Is Canada in a Recession?
|GDP for the first quarter was down 0.6%|
If you recall, back in January, the Bank of Canada surprised everyone by cutting the overnight lending rate by 0.25% from 1.0% to 0.75%.
The driving factor for this change? Oil prices.
One of the concerns this week is talk that Canada is in a recession.
So what is a recession? Apparently, the definition of a recession is two consecutive quarters (or 6 months) of negative economic growth. I believe they use GDP as a measuring stick for growth. In Canada's case, we've had 4 consecutive months of negative economic growth. The data for May and June has not been released yet. However, many economists believe that we're still in the red.
The driving factor for this about face from last year? Oil prices.
Seems Canada's economy is tied directly to the oil industry.
Oil prices are down? Expect Canadian's dollar to drop (relative to the US dollar).
Oil prices fell? Expect the TSX index to follow suit.
So what happened? Why are we so dependant on oil prices?
I don't know. However, it would appear that after the recession of 2008, the price of oil started to rise and stayed at a very high price. As a result, there was an oil rush of sorts in Canada's energy sector. Due to this rush, our government likely doubled down on the energy sector and won.
They likely continued betting everything on oil until eventually oil plummeted earlier this year.
What lessons can we take from this?
Well, this shows us the importance of diversification. Had the government invested in something else, let's say manufacturing or infrastructure, then maybe the drop in oil prices wouldn't reverberate so deeply within our economy.
What other lessons can we take from this?
Well, this is a good example of chasing trends. Similar to people putting all their money into the stock market that's been on a good bull run, seems all our money was put into oil and oil infrastructure. When the price of oil went bust, a lot of companies pulled out or suspended production. This left governments without the necessary revenue. The federal budget was postponed until April. The dynasty in Alberta was toppled in a election calling for change. They've been talking about implementing a sales tax for the first time in history! A provincial sales tax in Alberta! Unbelievable.
Yes. Diversify, diversify, diversify!
Remember all wifey's friends who invested in the stock markets in China? None of them talk about stocks anymore. Wifey suspects they lost money investing. I have nothing against the Chinese stock markets or the oil industry. It's just important to put your money into other things.
For example, despite the oil prices hammering Canadian stocks as of late, our portfolio is still fairly healthy (as of July 13, 2015, we're up almost 5% for the year) in part to the fact that Canadian stocks only make up 30% of our portfolio*. Canadian bonds make up another 30%, and US\International stocks make up the final 40%.
So is Canada in a recession?
It's too early to say really. Until the data is released by Statistics Canada, there's no way to know for sure.
*Some would say this is on the high side. I'd agree with them, but I decided on this portfolio when I was relatively new to investing. Eventually, I'd like to change my Canadian allocation from 30% to 10%.
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