Wednesday, July 29, 2009

The recession is over!!...now about that recovery...

Canada has had three severe recessions in the past 30 years; one in 1981, again in 1990 and the most recent one that began in the last quarter of 2008.

The 1981 recession was a classic “V” shaped recession and lasted roughly five quarters. It was also the second part of a double-dip recession, following a brief contraction in 1980. The recession of 1990 was a steep, extremely painful and protracted “U/L” shaped recession, and was followed by a very weak recovery.

The Bank of Canada made some noise this past week after the release of its latest Monetary Policy Report (MPR) predicting an end to the recession in Q3 of this year. If the Bank’s forecast is correct (remember that it is a forecast, not an official statistical release) then the 2008 recession would go into the books as the shortest of the past three Canadian recessions.

The following figure illustrates the path of the Canadian economy 12 quarters after the business cycle peak prior to the recession for 1981 and 1990 along with the recent Bank of Canada forecast.



So where does the BoC expect the recovery to come from? Three places – Personal Consumption Expenditures, Government and Inventories. See below from the July MPR


I have my doubts that PCE will really be that strong coming out of this recession. THe unemployment rate is liklely to approach 10% and household saving is rising in response to massive wealth destruction from falling equity and home prices over the past year. However, indicators such as retail sales and consumer confidence do seem to be improving, so perhaps the Bank is right.

The real difference maker in the expected recovery from the 2008 recession, compared with past recessions, is the fiscal policy response of the Canadian Government. Government spending in the year following the end of the 1981 recession contributed just 0.3% to real GDP growth and only 0.2% to real GDP growth in the year following the end of the 1990 recession. In contrast, the BoC estimates that Government spending will add 1.3% to growth in 2010.

Given that inventory rebuild is estimated by the Bank to add 1% to growth in 2010 and you have 2.3% of the 3% growth forecast estimated to come from temporary sources that may not do much for job creation. Add an uncertain outlook for the Canadian housing and non-residential construction sector and it would seem like we have a recipe for a jobless recovery in 2010. But at least the recession is over...right?

3 comments:

insurance broker said...

Yeah, at least it's over. Too bad the recovery is going to be tough. Apparently, the strong Canadian dollar is going to slow it down. All in all, it was good to read this precise analysis of yours. Best regards, Lorne.

Kosta said...

I know you alluded to this in post, but instead of looking at the 1982 recession as a "V" shaded recession, what about looking at it as a "W" shaped recession starting in 1980.

Using this starting point might lead to different insights when comparing past recessions

Shock Minus Control said...

Insurance Broker: I have a post coming about the impact of the dollar on growth, stay tuned.

Kosta: Very good point.