With GDP down, is Canada heading toward a financial crisis?

Click to play video: 'Canada’s GDP has the biggest drop in seven years' Canada’s GDP has the biggest drop in seven years
WATCH ABOVE: First the bad news, the Canadian economy shrank by 1.6 percent in the second quarter. Analysts say the Fort McMurray wildfires are largely responsible for the sharp downturn, but it was a one-time event, and the numbers also show the economy is already bouncing back. Eric Sorensen has more. – Aug 31, 2016

Statistics Canada released its latest assessment of Canada’s economy on Wednesday morning, and it was a rough one.

The biggest eyebrow-raiser was real gross domestic product (GDP), which fell at an annualized rate of 1.6 per cent in the second quarter (April through June).

READ MORE: Canadian economy shrinks 1.6% in Q2, worst showing since 2009 financial crisis

That represents the worst GDP performance in a single three-month period since mid-2009, when the country was weathering the global financial crisis.

Here’s a look at why this news matters, how bad it really is, and what happened to bring Canada to this point.

Why is GDP important?

Gross Domestic Product is one of the primary ways economists and policy-makers gauge the overall health of the economy. GDP represents the total dollar value of all goods and services produced over a specific time, and there are different ways of calculating it.

Story continues below advertisement

If GDP starts to shrink, it’s a sign that things aren’t going as well as they could be.  If a country sees two consecutive quarters of declines in inflation-adjusted GDP, as Canada did in late 2015, then technically it is considered to be in a recession.

READ MORE: Canadian CFOs think there is a 42% chance Canada could slip into a recession

What happened?

Canada’s rather abysmal second-quarter results for 2016 are being blamed largely on Mother Nature, not human error or global headwinds.

WATCH: New GDP numbers show devastating impact of Fort Mac wildfire

Click to play video: 'BIV: New GDP numbers show devastating impact of Fort Mac wildfire' BIV: New GDP numbers show devastating impact of Fort Mac wildfire
BIV: New GDP numbers show devastating impact of Fort Mac wildfire – Aug 31, 2016

The wildfires, which disproportionately affected the oil-boom town of Fort McMurray, forced the evacuation and shutdown of several oil-producing operations in the region. To make matters worse, oil exports were already in trouble due to the drop in energy prices in the months leading up to the natural disaster.

Story continues below advertisement

If it hadn’t been for the Alberta fires and declining oil prices, GDP would actually have have grown, although by a very small margin.

According to Statistics Canada, “excluding the impact of the large decline in crude petroleum output, which was due to continued weakness in the energy sector and the wildfire in Fort McMurray, real GDP grew 0.1 per cent.”

That’s around 0.4 per cent growth annualized.

How bad is this news?

The news certainly isn’t great, especially coming on the heels of the unexpected loss of 31,200 Canadian jobs in July and a growing gap between the amount of goods we import and export (known as a trade deficit).

While the Fort McMurray fire dealt a major blow to the Q2 results, it wasn’t the only factor at play. Overall, exports of goods and services fell 4.5 per cent in the second quarter. A decline in exports was experienced across a number of categories, including the export of vehicles and parts and consumer goods.

READ MORE: Canada is evenly divided on whether the economy is good or bad

But economists are cautioning that a bad Q2 was also something they were expecting. CIBC even titled its Wednesday report: “Canadian Q2 GDP: No Uglier Than Expected.”

BMO Chief Economist Douglas Porter also pointed out that this was hardly a surprise in his own published analysis.

Story continues below advertisement

“We knew for the past four months that today’s GDP report was going to be ugly, and it delivered with a capital U,” Porter wrote.

A sign of things to come?

So, is Canada’s economy in a downward spiral, or barreling back toward recession? The experts are saying no, citing the fact that in spite of the overall drop in GDP during the quarter, the month of June wasn’t too bad taken on its own.

“The 0.6 per cent rise in monthly GDP for June was a couple of ticks above market expectations and wasn’t just the result of a rebound in oil production,” the CIBC analysts wrote.

“Indeed (the oil) sector contributed slightly less than half of the advance in monthly GDP. Manufacturing enjoyed a good month, while broad-based increases in the service sector also added to the positive June GDP (growth).”

Porter agreed with that assessment.

“The good news is that we have … known that there would be a considerable rebound in (the third quarter), and June’s solid result reinforces that view,” he wrote.

Porter predicted that the federal government’s stimulus program (largely driven by infrastructure investment) and more stability in the energy sector will help GDP “settle in” at close to a 2 per cent growth by early 2017.


Sponsored content