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(Sept. 1, 2015) -- Second-quarter 2015 gross domestic product growth in Canada dropped by a smaller than expected 0.5 percent following a 0.8 percent decline in the first quarter (previously estimated as -0.6 percent), RBC Economics reported.

Canada slips into recession

TORONTO —  Second-quarter 2015 gross domestic product growth in Canada dropped by a smaller than expected 0.5 percent following a 0.8 percent decline in the first quarter (previously estimated as -0.6 percent), RBC Economics reported.

Market expectations had been for a larger 1.0 percent decline in the quarter, said Paul Ferley, assistant chief economist.

“Although two quarters of declining GDP are often associated with recessions, a recession also needs to entail broad-based weakness,” said Ferley. “The shallow declines reported during the first half of 2015 were largely the result of weakness in business investment with the energy sector markedly reducing capital expenditure in the face of the slide in oil prices.”

The report indicated strengthening consumer spending and exports turning modestly higher. As well, the report that June GDP surged by 0.5 percent in the month augurs well for third-quarter 2015 growth to return to the positive column, he predicted.

Business investment dropped by 12.0 percent in the second quarter following a 17.7 percent plummet in the first quarter. Spending on machinery and equipment dropped by 17.1 percent while the structures component fell by 8.8 percent. These declines subtracted 1.4 percentage points from the overall annualized second-quarter GDP growth rate. The other main area of weakness was inventories, where a smaller build in the second quarter subtracted 1.2 percentage points.

The main area of offsetting strength was consumer spending, which rose by 2.3 percent following the disappointing 0.5 percent gain in the first quarter. The severe winter weather may have weighed on spending at the start of 2015, and the return to seasonal temperatures in the second quarter likely contributed to the strength, said Ferley.

As well, the drop in gasoline prices and continued job gains supported household spending. These factors along with low interest rates continued to support residential investment, which rose from an already high level of activity by 1.3 percent in the second quarter after a 3.5 percent increase in the first quarter that were backed by renovation spending and a surge in ownership transfer costs.

Net exports also provided some offset to the weakness in business investment, and inventories contributed 0.6 percentage points to second-quarter GDP growth. This support mainly resulted from imports dropping by 1.5 percent after a 1.4 percent decline in the first quarter, with the weak Canadian dollar limiting foreign purchases by Canadians.

The weak currency and bounce back in U.S. growth were likely factors returning exports to positive growth, although the second-quarter increase was a relatively modest 0.4 percent. Indications on a monthly basis of a surge in exports in June augur well for this component to make more of a contribution to GDP growth in the current quarter, Ferley explained.

“Optimism about third-quarter growth was abetted by a separate report indicating that June 2015 GDP surged by 0.5 percent in the month, which ended a string of five consecutive monthly declines,” said Ferley. “This strength was likely in part related to the surge in exports; however, it also reflected the ending of a shutdown of an oil sands facility that contributed to the mining component jumping by 3.1 percent in the month.”

The FIFA Women’s World Cup, the bulk of which was held in June, also provided a boost with the arts, entertainment, and recreation component of GDP rising by 6.4 percent.

“The second-quarter 2015 GDP numbers indicated modestly declining growth during the first half of 2015, with the fall in oil prices taking its toll on economic activity,” Ferley explained. “The reported 0.5 percent surge in June GDP indicated of a return to positive growth in the third quarter of around 2 percent This is consistent with indications of strong above-average U.S. growth along with the weakening Canadian dollar sustaining the rebounding export growth that emerged late in the second quarter.

“In terms of policy implications, indications of a likely return to positive GDP growth in the current quarter reduces the probability for any further easing by the Bank of Canada,” he added. “We expect the overnight rate to remain unchanged at the current 0.50 percent range into 2016, although that depends on subsequent data releases remaining consistent with the central bank’s current forecast of growth strengthening to an above-potential rate during this period.”

SOURCE: RBC Economics press release

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About Greg Gerber

Greg Gerber is a freelance writer and podcaster who has been writing about the RV industry since 2000. He is the former editor of RV Daily Report.

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One comment

  1. The title of this article is misleading, energy is way down. Everything else is up.