Canada's GDP shrunk at an annualised 0.5% rate in the second quarter, after a 0.8% fall in the first so the country is now technically in recession. Slumping commodity prices have hit exports and capital expenditure: business investment fell by 8% in the second quarter after a 10.9% drop in the first. But the worst of the downturn is now expected to be over. The Bank of Canada still foresees a 1.1% expansion for 2015 as a whole.
What the commentators said
The commodities boom kept it going, but it also lifted the Canadian dollar, or loonie, to levels that began to damage domestic industries by deterring foreign investment and undermining
exports. A fall in the loonie is usually an opportunity to "strike up the band" in the manufacturing sector, as Fiat Chrysler's Canadian CEO Reid Bigland told Reuters. "Unfortunately the [loonie] has been so strong for so long that a lot of the band has left." Last year Canada attracted only $750m of investment from carmakers, compared to $10bn in the US and $7bn in Mexico, according to the Center for Automotive Research. In the meantime, "the only thing that has kept Canada from a full-blown recession is a US-style housing bubble", said the FT.
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In recent months, households have been dipping into their savings, as Kiran Rana said in Canada's Globe and Mail. Household debt as a proportion of disposable income is at a record high of 165%. With house prices overvalued by up to 30%, said the Bank of Canada, the economy looks unusually vulnerable to higher interest rates, suggesting consumption and growth are unlikely to rise very fast from here. The next prime minister faces an unenviable legacy.
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