By Steve Ambler and Jeremy Kronick
Statistics Canada’s release of preliminary merchandise trade figures for June may provide some closure to the debate on Canada’s so-called recession. After a 4-per-cent fall in export volumes over the first five months of 2015, Canada’s sales to foreigners came roaring back, with a 4.8-per-cent increase in June alone. Imports also decreased in volume by 0.9 per cent from May to June.
Overall Canadian economic growth in the first quarter of 2015, as well as the first two months of the second quarter, was negative. The decline in the value of the Canadian dollar in the wake of falling world oil prices had been expected to boost the growth of most other exports, but until June, the numbers had been disappointing. Numbers for one month do not make a trend (they are also subject to possible revision), but trade may be poised to be part of a turnaround for the Canadian economy.
The trade figures also have potentially important implications for the performance of Canada’s gross domestic product in the first half of 2015, a topic of much recent debate. GDP is commonly calculated as the sum of domestic demand (spending on goods and services by Canadian households, businesses, governments and other institutions) plus net exports: Exports make a positive contribution while imports subtract from GDP, in that they are not spent on Canadian production. Because merchandise exports represent a bit over a quarter of GDP, a 4.8-per-cent increase in volume translates into a positive 1.2-per-cent contribution toward real growth in June. Merchandise imports also represent about a quarter of GDP, so a 0.9-per-cent drop translates arithmetically into a 0.2-per-cent positive contribution to GDP.
This means that trade could boost Canada’s June GDP by a total of approximately 1.4 per cent. This would be a very high monthly growth number for GDP, so it is fair to say that some of this gain in exports could be a release of inventories, thus making this figure smaller. (Inventories increase investment in the month they are produced, so if they are sold as exports later on, the increase in exports is offset by a fall in investment.) Preliminary figures on June’s real GDP won’t be released until the end of the month, but we can speculate on what growth in domestic demand would have to be to give us another month of negative real growth in different inventory scenarios. In making this calculation, we are leaving out exports in services, which, while important, represent only approximately 4 per cent of real GDP compared with 25 per cent for merchandise exports.
Canada’s real GDP has declined each month from January to May by an average of about 0.16 per cent a month, yielding a total decline of 0.8 per cent. Therefore, assuming no changes in inventories, the contribution of this preliminary trade number in June more than wipes out the total decline in GDP over the January-to-May period. Domestic demand for the month of June would thus have to be quite bad – contracting by 0.6 per cent, almost four times the monthly rate of GDP decline from January to May – in order for real GDP to be negative in the first half of the year as a whole. While lower imports in the second quarter as a whole, especially the decline in many industrial inputs and machinery, may suggest weakness in business spending sectors, imports of autos and other consumer goods rose, suggesting consumer resilience. If we assume domestic demand stays put in June, compared with May, inventories would have to fall to nearly zero for GDP growth in the second quarter to be negative.
One of the requirements for calling a recession is a significant and sustained decline in real GDP. The unfortunately pervasive standard rule of thumb of two negative quarters is another possible metric. It looks increasingly unlikely that Canadian GDP will meet either of these criteria. Given positive employment growth throughout the first half of the year, and upward trends in a subset of sectors of the Canadian economy, Canada may yet escape an oil-price-induced recession. The GDP numbers for June should prove very interesting.
Steve Ambler is a professor at the University of Quebec at Montreal’s management school, and holder of the David Dodge chair in monetary policy at the C.D. Howe Institute. Jeremy Kronick is a senior policy analyst at the C.D. Howe Institute in Toronto.
Published in The Globe and Mail on August 11, 2015
