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Canada Enters Recession

September 9, 2015, 8:10 AM Arkadiusz Sieroń , PhD

The Canadian economy recorded a second consecutive negative quarter. What does it mean for the global economy and the gold market?

We wrote in March that Canada was falling into recession. According to the official data published last week, real GDP declined 0.1 percent in the second quarter, following a 0.2 percent decrease in the first quarter, technically putting Canada in a recession. Interestingly, Prime Minister Stephen Harper has refused to recognize this simple fact. This may have something to do with the looming elections, however, denial is quite common among the policymakers. For example, on January 10, 2008, after the U.S. had already entered into recession, Bernanke said that "The Federal Reserve is not currently forecasting a recession". And as late as June 2008 he said that “The risk that the economy has entered a substantial downturn appears to have diminished over the last month or so”. Therefore, investors should not trust the policymakers and the official propaganda.

But let’s get back to the recession in Canada. As a resource-based economy, Canada was hit last year by the plunge in oil prices. So far Canadian consumers have helped offset the damage by borrowing and spending, however, this has resulted in a massive accumulation of debt. The household debt to GDP ratio is 94.27, not so far from the levels seen in the U.S. before the crisis, which creates a risk, especially if employment deteriorates, wage growth weakens, or the housing bubble bursts. According to the Economist, Canada has the most overvalued housing market in the world in terms of rent prices (by 89 percent) and the third most overvalued in terms of incomes (by 35 percent). Thus, we can say that Canada right now experiences an oil bust, while sitting on top of a housing bubble – which is a rather toxic mix.

What are the implications of the Canadian recession? Well, this is a great unknown, however, the potentially impact may be quite large since Canada is one of the biggest economies in the world and the most important trade partner of the U.S. (Canada counts for 19 percent of total U.S. exports). If the Bank of Canada further cuts the interest rates, the loonie will depreciate and the greenback will appreciate, exerting downward pressure on the price of gold. On the other hand, Canada’s recession will weaken U.S. economic growth, which should be positive for the shiny metal.

The bottom line is that Canada entered a technical recession. There may some rebound in the short term, however, household debt and the housing bubble are serious long-term threats for the Canadian economy. The slump in Canada reflects the global turbulences after the slowdown in China. Since Canada is the most important trade partner of the U.S., its recession may be a bigger direct problem than a cooling in China. The potential spillovers should be positive for the gold market, however, the rising greenback may be a headwind for the yellow metal.

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Thank you.

Arkadiusz Sieron
Sunshine Profits‘ Gold News Monitor and Market Overview Editor

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