That Canadian real gross domestic product (GDP) shrank at a 0.1 per cent annual rate in the first quarter after a one per cent pullback in the fourth quarter puts the classic “two negative quarters” rule in play. Then again, that is only a rough rule of thumb for recessions, not the official standard.

In Canada, recessions are formally dated after the fact by the C.D. Howe Institute’s Business Cycle Council, which looks at depth, duration and breadth across employment, income and output, not just the GDP line. They haven’t declared one, but it is a very close call.

This was not just back-to-back real GDP contractions, but three quarters in the past four, taking the year-over-year trend slightly into negative terrain. Only during the energy sector meltdowns in 1986 and 2015 did a recession not occur alongside a negative year-over-year real GDP trend of any size. And the labour market is flagging net job losses and a rising unemployment rate.

It was particularly disappointing to have seen that negative headline, given the consensus forecast was 1.5 per cent annualized. Even a 4.3-percentage-point annualized contribution from inventory accumulation could not stem the negative tide. As a result, the Bank of Canada would need to have its head examined to be contemplating rate hikes, which have been priced into the Canadian money market these past two months — nutso.

But it’s not just GDP. It’s also the labour market that has the recession label. We will get an updated number for May this Friday, but the one thing we can say with certainty is that there is no way the Bank of Canada is going to be hiking rates in the sort of deteriorating jobs market we have on our hands.

Yet the money market, like a dog with a bone, just won’t give up the notion that the central bank’s next sadistic move would be a rate hike. From my lens, with real GDP contracting, the labour market struggling and the inflation data comfortably within the central bank’s comfort zone, if it were not for the United States-Iran war-related oil price shock, governor Tiff Macklem would be talking about resuming the rate-cutting program.

Let’s go back to the last data point we have on Canadian employment: down 17,700 in April, which was a big surprise to a consensus expecting a 10,000 increase. Canada’s economy has lost more than 112,000 jobs so far this year, a 1.6 per cent annual decline, and yet here we have had the money market thinking that Macklem and his crew will be raising rates roughly two times in the coming year.

Indeed, the most credit-sensitive sectors — construction with a 15,700 pullback and retail/wholesale trade with an 8,300 retrenchment — are begging the central bank to start cutting as soon as possible. That manufacturing lost 1,500 jobs and has been down in three of the past four months is also a sign that the Canadian economy probably needs a weaker currency, not a stronger one. The soft GDP report last Friday already seems to be accomplishing that.

Making matters worse, full-time positions sank 46,700 and, for the first time in five years, the year-over-year trend has completely stagnated. Meanwhile, the unemployment rate hooked up to a six-month high of 6.9 per cent from 6.7 per cent in both February and March and 6.5 per cent in January, and this widening slack in the labour market triggered an easing in wage growth.

The inflationists have not one leg to stand on because all the energy shock is going to do is hit a wall in the labour market and create the conditions for contracting real personal incomes and spending.

Tack on that the hours worked shrank 0.1 per cent month over month and have contracted now in two of the past three months, which poses a risk for real GDP growth from a supply-side standpoint in the second quarter unless productivity picks up materially.

The bottom line here for the central bank and the bond market is that the Canadian economy and labour market have lost whatever vitality they may have had, and the disinflationary resource gap is widening.

Macklem would be well-advised to start going easy on even hinting at any rate increase, because all he does with that sort of rhetoric is make the bond market jitter and cause an unnecessary tightening in financial conditions.

David Rosenberg is founder and president of independent research firm Rosenberg Research & Associates Inc. To receive more of David Rosenberg’s insights and analysis, you can sign up for a complimentary, one-month trial on the Rosenberg Research website.

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