Trading Nation

Canada is on the brink of a ‘very unusual recession’

Trouble in Canada

Canada is teetering on the edge of a recession.

The country's GDP has fallen for five straight months, the latest numbers coming in at a 0.2 percent contraction in May. And economists say Canada is about to hit its second-straight quarter of declining GDP, the technical definition of a recession.

Contributing to Canada's problems include plunging commodities prices, slowing exports and a falling Canadian dollar. The tumble in crude oil, which has fallen more than 15 percent year to date, has hit Canada hard as a commodities-heavy economy.

According to TD Bank's deputy chief economist, Derek Burleton, investor concerns about the Canadian economy date back to last year, when oil prices first began to fall.

"They're worried about Canada; they're still short Canada," Burleton said. "There's not a lot of upside to growth."

An unexpected lag in exports this year has also pulled down GDP. However, Burleton pointed to trade numbers released Wednesday that showed a 6.3 percent jump in May exports, as the beginning of a turnaround.

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Although Burleton said Q2 GDP will likely show a 1.0 percent contraction, many economists expect to see growth in the second half of the year of about 2 to 2.5 percent.

Douglas Porter, chief economist at BMO Capital Markets, said although Canada could technically enter a recession, it would be "a very unusual recession."

"There just isn't the sense from other indicators that the economy is in dire straits," Porter said.

Along with the exports data released Wednesday, Porter said the Canadian economy has also seen strength in job creation and sectors such as agriculture and manufacturing. And although oil prices may stay low, Porter said he doesn't expect to see another significant drop that will pull GDP down further.

Still, some traders say this is a good time to reduce exposure to specific Canada-centric stocks.

Erin Gibbs of S&P Capital IQ said Devon Energy is one stock to watch.

"About 25 percent of their revenues come from Canada. So not only are they seeing falling oil prices, falling natural gas prices, but that plummeting Canadian dollar is also hurting their revenues," Gibbs said Wednesday on CNBC's "Trading Nation."

Devon Energy's stock has fallen more than 23 percent year-to-date. And Todd Gordon of said there's more pain to come, as both oil and the Canadian dollar drop lower.

"We've broken through that $50.50 level. It looks like we're going to reach for that credit crisis low of about $38," Gordon said Wednesday.

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