Without actually using the word, Stephen Poloz, The Governor of the Bank of Canada, acknowledged that there may be a recession coming for the first time in six years, by cutting the interest rate for the second time this year, to 0.5 percent.
The central bank outlook is that the economy will have contracted by 0.6-0.5 percent in the first and second quarter respectively, making it two consecutive negative quarters, the definition of a recession.
Three Key Factors
During the press conference, Poloz cited the three main reasons behind the second reduction in just six months. He highlighted that the continuing fall in oil prices has caused Canadian oil producers to lower their long term outlook, making them reduce their planned investment spending. Oil is one of the key economic drivers of the economy with the oil sands in Alberta and other provinces adding billion’s each year.
The two other potentially dangerous issues are China’s slowing economy, which has caused it to turn inward, looking at domestic development rather than importing. As a result, it is decreasing the amount of Canadian exports, to what is often overlooked as a significant export market. This added to the slower US economy is reducing its other main export market as well.
Despite the slow start, policymakers are predicting that the Canadian economy will grow by 1.5 percent in the third quarter and 2.5 percent in the fourth quarter of 2015. The Bank of Canada is hoping that due to the weaker Canadian Dollar, the non-resource areas of the economy will expand, and become the new driving force for growth in the country.
That could be followed by higher exports to the United States, something sorely needed to strengthen business confidence and investment. Whether rates will fall further is open to debate as, at 0.5%, the central banks leeway is getting smaller.