Canada’s central bank has cut its key interest rate and slashed its economic outlook in the second quarter due to the impact of lower oil prices and weaker demand for exports.
The Bank of Canada cut its target for the overnight rate by a quarter of a percentage point to 0.5 percent. In response, the Canadian dollar dropped to a post-recession low of about 77 U.S. cents.
This news is troubling enough, but it also marks the second straight quarter where Canada’s gross domestic product actually contracted — the textbook definition of a recession.
And yet, “I’m really hesitant to call it a recession at this point,” says Jeremy Kronick, a senior policy analyst at C.D. Howe Institute, an economic policy think tank based in Toronto.
“We have to have some duration of negative growth, we have to have obviously certain amplitude, but even more importantly we need it to be widespread,” Kronick says.
He says the downturn is largely caused by one industry — energy. Crude oil found in Canada’s western provinces is the country’s top export.
Arlene Kish, a senior Canada economist for IHS, says that despite steep cutbacks in the oil industry, other sectors such as retail and housing are doing quite well.
“So, consumers are still out there spending, incomes are still rising, so it’s not as if we’re facing any major challenges on the household front,” Kish says.
Moreover, Canada’s main trading partner, the United States, is still doing well; any threat to the broader North American economy typically runs from the U.S. north, not the other way around.
“When they sneeze, we catch a cold,” she said. “So, when Canada has a recession it is typically not going to be felt that big in the U.S.”
She said low interest rates, and the favorable exchange rate with the U.S. dollar, should eventually boost the manufacturing sectors located in Ontario and Quebec, which are heavily vested in aerospace and the auto industries.
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