OTTAWA — Politicians and economists are warning of tough times continuing despite data released Monday that signal Canada’s short and sharp recession ended in June and the current summer quarter will produce the first quarterly growth since last fall.
June’s 0.1 per cent output gain was lower than consensus expectations, and other indicators suggest the economy is still not poised for the kind of bounce-back that would set champagne corks popping, analysts noted.
More worrisome, several economists said a double-dip slump was still a possibility for next year once extraordinary U.S. government spending peeters out.
The sobering outlook served to pour cold water on what a few months ago would have been considered shockingly good news — that after almost a year of contraction, output actually increased, and is likely to continue to grow throughout the year.
Technically, the recession will not be declared over until complete numbers on third quarter activity, the July to September period, are known later this year.
But economists say that is a formality, since enough is known about how the economy fared in July and August to make growth in the third quarter a foregone conclusion.
Technically a recession is defined as two successive quarters of economic shrinkage. Canada’s economy began contracting in the 2008 fourth quarter and continued the stagnation in the first and second quarters of this year.
Merrill Lynch chief economist Sheryl King said the rebound could actually hit three per cent in the third quarter, far higher than the Bank of Canada’s call for a 1.3 per cent annualized advance.
For Transport Minister John Baird, any sign of growth was a welcomed, but he too cautioned that the recovery remains ”tentative and fragile.“”
“This is and will continue to be a difficult year for the Canadian and global economy … we are not out of the woods yet,” Baird told reporters in Ottawa, warning the opposition parties against triggering an election that would disrupt needed government spending on construction.
Going forward, economists expect output to experience a spurt during this quarter, in part because the second quarter was weaker than expected, and in part because of the auto sector restart in July.
But most agree any fast sprint from the stand-still of the past 11 months will be illusory, and that growth will be sluggish the rest of this year and through much of 2010.
As the Bank of Canada has warned, the resurgent loonie, if the strength persists, will weigh down on the export sector. As well, household indebtedness in the U.S., and to a lesser extent in Canada, will keep consumer demand in check.
Meanwhile, the back-up of unsold goods in factories remain high, which is expected to keep employment and production growth weak even if demand picks up.
Since October, 414,000 net jobs have vanished in Canada, and by some estimates, another 100,000 could well be lost through the rest of the year before employment begins to revive.
“The rise in GDP in June and a lot of other indicators we have do indeed suggest the recession ended around mid year,” said Douglas Porter, deputy chief economist with BMO Capital Markets.
The bigger issue is how robust and sustainable the recovery is. This could be a very halting recovery that’s not going to feel a whole lot better than where we were a few months ago,“ he added.”
Scotiabank’s Derek Holt added a new caution, that stock markets may trend lower because they had expected a bigger bounce back.
“Even the most bullish forecast has been priced in much more aggressively into markets than is justified,” he said
Most global markets retreated sharply Monday, including the Toronto exchange, which fell more than 100 points. The loonie also traded lower as the price of oil decline US$3.10 to just over US$69.
Holt believes a double-dip recession next year remains a risk, since U.S. consumers, hung over from years of debt and spending, won’t have the cash to sustain demand once government stimulus is exhausted.
If the recession is indeed over, the data shows it was among the most precipitous falls since the Great Recession, but also relatively short, lasting just over three quarters.
Statistics Canada revised the first quarter contraction from 5.4 per cent to 6.1 per cent, making it the steepest three-month plunge in output on record, beating the 5.9 per cent fall-off of the early 1990s. The second quarter decline also came in lower than expected at negative 3.4 per cent annualized.
But because of its short duration, the downturn was not the worst since the Second World War, as it has been in many advanced countries.
From peak to trough, the Canadian economy contracted by 3.3 per cent, less than the 4.8-per-cent plunge of 1981-82, according to the TD Bank.
It was also predominately a recession imposed on Canada by the more massive retreat in global markets, which not only depressed demand for Canadian exports of autos, parts, wood products and oil and other commodities, but also prices.
Statistics Canada put the decline in exports in the second-quarter at 5.2 per cent, after falling 8.7 per cent in the first quarter. They have shrunk about 30 per cent since the start of the U.S. economic downturn at the end of 2007.
As TD economist Diana Petramala noted, the impact on Canadian business has been profound, with business investment in structures, machinery and equipment dropping about 17 per cent in the second quarter alone.
By contrast, the domestic economy only saw a modest slump and actually showed renewed signs of life as early as the spring, with both consumer and government spending, as well as personal income, turning positive in the second quarter.
“The big story in the second quarter was that the economy was still facing extreme weakness imposed on it from abroad. We had this deep decline in exports and we had businesses responding to that by really cutting back on capital spending and inventories,” said Porter.