my family and I don’t want to miss it. Life in Toronto has become to busy, stressful and expensive, also crime rate is at all times high although officials will never admit to this.
    Just hope this real estate casino will last for few more months.

  7. Paulo
    Jul 15, 2015 at 9:00 am

    Cocoa and Mark,

    Cocoa, it sounds like you live in Campbell River, the patron saint of unrealistic spending and fire fighter coddling. I lived there for 25 years and finally got tired of the bullshit and growth. Never looked back. Just a note, forest industry pensions are not rich at all. My neighbour worked in the industry for over 30 years, mostly for M&B as a faller. His pension is approx. $1200/month. With his CPP and OAP he brings in $1800/month. I know this because my son is his landlord.

    Mark, those teacher wages you cite are after 10 years full time experience and a masters degree. They are usually trotted out at election time, but as someone who worked 17 years teaching grades 5-12……after 25 years in the private sector as a carpenter and pilot, I can say the teaching gig was not a good job. I stuck it out despite cuts to programs and budgets from the first day I started. With a fiver year degree a new BC teacher makes $48,000/year if he or she is lucky to get a full-time job. And for years, there was not even money for text book replacement. I used to photo-copy texts which drew the money from the school budget instead of the District budget. When I taught welding I would hit the scrap dealer every other day on my own time and with my own truck as my budget did not cover steel purchases. When I taught other shop classes my budget was 30 cents per day per kid. Now, you tell me how much welding you can do for 30cents, or machining, furniture building, whatever? Not effing much. Luckily, I scrounged from industry because I had contacts.This was in BC. The school budget cuts did not go to wages as often implied, they went to across the board tax cuts which meant the richest in the Province received the biggest gift when the Socreds…ooops Liberals got in 14 years ago.

    And cocoa, don’t forget Bill Bennet and family caught for insider trading with Herbie Doman (remember Doman Forest Industry?), when the Bennets were tipped off about the Georgia Pacific purchase collapse and sold their shares minutes before it was announced the deal fell through. That is BC politics. Did anyone go to jail? There is always a lot of whining about wages and Unions from Phil Hochstein types, but on the other side the reek of insider deals and Govt collusion is sickening.

    It used to be that in order for BC forest companies to be able to log Crown land they had to link the harvest with a BC mill (appurtenance…discontinued by Gordon Campbell). In other words, the lumber had to go to a BC mill before export. There was virtually no raw log exports. I worked at Chemainus Sawmill and all wood had to be milled before heading into a ship for export. Guess what? That mill and 95% of all sawmills shut down with our free enterprise anti-union Govt, and as I write this I can hear a logging truck heading for the Kelsey sort with a load of raw logs destined for China. It breaks my heart to see the logs being shipped out.

    And for all, if our unemployment rate was calculated the same way as it is done in the US, we are at 5.2%….not 6.3% unemployment.

    There may be a big slowdown coming, but it will be a Vancouver Toronto housing collapse that will trigger the wave of bankruptcies. And that will happen when Chinese money dries up.

  8. Michael Gorback
    Jul 15, 2015 at 12:03 pm

    Baghdad Bob is alive and well and living in Canada!

    It’s only oil, manufacturing and construction. No reason to worry just because those are all things that create real wealth.

Comments are closed.