It's 'negligent' to say that Canada is in a recession
However, the two quarters of contraction definition may be overly simplistic, says Douglas Porter at BMO Capital Markets. There are actually a lot of indicators that point to Canada not being in what he call the "r-word."
"While there is little debate that Canada's performance so far in 2015 has been a big disappointment, we believe it is premature-and perhaps even somewhat negligent-to officially declare Canada to be in recession," said Porter.
Porter offered two alternative definitions of recession and said that Canada fits into neither of them.
The first, from the National Bureau of Economic Research which declares "official" recessions, is simply "a broad-based decline in activity and employment." Porter said that Canada doesn't qualify because the drawdown has been limited.
"So far this year, 13 of the 20 sectors of monthly GDP actually grew, despite five consecutive monthly contractions to start 2015," wrote Porter in a note to clients on Tuesday. "And, employment is up 114,500 through the first eight months of the year, hardly a sign of a faltering economy."
He also says there have been previous instances of economic weakness in 1986 and 2001, with similar GDP losses over similar time frames, that have not been called recessions
Porter sources his second definition from former Fed chairman Alan Greenspan, who said a recession is "a process of deterioration in which events feed on each other to induce the economy into a cumulative decline."
To Porter, Canada does not fall under this definition either.
"This definition is exceptionally difficult to pin down, but the lack of broader weakness in the economy and resilience in consumer spending and housing suggests that Greenspan's negative feedback loop hasn't materialized," wrote Porter.
Porter argues that while there is significant softness in parts of the economy, especially resources, there are 8 reasons why it's too early to call for a recession yet. From Porter:
- "Spending remains solid."
- "Home sales remain robust."
- "Home building continues to chug along."
- "Credit growth remains healthy."
- "Consumer confidence, while down in recent months, is still not even close to consistent with past recessions."
- "Bankruptcies have barely budged."
- "Employment has been positive this year."
- "The unemployment rate has barely budged."
Porter expects that the temporary dip will end soon, he points out that June GDP growth was back to positive, and that Canadian GDP will be back to 2% growth next year.