Is Canada’s future V- or W-shaped?
To many, the term “double-dip” brings to mind nothing more sinister than a breach of snacking etiquette from a long-lost episode of Seinfeld. For others it’s a tasty treat from Tim Horton’s. Recently, however, the phrase has taken on a much gloomier connotation – the recession we’d rather forget about may in fact return and the much-hoped-for ‘V’-shaped recovery is merely the first half of a ‘W’-shaped rollercoaster. So, is Canada in for another round of recession? Are we headed for an economic double-dip?
For the first half of this year, Canada seemed to defy global trends by speeding out of the recession. First quarter growth was nearly 6 percent in Canada this year. Since then, however, enthusiasm has subdued somewhat. Though growth has continued throughout the year, in the second quarter it slowed to an annualized rate of only 2 percent. This result has set the debate rolling: was the second quarter slowdown a return to the slow growth predicted by so many coming out of the recession, or was it the dreaded ‘W’ – a step on the way back to a recessionary contraction in the economy?
Return to recession not inevitable
Certainly things have slowed down since the first quarter, when consumers and businesses rushed to put the recession behind them as quickly as possible. But I don’t think that the second quarter slowdown heralds an inevitable return to recession and all the nasty things that go along with it. Even in the United States, where economic headwinds remain much stronger than in Canada, a return to recession seems unlikely, barring a significant external shock such as a sovereign default.
Most American forecasters put the likelihood of a return to recession in the U.S. at a low level, considering the challenges the Americans still face. This is a country with a greater debt and deficit burden than Canada, much higher unemployment, and a continuing housing market crisis with mortgage foreclosures numbering in the millions.
Yes, we as Canadians are deeply linked to what goes on in the United States, but we remain in a much better position than our neighbours. Canadian consumers are not tied to the U.S. labour market where unemployment remains incredibly high. We do not face the same challenges American homeowners are currently dealing with in a still-declining market with more and more mortgages under water. Our own boom-era party was never as rowdy as the one south of the border. Today, our hangover is much less painful.
Despite all this, a return to recession in the United States appears unlikely. If they can avoid it in the coming months and years, surely we will too. Our fiscal fundamentals are better and our unemployment is lower. For dealers, while sales have slowed since 2008 levels, we haven’t experienced anything as severe as the crash suffered by the U.S. retail market in the past two years.
Interest increase a positive sign
Perhaps the most concrete expression of confidence in our economy was the Bank of Canada’s recent decision to hike its key interest rate another quarter of a percentage point. Though interest rates remain, in the Bank’s language, “exceptionally stimulative,” (read: ridiculously low) the fact that the Central Bank is prepared to tighten monetary policy at all is a solid sign that it sees the threat of a double dip recession in Canada as unlikely. While the Bank also cited “unusual uncertainty” in its statement, its interest rate move belies its stance on the likelihood of a return to recession – not very high.
Any prediction for the future is fraught with risk. I’ve long argued that any attempt to gaze into the crystal ball should be qualified with the often-forgotten reality that to predict future events is at its heart impossible. What we are left with, then, is the principle that the most likely scenario is the safest bet. Given the evidence at hand and our relatively strong economic position today, a return tomorrow to recession is not in the cards in Canada. We should avoid a W-shaped economic trajectory.
Also to be avoided is the assumption that robust growth is a birthright, particularly for a modern and mature economy such as our own. For the foreseeable future, the 2-percent growth we saw in the second quarter will probably repeat itself more often than the 6-percent rate we posted to kick off 2010.
