The long-awaited recession??

So, is this the start of the long-awaited (and for the media, seemingly much-desired) recession in Canada? Statistics Canada reported this morning that real GDP fell at a 0.2 percent annualized rate in the second quarter of the year. It takes two quarters of declining GDP to meet the "official" definition of a recession, but weak monthly GDP data for June and July suggest that a further decline in Q3 is at least a possibility.

Before we look at the details, let's just pause to think about what a "0.2 percent annualized rate" looks like. StatsCan correctly states in its media release that "real gross domestic product (GDP) was nearly unchanged in the second quarter", not that the media will take any notice of that form of words.   If we "de-annualize" the number we find that it means real GDP in Q2 was 0.05 percent smaller than in Q1. That barely even qualifies as a rounding error, and it could well be eliminated (or, equally probably, revised to a larger decline) when updated estimates are available in a few months' time. 

Looking deeper into the data, we immediately see evidence that the Bank of Canada's aggressive rate hikes are having an impact on at least one segment of the economy. Housing investment fell 2.1 percent in the quarter; this was its fifth consecutive quarterly decline, which corresponds remarkably closely to the duration of the Bank's tightening moves. StatsCan calculates that this factor alone accounted for a 0.65 percent annualized rate of decline in real GDP, so aside from the decline in housing, real GDP would have risen at about a 0.4 percent annualized rate in the quarter.

It is worth spending an extra moment looking at the implications of this weakness in housing. Immigration levels into Canada are running at an unprecedented pace, led by surging numbers of foreign students, refugees and more conventional migrants. The country's population hit 40 million earlier this year and is set to grow by at least a million this year and next -- and there are suggestions that the numbers may in fact be undercounted. Unsurprisingly, this is putting great pressure on the housing market, as well as social services in general. The news that new housing construction plunged by 8.2 percent in Q2 could not have come at a worse time. 

Returning to the StatsCan data, we find a number of other contributors to slower growth. Business inventory accumulation slowed in the quarter, a development that may well be partly attributable to Bank of Canada policy, given the rising cost of carrying unsold goods. The trade sector was also a source of weakness, at least in a statistical sense, as growth in imports outpaced a very marginal rise in export volumes.

Growth in household spending was markedly lower in the quarter, posting a rise of only 0.1 percent after a gain of 1.2 percent in Q1. Interestingly, or perhaps ominously, per capita household spending fell 0.7 percent in the quarter, a development almost certainly linked to the large rise in population.  On a more positive note, real business investment rose 2.4 percent in the quarter after a prolonged bout of weakness. All in all, final domestic demand posted a rise of 0.3 percent in the quarter (about 1.2 percent annualized), a number that is in line with the previous quarter and that does not seem consistent with an imminent recession. 

As usual, StatsCan also posted new data on monthly GDP growth. Real GDP fell 0.2 percent in June, with both goods and services output falling.  Preliminary estimates show that real GDP was little changed in July, and it is this weak "handoff" from Q2 to Q3 that suggests overall weakness in growth could persist through the current quarter. That being said, it might be worth noting that the monthly data are particularly noisy at the moment. StatsCan notes that the severe forest fire season depressed output in a number of key sectors in June, and the prolonged port strikes in BC must also have had an impact. Experience suggests that the economy usually bounces back quickly from such events, but it may take some time for the impact on the monthly data to wear off.

Today's numbers represent the last major data point to emerge before the Bank of Canada's rate setting meeting on September 6.  Markets had been pricing in about a 25 percent chance of a further 25 basis point rate hike, but that now looks unlikely to happen.  Raising rates in the wake of a negative GDP report would be more than just a bad look for the Bank -- it would be bad policy.