On Monday August 24th, the S&P/TSX Composite declined due to investor worries over the global economy. Another ‘sell off’ occurred on Monday September 1st – with the TSX giving up more than 350 points, declining 2.72%.
Canadian Loonie has declined 18% in the past year – due to different economic factors, such as the Bank of Canada (BoC) interest rate cuts.
The sell off is a result of the oil price slump, continued worries over the Chinese economy, and a release of a Statistics Canada report stating that the Canadian Economy has been shrinking for the first half of 2015.
“Expressed at an annualized rate, real GDP contracted 0.5% in the second quarter and 0.8% in the first quarter. By comparison, real GDP in the United States grew 3.7% in the second quarter.”
On September 2nd the TSX gained 63.35 points (+0.47%)
The TSX gained another 51.16 points on September 3rd – a 0.38% increase.
Recession
The technical indicator of a recession is two consecutive quarters of negative economic growth, as measured by the country’s GDP (Investopedia). Using this definition, Canada is in a ‘technical recession.’
Investments
Digger deeper into the GDP, overall investing has declined. Business investment in non-residential structures decreased 2.3% in the second quarter – which is the third consecutive quarter of negative growth. New housing construction also decreased 4.1% (Statistics Canada).
Inventory
Overall, there was an increase in inventories. Retailer inventory rose – this can suggest that the demand for certain goods have been weakening.
Inventory Levels:
- Wholesalers: +6.1 billion
- Motor vehicles: +4.1 billion
- Non durable goods: +4.7 billion
- Durable goods: +1.5 billion
- Farm inventory: -1.7 billion
Source: Statistics Canada
Other GDP Factors
- Household consumption: +0.6%
- Exports: +0.1
- Imports: -0.4%
Source: Statistics Canada
The biggest impact on the Canadian exports was intermediate metal products (-3.4%), and metal ores and non-metallic minerals (-7.9%). This decline was mostly offset by exports of tires, motor vehicle engines, and motor vehicle parts (+11.2%).
With a decline of 6.6%, Industrial machinery, equipment and parts had the largest impact on imports. Overall, Canada’s terms of trade (-0.1%) declined for the fifth quarter in a row (Statistics Canada), mainly due to the result of higher import prices offsetting export prices. This can be linked to the decline of the Canadian Dollar, which is at an all time low since 2004
Conclusion
Taking these factors into consideration, the Canadian economy has been facing a slowdown. Factors causing the economy slowdown include the decline of the Canadian Lonnie, and the interest rate cuts, leading to a further devaluation of the Loonie. Within one year, the Canadian Loonie has lost 18% of its value – it is approximately 0.75 USD (Sept. 2nd). This impacted the Canadian economy in a negative way – as there are fewer investments.
The prices of Oil, declining more than 50% in one year, played a huge factor. Oil exports are one of Canada’s top 3 exports – making up approximately 8% of the GDP in June 2015 (Statistics Canada).
A cheaper Loonie has benefits, such as increasing exports. However, the growth of exports did not offset the rising import prices. Canada’s recession will continue the ‘housing debate.’ Let’s also keep in mind that the household savings declined to 4.0% from 5.2% in the first quarter. Under these circumstances, it is not likely for the Canadian housing market to continue its pace, as Canada is facing a ‘technical recession.’
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