Statistics Canada reports that real gross domestic product (GDP) fell at a 0.6 per cent annualized rate in the first three months of the year, considerably worse than even pessimistic forecasters were expecting. It is clear that the slump in global oil prices is taking a measurable toll on Canada’s energy-centric economy.
Non-residential investment plunged by 15 per cent in January, February and March, led by sharp cuts in capital-spending by the oil and gas industry. In recent years, the energy sector has accounted for more than one-third of all non-residential investment, as well as for roughly one-quarter of Canada’s merchandise exports. So the downturn in oil and natural gas markets is dampening overall private sector capital outlays and weighing heavily on Canada’s export receipts.
Harsh winter weather also played a role in the gloomy first-quarter report. Consumer spending came in below expectations, as many Canadians apparently decided to stay indoors.
Economists define a “recession” as two consecutive quarters of declining real GDP. We are half way there, and some recent economic data signal further softness in April, May and June.
The U.S. economy has also disappointed: Real GDP contracted by 0.7 per cent in the first quarter (bad winter weather and a West Coast port strike contributed to this outcome), and the growth rate for the last quarter of 2014 was revised down. Most forecasters are reasonably positive about the U.S.’s economic prospects over the balance of this year, but the surprisingly downbeat first-quarter data does not inspire confidence.
The oil price collapse has by no means run its course, with Canadian producers likely to announce more large-scale spending cuts and layoffs in the coming months. Ongoing pain in the energy sector will hurt many other industries, as well as the large numbers of Canadian households that have come to depend, directly or indirectly, on a robust oil and gas industry.
The Canadian labour market has also clearly lost steam, buffeted by job losses in eight of the last 17 months. Employment growth is running at less than 1 per cent on an annual basis, well behind the U.S.
Finally, Canada has seen a significant deterioration in its trade and current account deficits amid plummeting oil prices and soggy markets for other commodities, like natural gas, coal and base metals. The current account deficit widened dramatically in the first quarter, reaching a near-record level of almost $18 billion. And the merchandise trade deficit for the month of April was the second biggest on record.
It is unclear to what extent stronger growth in non-energy exports – including service exports but also manufacturing, forestry and agri-food products – will offset the weakness stemming from depressed oil and natural gas markets. The Bank of Canada and private sector forecasters have been calling for a revival of non-energy exports, but achieving this depends on solid and sustained economic momentum in the U.S.
At this point, Canada looks to be headed for a year of very tepid growth in its gross domestic product, well below 2 per cent and possibly dipping to 1 per cent.
I do not expect a second quarter of shrinking economic output in the second quarter (which would result in a “technical” recession), but such a scenario cannot be ruled out, given the dismal first quarter numbers and the continuing struggles in the energy sector.
Jock Finlayson is Executive Vice President of the Business Council of British Columbia.