Is Canada in a Recession?

There has been a lot of debate in the financial media over whether Canada is in a recession currently. Using the definition of two consecutive quarters of declining GDP, simply put, yes Canada is in a recession. It is no secret that different industries are feeling the downturn worse than others but that does not make it any more or less of a recession by the definition. So out of the spirit of the argument, lets see who may be feeling this the most. 

Looking at the six-month chart below of the ten TSX sectors, we see that only two sectors, Consumer Staples and Health Care, have had a positive performance over the last six months. Consumer Discretionary, IT, Telecommunications and Financials are at best treading water, with financials the worst of this group. Then we have a bit of an odd item out with utilities being the fourth worst performing sector. This is an interesting development as this is typically a defensive industry that sees more demand in turbulent times.  It appears that there is some fear over the declining oil sector being a drag on volumes processed by the utility companies. The three worst performing industries should not be much of a surprise to anyone, with Industrials, Energy and Materials all down significantly over the last six months. We also have the three and six month industry performance in percentage terms below.

So what does this mean for Canada and the ‘seriousness’ of the recession? It is first important to remember that the stock market is not the economy. Often time’s markets can move without regard for the economy in the short to medium term. With that said, it does appear that this recession is largely driven by Materials and Energy. So yes, it is probably fair to say it is not a broadly felt recession but it still does have lingering knock on effects when we look at how much of the Canadian economy these lagging sectors form. Looking at the table below, the three worst performing sectors (Industrials, Materials and Energy) make up 39% of the TSX. When we consider that the financial industry is likely providing a large degree of services to these sectors and that the financial sector comprises 34% of the TSX, we now have 73% of Canada’s economy facing serious headwinds. These sectors may make up only 4 out of the ten sectors, but the catch is that these areas make up the majority of Canada’s economy! So while we are the last ones to be alarmists of any sort, trying to sugar coat things as a ‘technical’ recession may not be doing any one justice.

What is likely the most worrying about the charts is that while a lot of industries may be treading water, the only ones that are outperforming are some of the smaller industries in Canada, being Health care (5%) and Consumer Staples (3%) and the health care sector is dominated by Valeant Pharmaceuticals (VRX). Fortunately, there are a few things that bode well for Canada and help to corroborate claims that this recession will be short lived. The low Canadian dollar only makes Canadian goods and services all the more attractive to the US who is our biggest trading partner and probably the only economic bright spot globally right now. We may limp along, but we have a strong partner who can act as Canada’s economic crutch. Some of this impact is likely already being seen with export orders that have been surprising markets for the last two readings. The other positive is that while low oil prices have hurt a large portion of the economy, this also means that energy costs for many companies as well as the broad public have been on the decline which allows spending in other areas. So there still are reasons to have hope for the Canadian economy. Regardless of who is feeling it more and how deep or long it will go, it is time to call a spade a spade and stop arguing semantics, this is a recession whether you agree with the definition or not.

As a bonus, members can log-in to view the performance of the TSX by sector since 1988. Of particular interest (to us at least) should be the Consumer Staples and Healthcare sectors.