For months now, Bank of Canada Governor Stephen Poloz as well as an accompanying chorus of economists happen to be predicting that the second quarter would be turnaround time.
\’R\’ word returns to haunt Canada as economy does not shake off oil price plunge
Data out this week showed the damage of oil’s collapse is deeper than many thought, raising fears that we\’re slipping into recession and speculation the Bank of Canada will cut rates. Read on
Yes, the very first quarter stank, because of the oil price shock. But in the second quarter, the \”insurance\” the financial institution took out in January – a 0.25-per-cent rate cut – would have had time for you to work its magic, exporters would start obtaining the slack in the oil patch, and the tide would turn.
Well, now we know that\’s kind of a pipe dream.
Statistics Canada released its gdp report this week, and it demonstrated that GDP fell by 0.1 percent in April. Just about every economist in the land have been predicting at least a modicum of growth as the first step in a rebound from a dismal first quarter during which GDP shrank by 0.6 per cent.
The rebound didn\’t happen. And it very well might not happen in May and/or June. If it doesn\’t, then we\’ll have two consecutive quarters of contraction. Which, technically, is a recession.
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This raises one obvious question and one not-so-obvious one. The first is, why are we here? That is: How come the \”insurance\” Poloz got in January doesn\’t appear to be working, a minimum of not yet?
There are very a few answers for your.
First, it\’s probable that economists underestimated the outcome of lower oil prices. Addititionally there is the on-again, off-again recovery in the United States, which was supposed to be growing like gangbusters (relatively speaking) by now. Hasn\’t happened. Manufacturing in China, meanwhile, has slowed, which has kept commodity prices down.
And then there\’s the recalcitrance of Canadian companies when it comes to investing in their businesses. This is particularly important within the manufacturing sector, where capacity shrank through a decade of high oil prices, and which would need to increase spending to meet increasing U.S. demand (which, you realize, hasn\’t really happened).
Under the rebound scenario, lower rates of interest should incentivize businesses to take a position. Yet capital investment remains weak, and manufacturing\’s contribution to GDP actually fell by 0.2 per cent in April.
It might be because rates of interest are already so low that the reduced cost of debt capital isn\’t spurring more investment. Maybe companies just aren\’t seeing the return on even cheap money.
In nevertheless, businesses built up a lot of inventory over the winter, so it\’s not like they need to produce more awaiting future demand. It\’s smarter to simply wait and see.
And that, in a way, leads to a less obvious question: If we\’re heading into or already inside a recession, why it doesn\’t believe that way?
That\’s a subjective question. But consumer confidence has been strong even as the economy swooned. Job growth is okay, too. The typical Canadian is feeling pretty good about things and why not?
Canadians are getting richer while the economy gets, er, poorer. According to Statscan\’s mid-June national balance sheet report, per capita household net worth rose by 3.2 per cent in the first quarter. Some of that gain has to do with real estate, but non-financial assets rose by only 1.2 per cent in the first quarter, while financial assets – pensions and mutual funds, that sort of thing – gained 6.2 percent.
Even though Canadians borrowed more money in the quarter, the ratio of total household debt to assets fell. Just like it has ever since 2009. By the way, April 2009 happens when the Bank of Canada brought in the last 25-basis-point rate cut in response to the worldwide recession – or rather, the last one until this January.
Last week, Poloz said at a conference held through the Bank for International Settlements that his January rate cut was like emergency surgery, necessitated by the oil price shock. \”If the doctor says you need surgery to avoid death, the side effects don\’t usually deter you,\” he explained.
But one of the negative effects of monetary easing is asset price inflation, about which the Bank has occasionally expressed concern, as have the Organisation for Economic Co-operation and Development and the International Monetary Fund in more alarmist terms. Despite all the warnings, Canadians still seem quite happy to buy houses and purchase the stock market.
What we have here is a situation: Neither businesses (who should be spending) nor consumers (who should stop borrowing money, dammit!) do what they\’re designed to do. As well as for perfectly rational reasons.
After this week\’s bad GDP data, economists have moderated their predictions and are now giving more weight to the likelihood of another rate cut.
Maybe the next time it will work the way in which it\’s supposed to.