Is Canada in a Recession Again?

This seems to be the question of the moment. We began the year with extremely low oil prices which had major impacts on the economy and dollar. In January of this year, the BOC reacted to the performance of the Canadian economy and reduced the key lending rate by .25%, making it .75%.

Coming into June, Reuters reported that “Canadian home prices rose to a record high in June from a month ago, the sixth consecutive monthly increase, and were up strongly from a year ago as Toronto and Vancouver held momentum, the Teranet-National Bank Composite House Price Index showed on Tuesday.”

In the lead up to the scheduled July of 2015 Bank of Canada rate announcement, many economists began to comment strongly on the state of the Canadian economy. Most were calling for and even predicting another rate cut while at least one publication reported that a TDCT economist went as far as to say that in the first half of 2015, Canada was in a recession.

In July’s rate announcement, the Bank of Canada, while not agreeing that Canada was in a recession, did drop the key lending rate a second time for 2015 by another of .25% making it only .5%.

The BOC’s reasoning behind the rate cut – short points:

·         Global growth faltered specifically in the US and China – this has dragged down the price of some commodities that are important to the exports.

·         Downgrades in business investment plans in the energy sector and weak exports of the non-energy commodities were also strongly considered.

The BOC admits that in the first half of 2015 Canada’s GDP did contract, however they believe that growth will resume coming into the second half of the year – primarily in the non-resource sector of the economy. Aside from the energy sector, consumer confidence remains high and labour markets continue to improve.

If Canada is not in a recession but is headed in that direction, what impact would a shift in supply and demand mean to the real estate industry? As it stands the small decreases in Canada’s lending rate should have the trickledown effect of making it cheaper to buy a home.

Even with most of the banks, economists were in agreement in July that Canada could be headed for a recession if not facing one already, yet Canada still saw strong home sales for the 6^th time in a row in June.

There is no doubt that reducing the interest rate is one way to stimulate the economy, and, where housing is concerned, make it more affordable to buy. With that said, Canada’s lending rate coming down to .5% does not give much room to move moving forward. What’s your take? Do you think that poor performance in other sectors of the economy will eventually have a spillover effect into the Canadian housing market?

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