Canada slipped into a recession during the first half of the year, government data released Tuesday show, 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 percent annual rate during the second quarter, according to figures released Tuesday. The decline followed a 0.8 percent annualized dip in 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 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 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 America's northern neighbor come amid mounting evidence that growth in China is also losing steam. An official measure of manufacturing in China released 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 President Eric Rosengren said Tuesday that turmoil in the global economy has increased uncertainty around forecasts for growth and inflation, suggesting that 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."
Speaking from prepared remarks, 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 Fed’s target of 2 percent, held back by strong dollar, falling commodity and oil prices and weak global demand. A slowdown in the world economy could reverberate back home, threatening the progress in the job market and further dampening inflation.
“Without an expectation of growth above potential and further tightening of labor markets, I would lose my primary rationale for a forecast of rising inflation, diminishing my confidence that inflation will reach the 2 percent 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. Fed 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 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 one in three chance the central bank will act.
The Fed 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, Wyo., for an annual symposium of the world’s economic elite sponsored by the Kansas City Fed. Vice Chair Stanley Fischer on Saturday expressed faith that inflation would eventually reach the Fed’s target as international pressures subsided. But he patently refused to say whether the Fed would hike in September.
“I will not -- and indeed cannot -- tell you what decision the Fed will reach,” he said at the conference.
On Tuesday, Rosengren emphasized that even after the central bank does lift off, he believes it should move more slowly and gradually than it has during previous rounds of increases. In addition, the central bank’s target rate may run below its historical average. Low inflation and lackluster growth mean that the Fed will have plenty of latitude to move, Rosengren said.
“The more gradual tightening cycle should enable monetary policymakers to gauge how tight labor markets can be while maintaining stable prices,” he said.
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