Things aren’t going so well for our neighbor in the north. On Tuesday September 1st, Statistics Canada reported that real GDP (gross domestic product) in the Great White North declined for the second consecutive quarter, sending the country into a technical recession. (Source: Statistics Canada, September 1, 2015.)
In June, real GDP in Canada rose 0.5%, beating the expected 0.2% growth. However, the country’s real GDP fell for five consecutive months. June’s growth did not prevent the economy from entering recession territory.
Aggregating the numbers for the first half, we see that Canada’s economy in the first quarter of 2015 shrunk 0.8%. In the second quarter, the contraction continued at a rate of 0.5%.
Sector-wise, mining, quarrying, and oil and gas extraction surprisingly expanded after seven consecutive months of contractions. The sector expanded 3.1% in June. This was quite a surprise because as oil prices decline, many Canadian companies are experiencing massive layoffs.
Wholesale trade rose one percent while retail trade stayed unchanged. The finance and insurance sector grew 0.7%. The arts and entertainment sector gained a solid 6.4%, mostly due to the FIFA Women’s Soccer World Cup that was hosted in Canada. Manufacturing output grew 0.4%, while construction fell 0.6% in June.
Bank of Canada to Further Lower Interest Rates
With the country’s economy in recession, analysts are saying that the Bank of Canada will cut interest rates in September. According to National Bank analyst Paul-Andre Pinsonnault, the central bank’s governor Stephen Poloz will make another quarter of a percentage point cut to the policy rate at the September 9 meeting. This would send the policy rate to 0.25%, a record low since 2009’s global financial crisis. (Source: Financial Post, last accessed September 1, 2015.)
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Note that Canada’s central bankers have already cut interest rates. In July, the Bank of Canada lowered its target for the overnight rate by a quarter of a percentage point to 0.5% in the face of a sluggish global economy. (Source: Bank of Canada, last accessed September 1, 2015.)
CAD-USD: Further Depreciation for the Canadian Dollar
Since Canada’s GDP in June turned out to be better than expected, the Canadian dollar gained a little bit against the U.S. dollar. However, if you look at the long-term trend, the situation for the loonie (a nickname for the Canadian dollar) is anything but cheerful.
While Canada is lowering interest rates, the U.S. is thinking of doing the exact opposite. The U.S. Federal Reserve is expected to raise interest rates sometime later this year. Growth was solid in the U.S. economy; real GDP grew an annualized rate of 3.7% in the second quarter of 2015.
When the U.S. economy continues to outperform the Canadian economy, things don’t look so good for the loonie. In July, the Canadian dollar hit its 11-year low against the U.S. dollar. Back in July 2011, one Canadian dollar could get you more than one U.S. dollar. Right now, a loonie could only get you 76 cents. That’s more than a 28% depreciation for the Canadian dollar in four years!
If the divergence in the two nations’ economic performance continues, the Canadian dollar is likely to stay low against the mighty greenback. In July, Gluskin-Sheff’s chief economist David Rosenberg warned investors that the CAD-USD exchange rate could go to as low as $0.69. (Source: Financial Post, last accessed September 1, 2015.) In August, Macquarie Capital Markets analyst David Doyle said that the Canadian dollar would hit fresh new lows against the U.S. dollar, and the downturn could last up to 10 years. (Source: Financial Post, last accessed September 1, 2015.)