Vancouver (Globe and Mail) – Canada’s economy shrank for a second straight quarter, the weakest six-month period since the Great Recession, sending the country into a technical recession even as strong growth in June suggests the pain may be short-lived.

Statistics Canada reported Tuesday that the country’s gross domestic product contracted by an annualized rate of 0.5 per cent between April and June, driven by a continuing slump in the oil and gas sector. That followed a 0.8-per-cent drop in the first three months of the year, which Statistics Canada revised downward from 0.6 per cent.

Business investment dropped by an annualized 7.9 per cent in the second quarter, after falling 10.9 per cent annualized in the first quarter, led by a sharp decline in spending on equipment and machinery in the oil and gas exploration sector and support services to the industry. Stockpiling of inventory also slowed, shaving as much as 1.2 percentage points from the growth rate.

But the economic dark clouds also offered several glimpses of a silver lining. Second-quarter figures beat consensus estimates among economists for a 1-per-cent cent drop in GDP.

Excluding the oil, gas and mining sectors, the economy actually grew in the second quarter, thanks to higher consumer spending on the strength of the housing market as well as a modest jump in exports, led by the automotive and energy sectors.

Activity among real estate brokers rose nearly 10 per cent on the strength of the resale housing market, while spending on renovations and property transfer taxes also rose, offsetting a 4-per-cent drop in new home construction. The increased household spending came on the backs of savers, with household debt rising in the second quarter and the savings rate dropping to 4 per cent from 5.2 per cent at the start of the year.

A declining savings rate was a sign of “optimism” among consumers, said Canadian Imperial Bank of Commerce chief economist Avery Shenfeld. However, Canadians’ rising debt loads were aggravated by the fact that real personal disposable income, which had risen in each of the past three quarters, fell at an annualized rate of 3 per cent.

Meanwhile, Statistics Canada reported that real GDP rose 0.5 per cent in June, the strongest monthly growth since May of last year, reversing five months of declines.

The June increase was broad-based and led by a 3.1-per-cent comeback in the oil patch, which rose for the first time in more than seven months. Economists expect that bump to be short-lived, given that the industry was hampered by wildfires across the prairies in April and May. The FIFA Women’s World Cup also gave a temporary boost to the arts and entertainment sector, which rose 6.4 per cent in June.

Tuesday’s results will do little to quell the debate over whether Canada’s economy is mired in recession, which is becoming a key question in a federal election that is shaping up to be a battle over who could best shepherd the country through a protracted downturn.

Liberal Leader Justin Trudeau said on Tuesday that Canada had officially fallen into a recession, while Conservative Leader Stephen Harper told a campaign stop that the economy appeared to be “back on track” in June.

While two consecutive quarters of economic decline qualify as technical recession, both trade and employment numbers have shown positive signs this year, suggesting much of the downturn has been confined to investment in the energy sector. “If this period is ultimately deemed to be a recession, it will be of the mildest variety and one of the strangest recessions ever,” Bank of Montreal chief economist Douglas Porter wrote. “Consumer spending was up in both quarters and so too was employment, far from a widespread softening in the economy.”

It’s simply too early to pronounce Canada in recession, Bill Robson, president and chief executive officer of the C.D. Howe Institute, said in an interview. “What you would typically look for in a recession is something that was long and widespread and deep and the GDP numbers were very flat early in the year,” he said, echoing a statement by the think tank’s business cycle council in July.

“Employment gains, robust housing markets, and solid consumer spending are not typically hallmarks of recession,” wrote Bank of Nova Scotia vice-president of economics Derek Holt, adding that “the ingredients for a snap-back in growth, at some point, are starting to appear.”

With June’s better-than-expected numbers, the consensus among economists is that the Canadian economy will expand by as much as 2.5 per cent in the third quarter, a full percentage point above the Bank of Canada’s estimates in July.

“At this juncture, the scope and amplitude of the drop in economic activity so far in 2015 looks more like stagnation than recession, unless of course you work in the energy industry,” wrote National Bank Financial chief economist Stéfane Marion.

Yet, despite a positive story from June to kick off the third quarter, the fate of Canada’s economy remains uncertain.

After rising in the second quarter, oil prices have plunged again more recently, while the falling loonie has made it more expensive for businesses to import machinery. The boost to consumer spending may also prove short-lived if the continuing pain in the energy sector leads to higher job losses. CIBC’s Mr. Shenfeld predicted spending cuts by energy firms will continue into the third quarter and “will ripple through to hits to consumer attitudes, homebuilding and government spending in affected regions.”

Then there are signs that other segments of the economy may be struggling to step in and fill the gap left by the slumping resource sector. Royal Bank of Canada reported Tuesday that its Canadian Manufacturing Purchasing Managers’ Index fell for the third consecutive month in August, driven by lower orders from the energy sector that more than offset gains in other manufacturing industries.

Some see disappointing results from the manufacturing sector as a potential red flag for Canada’s longer-term growth prospects, given that the conditions for a manufacturing comeback – lower interest rates, an improving U.S. economy, cheap oil prices and a low dollar – have yet to spark a meaningful turnaround.

For manufacturing to rebound enough to lift the Canadian economy out of its oil-driven slump, something Bank of Canada Governor Stephen Poloz was hoping to achieve by cutting interest rates twice this year, the industry will have to address its deeper problems of high costs and low productivity, said Ben Homsy, fixed-income analyst at Leith Wheeler, an independent Vancouver-based investment firm.

“We don’t think this is really just a story that’s going to get resolved from currency weakness on its own,” he said. “Canada’s manufacturing sector definitely has been hollowed out over the last 15-20 years.”

Many now expect the stronger growth in the third quarter will prompt the Bank of Canada to hold off on cutting interest rates any further this year. Most likely the central bank will wait until after the U.S. Federal Reserve Board raises rates later this fall or early next year, said Conference Board of Canada deputy chief economist Pedro Antunes. “If Canada doesn’t move that will automatically put some stimulative monetary policy into effect,” he said.

The Canadian dollar ended the day down 0.38 cents to 75.63 cents (U.S.).

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