The Bank of Canada (BoC) announced Wednesday that it would not be hiking its overnight interest rate from the current 1.75%. This was the third consecutive time that the central bank has opted to keep the rate as is, but it was the first in which the bank acknowledged that it probably wouldn’t be reaching its inflation target any time soon, due to the weakness of the Canadian economy.
Slow economic growth, along with a vulnerable housing market, have prompted some economists and financial commentators to close in on one question that has probably been lurking in the minds of Canadians for months: are we headed for a recession?
In the fourth quarter of 2018, the Canadian economy grew by only 0.1% — the slowest pace of quarterly growth in two-and-a-half-years, according to Statistics Canada.
That 0.1% is also a lower figure than economists had expected.
But the other big topic of discussion is residential investment, which dropped by 7.5% over the past year, noted Robert Kavcic, senior economist at the Bank of Montreal, in a report this week. This includes building, buying or renovating homes.
“Historically, declines of this magnitude in such an important sector have usually correlated with a broader recession,” Kavcic wrote.
The slowdown in residential investments — which was largely triggered by the introduction of the mortgage stress test, rising interest rates and, in Vancouver and Toronto, a series of policies introduced by the municipal, provincial and federal governments to rein in runaway housing prices — is especially significant at the current moment: a recent report from CIBC notes that the sector currently makes up a larger share of the economy than “at any other time on record.”
But other experts are not so convinced that a recession is imminent.
Over at CIBC, chief economist Avery Shenfeld wrote in a client note last week that while “Canada's economy barely skirted the start of a recession” in the fourth quarter of 2018, the 66,800 jobs that were created in January should not be overlooked.
“If not for a huge employment gain in January we'd be worried about an outright recession, but at this point, its [sic] best described as a stalled engine,” said Shenfeld.
At the Globe and Mail, reporter Michael Babad reminded readers that Alberta Premier Rachel Notley recently gave the green light to ramp up oil production in the province, after implementing cuts in January that were widely expected to diminish the country’s GDP.
Stephen Brown, senior Canada economist at Capital Economics, also noted in a recent forecast that both home and car sales saw “strong monthly gains” at the start of the year.
In other words: the outlook isn’t great, but it’s not all bad, either.
“Canada is not at immediate risk of recession,” said Brown, “but the chance of GDP growth rising back above potential in the second half of the year looks slim.”
“We now expect growth to average just 1 per cent in 2019.”