The Recession: Some Perspective

Numerous groups in Canada are proposing massive increases in government spending to counteract what they claim is a major recession in economic activity. As it turns out, those claims are based on projections of what will be and not what is. Canada is likely now in a recession, but it is far from certain that it is a major one.

Economists define a recession as a period in which economic activity declines for two or more quarters. Gross Domestic Product (GDP) is used as the measure of economic activity. GDP data are produced quarterly by Statistics Canada and typically released two months after the end of a quarter. The most recent Canadian GDP data were released on Dec.1/08. In the third quarter of 2008 (the three months ending on Sept. 30/08), GDP did grow, but by very little. In the first quarter of 2008, there was a very slight decline in GDP, which was followed by a small increase in quarter 2.

The bottom line: up to Sept. 30/08, the economy was growing, albeit anemically, but it was not in recession.

Despite all attempts by governments to prevent them, recessions are a regular occurrence in modern industrial economies. Two central features of a recession are declines in GDP and increases in the unemployment rate. Statistics Canada publishes the unemployment rate for a month within a week after the month ends. Hence, it is available more frequently than GDP data and is more timely in charting the course of a recession.

The unemployment rate in Canada reached a record low of 5.8% in early 2008. In other words, in its long history of measuring unemployment, Statistics Canada had never found the unemployment rate to be this low. By December 2008, the unemployment rate had moved higher, to 6.6%, not as good as things were earlier in the year, but still lower than the annual unemployment rate in every year from 1976 to 2005 inclusive. The annual rate in 2006 was 6.3% and in 2007 it was 6.0%.

Some further perspective. Canada did suffer through major recessions in the early 1980s and in the early 1990s. In 1982, the unemployment rate rose to 11.0% from 7.6%in the previous year. It peaked at 12.0% in 1983, and did not fall to its pre-recession level again until 1989. In 1991, the unemployment rate rose to 10.3% from 8.1% in the previous year and it took until 1999 to lower unemployment to the 1991 level.

The bottom line: with an unemployment rate of 6.6% in December, we are nowhere near the depths of previous recessions.

A major rationale cited by the parties calling for massive increases in federal government spending is declining economic activity in the U.S.A., the major buyer of Canada's exports. Yesterday's National Post ( January 13, 2008, page FP3; please scroll to the end of the following two-page article with the heading of "Milk" http://www.financialpost.com/story.html?id=1170081) has an insightful commentary by Terence Corcoran debunking the claims of economic disaster in the U.S. He notes that the U.S. unemployment rate of 7.2% in December 2008 is far blow the highest level experienced by the U.S. in the past 25 years (over 10% in the early 1980s).

Implications for the January 2009 federal budget: some further stimulation of the the economy is required, but it should not be massive. And the stimulation should be applied in carefully measured amounts over the upcoming quarters in a manner that allows it to be reduced if the economy proves to be more robust than the pessimists are predicting.