Interest Rate Cut Back On The Table After Canadian Economy Shrinks

Canada’s economy is contracting in the first quarter, oil and gas activities fell

Ottawa – Canada’s economy is contracting for the first quarter in nearly four years.

 In the United States, a disappointing in growth might be a cause for pause in the Federal Reserve’s plan raising interest rates before the end of the year.

Both countries’ economies were hit harder than analysts had forecasted between January and March. 

With Canada, gross domestic product in the first quarter suffered 0.6 percent annualized contraction while oil and gas activities fell amid the plunge in crude prices, according to Statistics Canada on Friday.

The last time Canadian economy performed poorly like this was in the second quarter of 2011. The largest decline before that was the 3.6 percent drop, which was recorded as in the second quarter of 2009, which was the final three months of Canada’s recession.

Support for mining and oil and gas extraction tumbled 30 percent in the first quarter, as well as construction, manufacturing, and wholesale was down.

Business investment fell 15.5 percent at an annualized rate while household spending grew 0.4 per cent between January and March.

Douglas Porter, Chief Economist at BMO Capital Markets, said by far the dominant story was the collapse in business investment, which was largely in the energy sector.

Exports and imports also stumbled in the first quarter. Shipments of goods and services were down 1.1 percent on an annualized basis, which declined of 1.7 percent compared to the fourth quarter. Imports dropped 1.5 percent between January and March after 1.6 percent rise in previous three months.

Output in the U.S., which reported revised GDP for the first quarter on Friday, shrank 0.7 percent on an annualized basis instead of 0.2 per cent rising estimated previously. Severe winter and West Coast port disruptions took most of the blame for the weaker GDP than expected.

Energy sector slumped, particularly resources in Alberta.

Stephen Poloz, Bank of Canada governor, warned the collapse in oil would make them consider of cutting interest rates by 25 basis points by January, to 0.75 percent,  as an “insurance” if further blows to the economy occurring.

The speculation now is, Polow could cut the bank’s rate again by another 25 basis points this year, while the U.S. Fed might still stay on hold with the current interest rate rather than hiking its benchmark.

BMO’s Porter said the rate cut now is 50-50 chance by the Bank of Canada.

Emanuella Enenajor, the Canada and U.S. economist at Bank of America Merrill Lynch, said the next rate move will be a 25-basis-point cut in October. “You could say that first-quarter is a write-off, but second-quarter growth is going to struggle to get above one percent, given the kind of handoff that we have and the trend that we’re seeing.”