How Canada escaped the worst of the recession
OTTAWA - Canada's version of the Great Global Recession may have seemed brutish, but -- if economists are right about new output numbers being released Monday -- it will also have turned out to be mercifully short and relatively mild.
With gross domestic product data released for June and the second quarter, the consensus of economists is that the economy continued to contract sharply for the third straight three-month period.
But it will also show that the recession, at least as it is technically defined in terms of gross domestic product, likely ended in June.
Bank of Canada governor Mark Carney took some heat last month for declaring the recession all but over -- with only a smattering of hard data to back him -- but most economists now believe the evidence is lining up squarely behind him.
The consensus is that the official report Monday will show that growth returned to the economy for the first time in 10 months in June -- albeit minuscule growth of 0.2 per cent.
If true, and barring an unexpected reversal, Canada will have gotten off relatively easy, economists say.
"We have lost a lot of jobs, but in general, Canada has come out fairly well, fairly unscathed," said economist Pedro Antunes of the Conference Board, an Ottawa-based economic think-tank.
"Last fall it looked very dreary. But we should remember that even as we are entering the darkest hours, we do typically come out of these things."
This time, however, it was not without a great deal of help and money.
TD Bank chief economist Don Drummond has few doubts the global recession would have lasted much longer and been far deeper had not central bankers acted quickly to slash interest rates and support lending, and governments responded in a co-ordinated fashion with trillions of stimulus dollars.
According to the White House, the U.S. alone will add have added as much as US$9 trillion dollars to its debt over the next decade, in large part because of the unprecedented fiscal and monetary stimulus.
In Canada, the federal government estimates federal and provincial stimulus spending will total $80 billion this year and next.
Most analysts say the public intervention was necessary. Some believe growth is so dependent on the public sector that there remains a risk of a double-dip recession later next year once the government spigot is turned off.
"It's true that relative to what we all thought a year ago amid some of the biggest financial institutions falling apart, everybody's got off a little bit lighter than we would have thought," Drummond said.
"But it took unprecedented both monetary and fiscal stimulus to come out of it, and as we are going to become painfully aware over time, those things come with costs."
Discussion about costs, in terms of weak growth and lower than expected improvements in living standards, is taking a back seat to the more immediate sense of relief.
The world is breathing easier now that there appears little chance of a repeat of the calamity of the 1930s, when rampant excess coupled with clueless governmental and central bank policies turned a stock market correction into one of the darkest economic periods in history.
For most of the industrial world, the downturn of 2008-2009 will indeed go down as the worst since the Great Depression.
At its free-falling worst -- the first quarter of 2009 -- Japan's output plummeted a record-shattering 14.2 per cent, and the 16-country euro currency zone saw a 10 per cent retreat. The U.S. saw a decline of 5.7 per cent, although it's steepest fall occurred the previous quarter, when GDP slid by more than six per cent.
In comparison, Canada's recession was milder and shorter.
Output fell three straight quarters -- 3.7 per cent annualized at the end of 2008, 5.4 per cent in the first three months of this year, and an estimated three per cent in the second quarter, which ended June 30.
In terms of total peak-to-trough GDP output, the current slump will come in at about half the 4.9 per cent pull-back of the early 1980s recession, similar to the 1990-91 contraction.
Job losses, while significant at 414,000 and likely still climbing, are also more in line with the early 1990s slump than with the longer and more painful slump of a decade earlier. By comparison, the U.S. has lost close to seven million workers.
According to Export Development Canada chief economist Peter Hall, exports fell about 15 per cent in real terms during the recession. Combined with the lower value commanded by commodity exports, Hall expects the value of what Canada sold the world will fall about 20 per cent this year alone, by far the worst on record.
Canada's domestic economy, worth about 68 per cent of the total, held up remarkably well.
At $34.4 billion, June's retail sales, for instance, were only about half a percentage point below last June. And Canada's home values have largely recovered, although starts remain depressed from the pre-recession levels.
"Exports is what really smacked us the most. If we were an island, Canada would likely have escaped with only a mild nick," said Douglas Porter, deputy chief economist with BMO Capital Markets.
Economists note that Canada, aided by skyrocketing commodity prices that kept the economy afloat during the first half of 2008, entered the recession months later than many other countries.
And it was in far better position to shelter itself when the storm came.
Canadian governments had been reporting budget surpluses for most of the decade, the housing market was not a house of cards built on suspect mortgages, and critically, Canada's banks were solid.
That meant that while loans dried up in many economies, regardless of the risks, in Canada the credit crunch was more of a pinch.
"We did not have the same level of excess in our economy as America had, or other major economies in the world," said Hall.
Economists warn that dangers persist. The strengthening loonie threatens to keep growth in check, and with the excess overhang in the U.S. expected to restrict spending for several years, Canada's export sector will continue to struggle.
Then there's the tricky balancing act faced by central bankers and governments, including Canada, of when to start winding down stimulus, and possibly even start raising taxes to pay off debt, and hiking interest rates to reign in inflation."Now comes the interesting part," cautioned Drummond. "My concern is that in the name of short-term stimulus, we've bought medium term pain."