The Canadian economy is headed for a recession

canadaAfter a contraction of gross domestic product in the first quarter, the Canadian economy, hit hard by falling oil prices, is headed for a recession, have two major banks said Thursday.

Nomura bank said it expected a further decline of 0.5% of GDP annual rate in the second quarter, while Bank of America predicts a decline of 0.6%. A recession is technically defined as two consecutive quarters of decline in real GDP.

In the first three months of the year, Canada – fifth oil producer in the world – has, against all odds, saw its GDP shrink by 0.6%.

Given the scenario that is emerging, the Canadian central bank will again reduce its key rate a quarter point, as it did in January, fixing it at 0.75%, say the two banks.

“The economy was surprisingly weak this year and appears to be in recession in the first half of 2015, even after the easing of monetary policy in January,” wrote economist of Bank of America Emanuella Enenajor.

Many economists are concerned about the state of the Canadian economy since the release last Friday statistics showing that GDP fell for a fourth straight month in April, a first since the 2008-2009 recession.

And these statistics, recalled Charles St-Arnaud of Nomura did not reflect the impact of forest fires in Alberta that resulted in a suspension of about 10% of oil production in the oil sands for part of May and June. “The Canadian economy is probably in recession,” he said.

Faced with this situation, according to analysts, the Bank of Canada will have no choice but to revise its forecasts. It still expects growth of 2.8% in the third quarter and 2.5% in the fourth quarter.

A new rate cut, combined with a recession risk of stopping further the Canadian dollar, which has already lost 22% against the US dollar for two years and is expected to be worth about 70 cents at the end of year.

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