Could the dreaded double-sip recession become a reality?

Statistics Canada has released the Canadian economic accounts with GDP estimates for the second quarter of 2011. It is not the best news. Overall, real gross domestic product or GDP declined by 0.1% in the second quarter following a 0.9% increase in the previous quarter. The big driver of the drop was the decline in exports as domestic demand was up.

While business investment in plant and equipment was up, as was consumer spending on goods and services, exports declined 2.1% and oil and gas extraction decreased 3.6% (due mainly to maintenance shutdowns and Alberta wildfires). Businesses are piling up inventories, which means that demand is slowing (or if you are an optimist they are piling things up to meet the anticipated coming boom in demand, but that’s not likely given the tight inventory management most companies follow today). When converted to an annual rate, real GDP in the second quarter declined 0.4% while it was up 3.6% in the first quarter.

An annual drop of only 0.4% does not seem fatal given that the annualized increase was 3.6% in the first quarter. However, this decline in the second quarter of 2011 comes before the economic turmoil and trauma of the summer in terms of international sovereign debt issues and, of course, the stock market drop. The burning question is whether this signals the start of another recession.

If the third quarter of 2011 shows another decline then we will technically be in another recession as recessions are traditionally defined as two consecutive quarters of negative growth.

What are the odds of this happening? Pretty good actually given that the big driver of the second quarter real GDP decline was the drop in exports. After a period of robust recovery from the third quarter of 2009 to the second quarter of 2010, they appear to be weakening.

Exports make up a third of our GDP and the weak performance of the American and European economies over the course of the summer does not bode well for a pick-up in exports in the third quarter. The third quarter will also be marked by a slowdown in U.S. output due to the impact of Hurricane Irene on the U.S. eastern seaboard though that might be balanced by reconstruction activity in the fourth quarter. The prospects of a double-dip recession may finally be about to become economic reality.

Livio Di Matteo is Professor of Economics at Lakehead University. Visit his Northern Economist Blog at http://ldimatte.shawwebspace.ca/.

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