Report: Canada's economy feels recessionary effects of low oil prices

In the first half of this year, Canada's economic recovery ended abruptly, Standard & Poor's Ratings Services said in a commentary published today. Sharply lower oil prices cut business investment, increased unemployment, and reduced workers' income in oil-producing regions.

In the report, "Canada Economic Outlook: Low Oil Prices Ignite Recessionary Forces," Standard & Poor's said that sluggish consumer spending and a decline in non-energy exports also helped set the stage for a 0.8% real GDP decline in the first quarter. The economy contracted a further 0.5% in the second quarter, and with that, Canada is again flirting with recessionary conditions for the second time in less than a decade.
 
Although back-to-back GDP declines meet the technical definition of a recession, most of the weakness stems from Canada's shrinking energy sector, which adds more than C$150 billion annually to real GDP and is now almost C$10 billion smaller than it was in June 2014 before oil prices collapsed.

The rest of the economy, on the other hand, benefits from lower oil prices, and has continued to expand since the middle of last year, suggesting Canada's downturn could be short-lived. Positive signals in the GDP report for the second quarter include a pick-up in consumer spending and rebound in international trade: Canadian exports rose for the first time in six months.

Standard & Poor's said that it sees these developments helping Canada's economy regain enough momentum to push real GDP growth above 2% in the second half of 2015.
 
"Unlike Canada's commodity markets, where business profitability is suffering and rising unemployment is eroding consumers' purchasing power and debt-servicing capacity, the current mix of economic conditions outside Canada's natural-resource sector points to stable or improving growth prospects," said Robert Palombi, fixed income analyst for Standard & Poor's. "We believe that will be enough to pull Canada out of the technical recession it fell into in the first half of 2015."
 



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