OTTAWA — When April’s gross domestic product report is released on Thursday, it will all but certainly confirm that Canada’s economy has stalled.
But while the majority of economists will put down the downturn to temporary factors like Japan and bad weather, there is also a gnawing concern that it could represent a longer-term problem. Even the dreaded double-dip is no longer something that can be ruled out confidently.
Thursday’s gross domestic product report from Statistics Canada is widely expected to show a rare result for the country since the end of the recession two years ago, an off-month when the economy actually contracted.
The consensus of economists has GDP retracing a slight 0.1 per cent in April, the first month of the current quarter which ends June 30.
Almost all the indicators so far published point to a negative result, although extraordinary and temporary factors were in play, including April showers that kept construction crews idle and shoppers at home, and Japan’s natural disasters that disrupted supply lines to Ontario’s Japanese car plants.
But while that is somewhat disconcerting following a first quarter acceleration of 3.9 per cent — the third best of the recovery period — the real measure is what happens next.
The Bank of Canada and many private sector analysts have the economy suffering through a slowdown for one quarter, then accelerating again before settling at a growth rate of about two per cent in 2013.
While nothing remarkable, most economists would gladly take such an undramatic outcome.
The trouble is, drama is in the air.
“You will see a lot of excuses Thursday about April,” says Benjamin Tal, deputy chief economist with CIBC World Markets.
“People will say, ‘Oh, don’t worry about it, it’s just the weather.’ The other story is that we are in a really soft period reflecting a very weak American economy and some softness in here in Canada. (But) The fact is we are in a very modest recovery and that’s an understatement.”
In a new report Tuesday, forecasters Capital Economics see GDP going declining each quarter until the end of 2012, averaging 1.5 per cent next year. Meanwhile, it predicts Canada’s unemployment rate will rise from the current 7.4 per cent to 8.2 by the end of next year.
“Canada’s recent economic performance has been impressive,” say the analysts. “Unfortunately … our fear is that with the housing bubble now close to bursting and commodity prices retreating, Canada will go from leader to laggard.”
Few currently use the dreaded double-dip terminology to describe the lull, but many agree that the expectations of a restart to the economy over the summer depends on avoiding a number of economic landmines.
The most immediate is the European debt crisis and this week billionaire investor George Soros wondered if that is something that can be avoided. The world is on the “verge of an economic collapse” that starts with Greece “but could easily spread,” he warned.
Many analysts, including TD Bank’s chief economist, Craig Alexander, think Europe and the International Monetary Fund won’t let Greece default on its debt because the consequences are too dire.
It won’t be pretty, he says. Greece will be punished through years of austerity, but the wider reckoning will be pushed further into the future until Europe’s banks are strong enough to deal with what, in essence, is a nation’s default.
“If Greece defaulted on their debt now and had a significant haircut on their bonds, it would have very detrimental effect on the Eropean banking system and it would have a knock-on effect around the world,” Alexander explained.
“(But) the most likely scenario is that Europe will find a way to push the ball farther down the road and every month that goes by, the balance sheets of the banks look better.”
Next in line is the U.S., Canada’s largest trading partner, but there are also potential pitfalls in the Middle East tensions and even China, where inflation threatens its ability to be the engine of global growth.
All is not well with Canada’s domestic economy either. Consumers, having sustained the recovery so far, have little left to contribute given that household debt now is at a record 147 per cent of income.
“If we’re at record high on home ownership rates, record household debt-to-income, record high consumer spending, record high renovation spending, and we see evidence of a slowing household sector, to me that says we’re tapped out,” says Derek Holt of Scotiabank.
That doesn’t mean Canada’s domestic economy will collapse — it won’t unless job growth stops — but it does mean households won’t be contributing to growth.
CIBC’s Tal believes the most likely scenario is that debt-fuelled activity that once represented 80 per cent of the economy is waning, to be replaced by business investments that go into production of real goods for domestic and export markets.
“The good news is that it’s a healthier 20 per cent,” he says. “The not-so-good news is it will be slower growth by definition.”