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'Technical' Recession Possible In Canada After Disappointing Economic Data: TD Bank

With Canada’s economy in a “lengthy hibernation,” we can at least rule out more interest rate hikes for now.
Canada is at risk of a
Canada is at risk of a

Canada's economy put in a much weaker performance at the end of 2018 than the experts had been expecting, and it's not just the slowdown in the oil patch. The country's fizzling housing market and tapped-out consumers are beginning to take a toll as well.

Economic output grew by a weak 0.4 per cent in the fourth quarter, Statistics Canada reported Friday — considerably less than the already unimpressive 1 per cent growth the experts had been calling for.

In December — the most recent period for which there is data — the economy shrank outright, by 0.1 per cent. It was the third time in four months that Canada's economy contracted.

Earlier: Should Canadians be worried about a recession in 2019? Story continues below.

"Brace yourself. Things are probably going to get worse before they get better," TD Bank senior economist Brian DePratto wrote in a client note.

"The monthly GDP data suggests little momentum heading into 2019, and the impact from mandatory oil curtailment in Alberta will deepen (in the next quarter), shaving around a point off of (first-quarter) growth."

That was echoed by Bank of Montreal chief economist Doug Porter, who said Canada will have to "wait for spring for the economy to pull out of its lengthy hibernation" at the end of last year and the start of this one.

But it's not just the oil sector dragging Canada's economy down anymore; the slowdown in the housing market is taking a toll as well.

StatCan noted that construction output is now 6.3 per cent lower than a year ago. It has been shrinking for seven straight months — the longest losing streak in nearly three decades. Residential investment posted its largest decline since 2009, when Canada's housing market briefly swooned during the financial crisis.

Household spending slowed for the second quarter in a row, StatCan noted, up 0.2 per cent after a rise of 0.3 per cent in the previous quarter.

"This isn't a recession alarm bell, but it's an economy that would be vulnerable if any new shocks were to emerge."Avery Shenfeld, CIBC

But there is one large silver lining: The country's continuing strong jobs situation, which has led to some solid wage gains.

"One of the (few) bright spots in today's data was a 3.3 per cent increase in household disposable income in the fourth quarter," Royal Bank of Canada senior economist Nathan Janzen wrote.

Risk of 'technical' recession

In a report issued Friday, TD Bank's DePratto suggested Canada is at risk of a "technical" recession, but not so much at risk of a "real" one.

In a "technical" recession, the economy would shrink for two or more consecutive quarters, but with only limited impact to the job market. That's roughly what happened in Canada in 2015, in the wake of the oil price collapse.

DePratto said Canada can expect to see more "solo" recessions in the future, where the domestic economy shrinks even as the U.S. economy continues to grow.

"We need only look back to 2015 to find evidence that Canada can indeed experience a 'technical recession' while the U.S. continues to expand," DePratto wrote.

In the past, Canada helped pull itself out of economic slumps by devaluing the loonie and exporting more. But that doesn't seem to work as well as it used to, DePratto wrote.

Interest rates on hold for now

Still, most economists aren't expecting anything worse than a "technical" recession.

"With no drop yet in employment, this isn't a recession alarm bell, but it's an economy that would be vulnerable if any new shocks were to emerge," CIBC senior economist Avery Shenfeld wrote.

Most of the big bank economists agreed that the slowdown means the Bank of Canada will no longer be in a hurry to raise interest rates.

"The Bank of Canada looks to stay very quiet for very long — they will need compelling evidence that growth is returning to an above-trend pace before even considering rate hikes, and that won't likely be the case until late this year, at the earliest," BMO's Porter wrote.

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