Economy meets standard definition of recession after shrinking in two straight quarters, with Canadian dollar hitting lowest point since 2009

The Canadian dollar has plunged to its lowest point since 2009, and the country’s clouded political future became even murkier as the Bank of Canada dropped its key interest rate to a record low for the second time this year, confirming that the national economy is shrinking as the country heads into an election.

Bank governor Stephen Poloz carefully avoided using the word “recession” as he announced the rate cut on Wednesday, bringing the central bank’s overnight lending rate down 25 basis points to 0.5%. But the indicators that inspired the move showed that the economy had shrunk for the second quarter in a row, meeting the standard definition of recession.

“Global economic developments have been quite disappointing,” said Poloz. “Canada’s economy is undergoing a significant and complex adjustment.”

But the government’s critics laid the blame for the decline with Stephen Harper’s governing Conservative party. “We’re the only G7 country to be in recession in 2015,” shadow finance minister for the Liberal party Scott Brison told the Guardian. “What’s clear is that Harper’s only plan – tax cuts for the rich and cuts in social services – is not working.

“Harper’s economic record is in tatters,” he added.

Adding to the discomfort, Poloz’s announcement came just days after US Federal Reserve chair Janet Yellen suggested interest rates south of the Canadian border could be raised before the end of the year.

Anticipating the news last week, Harper blamed falling oil prices and other outside factors for the persistent weakness of the Canadian economy, an excuse at least partially endorsed by the central banker today. The prime minister vowed to respond with “strong fiscal discipline” that would not “spiral ourselves into deficit”.

But the reality of economic shrinkage and falling revenue will almost certainly destroy his party’s key election promise to balance the federal budget for the first time since it came to power nine years ago.

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“Most of the damage here was self-inflicted and it is absolutely illegitimate to say we’re at the mercy of global pressures,” economist Jim Stanford, of the labour union Unifor, told the Guardian. “Canada’s economy is uniquely weak compared to our trading partners, and its weakness has been compounded by a number of policy errors.”

Foremost among them, according to Stanford, was the “premature” decision to withdraw the fiscal stimulus that helped Canada survive the 2008 economic crisis. “The government took its foot off the gas and slammed it on the brakes, deciding that eliminating the deficit was more important than anything else,” he said. “That decision was needless and very destructive.”

Central Canadian manufacturing was especially hard hit in recent years as investment focused on the booming oil patch and the Canadian dollar soared, reversing the currency advantage that has traditionally supported exporters of goods and services. Although the Canadian dollar is now trading below 80 cents USD, exports have yet to recover – a finding Poloz described as “puzzling”.

The damage caused by Canada’s quest to become what Harper once called “an energy superpower” could take years to heal, according to Stanford. “We still have a huge job ahead of us as a country to make sure that we are capable of participating in an advanced manufacturing economy,” he said.