Canada woes raise questions about health of world economy

Canada slipped into a recession during the first half of the year, government data released on Tuesday showed, raising more questions about the health of the world economy on a roller-coaster day for financial markets.

Canada’s economy shrank at a 0.5 per cent annual rate in the second quarter, according to the new figures. The decline followed a 0.8 per cent annualised dip during the first quarter as business investment dropped off amid plummeting oil prices.

Recessions are defined as two consecutive quarters of contraction, but some economists said the designation for Canada could prove transitory.

“The main point is that the Canadian economy is quite weak, felled by low oil prices,” Royal Bank of Canada chief economist Eric Lascelles said on Tuesday. But, he added, “other economic indicators are also not quite as weak — employment has been strangely resilient, and leading indicators signal softness but not recession.”

The gloomy numbers for the United States’ northern neighbour come amid mounting evidence that growth in China is also losing steam. An official measure of manufacturing in China released on Tuesday hit a three-year low, prompting a sell-off in Asian stock markets that continued on Wall Street.

In New York, Boston Federal Reserve Bank President Eric Rosengren said on Tuesday that turmoil in the global economy has increased uncertainty around forecasts for growth and inflation, suggesting he believes the time has not yet come for the central bank to start withdrawing its support for the nation’s recovery.

“We’re not totally insulated,” he said. “As for the probability of the recession [in the United States], I don’t think it’s very high.”

Rosengren highlighted the steady improvement in employment over the past year as one sign the economy has regained its footing. But inflation remains stubbornly below the Federal Reserve’s target of 2 per cent, held back by a strong dollar, falling commodity and oil prices, and weak global demand. A slowdown in the world economy could reverberate in the United States, threatening the progress in the job market and further dampening inflation.

“Without an expectation of growth above potential and further tightening of labour markets, I would lose my primary rationale for a forecast of rising inflation, diminishing my confidence that inflation will reach the 2 per cent target within a reasonable time frame,” Rosengren said.

The gloomier outlook suggests that Rosengren will be hesitant to support raising the Fed’s target interest rate for the first time in nearly a decade when he and other top central bank officials convene for their regular policy meeting in Washington this month. Federal Reserve Chair Janet Yellen has said she expects a rate hike will happen at some point this year, but officials appear divided on exactly when that will be.

Many investors had anticipated that the moment would come in September, but the wild swings in financial markets last month and renewed fears of weakness in China have cast doubt on that timeline. Futures markets now show investors predicting a 1-in-3 chance the central bank will act this month.

The Federal Reserve slashed its benchmark interest rate to zero during the depths of the 2008 financial crisis and has left it there ever since in hopes of fostering a stronger recovery. A low rate generally encourages consumers to spend and businesses to invest, while a higher rate reins in economic activity.

Rosengren’s remarks are the latest in a string of commentary from central bankers, who gathered last week in Jackson Hole, Wyoming, for an annual symposium of the world’s economic elite sponsored by the Kansas City Federal Reserve Bank. Federal Reserve Vice-Chair Stanley Fischer expressed faith Saturday that inflation would eventually reach the Fed’s target as international pressures subside. But he refused to say whether the central bank would hike the benchmark rate in September.

“I will not — and indeed cannot — tell you what decision the Fed will reach,” he said at the conference.

On Tuesday, Rosengren emphasised that even after the central bank does lift the rate, he believes it should move more slowly and gradually than it has during previous rounds of increases. In addition, the bank’s target rate may run below its historical average.