The Canadian economy is on hold and rates should be too

The decline in Canadian GDP illustrates need for continued economic stimulus

By Phil Soper

Phil-014_optA dip in Canadian gross domestic product in the first quarter of 2015 makes it vital that the Bank of Canada continue to stand firm on stimulative interest rate policy. The weakness in Canada’s energy sector has been a drag on the broader economy, causing the Canadian housing market to slow to soft-landing territory in virtually all regions of the country outside of Vancouver and Toronto — a good outcome.  It is vital that we support this delicately balanced market by keeping interest rates on hold.

My remarks are in response to today’s release of the Real Gross Domestic Product report from Statistics Canada, which showed an annualized decline of 0.6 percent in the first quarter. This is the first negative growth rate in real GDP since the second quarter of 2011.  The weakness was led by a decline in the energy sector where the support activities for mining and oil and gas extraction contracted by 30 percent over the quarter. Non-residential business investment also declined in Q1, in contrast to an increase in investment in residential structures.

The figures are not wholly unexpected, given that Bank of Canada Governor Stephen Poloz has referred to Canada’s economic performance during the first quarter of the year as ‘atrocious’.  The Bank of Canada cut its benchmark lending rate to 0.75 percent from 1.0 percent in January of this year.

While a drag on the national economy as a whole, soft oil prices are positive for some parts of the country, particularly central Canada and British Columbia.  Lower prices act in a similar way to tax cuts – they give consumers more money to spend, which does boost the economy. However, a bump in consumer spending is not going to replace the growth gap left by a sagging energy sector. Policy makers need to remain vigilant.

Note that the Canadian GDP was down 0.2 percent in March, which was the third month in a row to register a decline.  A 1.0 percent contraction in the goods producing industries outweighed a 0.2 percent rise in services during the month.  However, one of the sources of strength in the report came from the Real Estate and Rental and Leasing industry, which was up by 0.4 percent in March.

The housing sector is a key source of strength to Canada’s economy. A firm low interest rate policy is more important than ever.

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