Economists say data out this week is likely to show that Canada slipped into a technical recession in the second quarter, but the contraction should be short-lived.
“A number of positive elements are coming through,” said TD Bank chief economist Beata Caranci. “Even if, like we’re expecting, we get a contraction in the second quarter, the consumption numbers are likely to be fairly healthy.”
According to Thomson Reuters, economists expect Statistics Canada to report Tuesday that the economy contracted at an annualized rate of 1.0% in the second quarter.
Among other data expected from Statistics Canada this week are July trade figures on Thursday and the jobs report for August on Friday.
The Bank of Canada cut its key interest rate by a quarter of a percentage point to 0.5% in July amid concerns about the impact falling oil prices and weak exports on the economy.
In its July monetary policy report, the central bank estimated the Canadian economy contracted at an annual pace of 0.5% in the second quarter, but predicted things would pick on in the second half of the year.
Caranci says the benefit of the lower loonie to Canada’s export sector should boost growth in the third quarter.
Although exports were supposed to see a boost sooner, Caranci says the sector’s sensitivity to the loonie has diminished over the past decade as the U.S. — Canada’s biggest trading partner — has been importing more from China and Mexico.
“For every percentage point of deprecation you get to the Canadian dollar you’re getting less of a lift to exporters,” Caranci said. “You’re getting not only less sensitivity but also a more delayed response, so it’s coming in much later than we had been forecasting.”
TD is forecasting economic growth in the two to 2.5% range in the third quarter — more optimistic than the Bank of Canada’s 1.5% prediction for the three-month period.
Caranci says that would make another rate cut from the Bank of Canada unlikely.
“If we get momentum picking up in the third quarter, and we get the economy expanding more than the Bank of Canada is expecting, which is a low bar … then the probability of a Bank of Canada cut gets less and less,” she said.
“If you’re going to pull the trigger and take rates pretty much effectively close to zero, you need the economy to show that weakness in order to justify it.”
However, Capital Economics economist David Madani says he anticipates growth in the third quarter to be “unspectacular.”
“Most of the forward-looking indicators are pointing to further weakness,” says Madani, noting that business confidence indicators suggest the economy will continue to struggle during the latter part of the year.
“We are expecting a return to positive growth, but I think it’s going to be growth that’s fairly weak — well below the economy’s potential growth rate of 2%.”