Tuesday, January 18, 2011

Why Canada's recession wasn't as brutal


Globe and Mail Blog
In the cacophony of daily news, a useful new analysis has put the recession in historical context: it was milder than previous ones, though the initial tumble in output and employment was sharper than in any post-war period.
Moreover, Canada is now the only G7 nation to have recouped its losses from the 2008-2009 recession, as both real GDP and employment remain below pre-recession levels in the other six countries, Statistics Canada’s chief economic analyst says.

For Canada, “this is a significant achievement, given that the global economic downturn which began in 2008 was the most severe and synchronized since the 1930s,” said Philip Cross in a paper published Thursday.
While no Canadian body dates official starts and ends to recessions, as in the U.S., Mr. Cross estimates it started in August or September of 2008 and lasted until May or July of 2009. The economy was “clearly” in recession for three quarters, from the fourth quarter of 2008 to the second quarter of 2009, he says.
He explored what factors caused the precipitous slide, and why the downturn wasn’t nearly as severe as in previous recessions of 1981-82 and 1990-92, nor as bad as in other countries. Here are some of his findings:
  • Jobs contracted at only half the rate at which output fell during this recession. That’s because employers in Canada relied almost equally on reductions in employment and shorter workweeks to cut total hours worked in line with output. That response is different than in prior recessions -- in the prior two downturns, employers relied on cutting jobs much more than hours.
  • May, 2009, seems to be the low point for monthly GDP, “when widespread plant closures in the auto industry as two major firms went bankrupt depressed output, and the same month was the low in hours worked.”
  • The initial speed of descent in the last downturn exceeded that in the other two recessions.
  • But employment bounced back much more quickly. It took four years after the 1990 recession began for the labour market to recover; three years after the 1981 recession, and two years (for both GDP and jobs) to recuperate in the past recession. The downturn in the early 1990s was marked by a rare double-dip recession.
  • Full-time job cuts were heavier in prior recessions than the recent one. Full-time employment at the end of last year is still 64,000 below its pre-recession peak, which explains why total hours worked remain 0.7 per cent below their peak.
  • Exports plunged at a record rate. “The most striking feature of the 2008-2009 recession was the speed and severity of the contraction in exports,” the report said. The “unprecedented speed and severity of the fall in exports...reflects the impact on the global economy and trade flows of the unprecedented disruption in financial markets that occurred in the fall of 2008.”
  • With the fall in exports came a collapse of business investment. Investment in plants and equipment plunged by about 20 per cent in the recession, matching a record plunge. Investment has since picked up, but remains below pre-recession levels.
So why was this recession milder, with a speedier recovery? Household spending, Mr. Cross says. In prior recessions, it plummeted by nearly 6 per cent. This time round, it fell by only 2 per cent over two quarters and has already fully bounced back.
He attributes this to several factors: Canadian households had strong balance sheets going into the downturn. Employment didn’t fall as much as in past contractions. Credit wasn’t as impaired as in other countries. “This reflects both a sounder financial system and the massive response from policy makers both to shore up capital and to lower interest rates.”

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