Canada's Economy Seen Likely Stagnant In May, Stoking Debate Over Possible Recession

By Kim Mackrael 

        OTTAWA--Economists estimate that Canada's economy was stuck in neutral in May, reflecting weak manufacturing output and a likely temporary drop in oil production caused by forest fires.
        Gross domestic product data due on Friday could add to the debate over whether Canada entered a recession--often defined as two consecutive quarters of contraction--in the first half of 2015.
        The Canadian economy shrank 0.6% on an annualized basis in the first quarter, and the Bank of Canada this month cut its second-quarter forecast to a contraction of 0.5%.
        If the economy did shrink in May, it would be the fifth straight monthly contraction. But even a flat figure that month wouldn't change many economists' view that the second quarter as a whole was negative.
        "If it is flat or weaker, it does point to a small decline for the quarter," said BMO Capital Markets chief economist Doug Porter, who is calling for no growth in May. In April, Canada's GDP shrank 0.1%.
        Canada's stumble comes as the U.S. economy shows signs of acceleration after a slow start to the year. Gross domestic product grew at a 2.3% seasonally adjusted annual rate in the second quarter, the U.S. Commerce Department said on Thursday.
        The Canadian economy has been hit hard by sharply lower crude oil prices, which have reduced investment and driven down the value of the Canadian dollar.
        The Bank of Canada, which lowered its key overnight interest rate to 0.50% earlier this month, has said it anticipates a turnaround in the second half of the year, with growth in the U.S. giving a boost to Canadian exports, about 75% of which go to the Americans. The central bank has forecast Canada's economy will grow 1.1% in all of 2015.
        Earlier this week, a Toronto-based think tank said it was too soon to say whether Canada has experienced a recession. The C.D. Howe Institute's Business Cycle Council, considered an unofficial arbiter of economic downturns in Canada, said weakness during the first four months of the year was mainly linked to low oil prices and falling investment in some resource sectors. At the same time, it noted, labor markets have remained resilient, a sign that problems in the Canadian economy may not be widespread.
        C.D. Howe's Business Cycle Council defines a recession as a "pronounced, pervasive and persistent decline" in overall economic activity. The group performs a similar role to that of the National Bureau of Economic Research in the U.S.
        Bank of Nova Scotia economist Derek Holt said Canada's household sector performed well in May, but the economy as a whole was hurt by poor manufacturing and export numbers. He said temporary factors, such as forest fires and drought conditions in Western Canada, could complicate economists' forecasts.
        "For me, one takeaway is that it's going to take until late summer data before we start to shake out some of these transitory factors on growth, " Mr. Holt said. "It will be difficult to read in the meantime."
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        (END) Dow Jones Newswires

        July 30, 2015 12:17 ET (16:17 GMT)

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