Toronto-Dominion is the latest major bank to declare a recession in Canada, saying the “balance of probabilities” has tipped in favour of another quarter-point rate cut next week.
“It is likely the economy was in recession in the first half of the year,” thanks to the damage from a collapse in oil and commodity prices that has persisted since 2014, senior economist Randall Bartlett said in a note to investors Monday.
Echoing a report from Bank of America Merrill Lynch on July 1, Bartlett said the Bank of Canada will probably cut its 0.75 per cent key interest rate at its July 15 meeting and maintain the historically low rate until mid-2017. That will probably keep Canada’s exchange rate below 80 U.S. cents through this year, he added.
Bartlett said gross domestic product output likely fell by about 1.0 per cent in the first three months of 2015 and by 0.6 per cent in the second quarter. He said the second half is likely to be weaker than expected and will moderate annual real GDP growth to around 1.2 per cent for all of 2015.
That would mark the weakest pace of real GDP growth outside of a recession in more than 20 years.
Bartlett said growth is tracking well below the 1.9 per cent pace expected by the Bank of Canada with the first half rate roughly 1.8 percentage points below the bank’s latest forecast.
He added that some aspects of the economy have been surprisingly resilient, with the labour market posting advances in months when GDP has contracted.
In a separate note, TD Securities’ chief Canada macro strategist David Tulk said forecasters have underestimated the impact of the oil price decline on the Canadian economy, calling the shock “longer-lived and larger” than expected.
Meanwhile, the August contract for crude plunged $4.40 to close at $52.53 (U.S.) a barrel Monday on the prospect of increased oil output from Iran and worries over Greece.
The Canadian dollar was down for a fifth consecutive trading day, losing 0.58 of a U.S. cent to 79.04 cents as traders anticipate a second rate cut following a surprise 25 basis point reduction in January that was intended to stimulate the economy.
The Bank of Canada reported Monday that business sentiment for future sales growth remained “weak” in the second quarter as Canada’s energy industry struggled with an oil shock. Crude oil is the country’s top export and Statistics Canada also said Monday companies intend to cut capital investment by 18.7 per cent this year in the oil and gas, mining and quarrying category.
TD’s forecast runs counter to the Canadian government’s view. Citing optimism from manufacturers and consumers, Finance Minister Joe Oliver said last Friday that the economy is poised for a rebound and won’t fall into recession. The latest Bloomberg Nanos Canadian Confidence Index, which last week remained close to the 2015 high, supports Oliver’s view however his office declined a request for comment Monday.
– The Toronto Star