Canada is on the verge of a recession
The newest financial information from Canada reveals that it’s inching towards recession, after its financial system posted its fifth straight month of contraction.
Statistics Canada revealed on July 31 that the Canadian financial system shrank by zero.2% on an annualized foundation in Could, maybe pushing the nation over the sting into recessionary territory for the primary half of 2015.
“There isn’t a sugar-coating this one,” Douglas Porter, BMO chief economist, wrote in a shopper notice. “It is a bitter outcome.”
The poor exhibiting stunned economists, who predicted GDP to stay flat, however it the outcome adopted a contraction within the first quarter at an annual fee of zero.6%. Canada’s financial system could or could not have technically dipped into recession this 12 months — outlined as two consecutive quarters of unfavourable GDP progress — however it’s certainly dealing with some severe headwinds.
Makes an attempt to rebound: Canada’s central financial institution slashed rates of interest in July to zero.50%, the second minimize this 12 months, however that will not be sufficient to goose the financial system. With charges already so low, there comes some extent when rate of interest cuts have diminishing returns. Client confidence in Canada is at a two-year low.
There are different fault strains within the Canadian financial system. Fears over a housing bubble in key metro areas comparable to Toronto and Vancouver are rising.
“In gentle of its hotter value efficiency over the previous three to 5 years and higher provide danger, this vulnerability seems to be comparatively excessive within the Toronto market,” the deputy chief economist of TD Financial institution wrote in a brand new report.
A run up in housing costs, together with overbuilding models that have not been offered, and a excessive dwelling price-to-income ratio has TD Financial institution predicting a “medium-to-moderate” likelihood of a “painful value adjustment.” In different phrases, the bubble might deflate.
Housing markets within the oil patch have already began dropping worth. The Calgary Actual Property Board predicts that the resale worth of properties will fall by zero.2% by the tip of the 12 months. And whole dwelling gross sales might fall by 22% in 2015. That may be a dramatic downward revision from the group’s prediction in January that dwelling gross sales would rise by 1.6%.
It is all about oil: However that is as a result of the financial state of affairs is far worse within the oil patch than many had predicted six months in the past. And oil costs have crashed once more, a element not but captured by the disappointing GDP figures. Crude oil (WTI) is now under $50 per barrel, and Canada’s heavy oil trades at a reduction to even that low determine attributable to pipeline constraints and decrease high quality.
That is dangerous information for corporations like Canadian Oil Sands (COSWF), which owns a 36.74% stake within the Syncrude undertaking, Canada’s largest producer of artificial oil constructed from Canadian oil sands. The corporate misplaced $128 million within the second quarter attributable to decrease oil costs and better company taxes in Alberta.
Recessionary circumstances together with low oil costs might result in “deteriorating” asset high quality for a few of Canada’s largest banks, in line with Moody’s.
What’s subsequent? The grim oil value image is forcing corporations to slash spending and delay initiatives. Canada’s oil sands have a tendency to come back from large-scale, multibillion greenback initiatives. The excessive price places them on the frontlines for cancellations when oil costs sink.
In line with the Monetary Put up there have been 33 main oil and fuel initiatives which have been delayed or cancelled to date this 12 months, and 16 of them are situated in Canada’s oil sands. Many, if not most, of those cancelled initiatives will want a lot larger oil costs with a view to breakeven.
For now, it’s unclear when that may occur. Oil value predictions must be taken with a big grain of salt, however Once more Capital’s John Kilduff, showing on CNBC, mentioned that oil might dip into $30 territory later this 12 months.
“Christmas time we’ll most likely be rebounding off new lows off of the mid to low 30s,” he mentioned on Squawk Field. “We’ve so much to go. We’ll take out the March lows of $43 and commerce all the way down to the 30s in my opinion.”
And naturally long-term projections aren’t value a lot, however Goldman Sachs now says that oil might stay round $50 via 2020.
That isn’t one thing Canada’s oil producers need to hear.
Nick Cunningham covers vitality and environmental points for Oilprice.com.