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2008: The Year in a Picture

We are on the edge of disaster without being able to situate it in the future: it is rather always already past. Maurice Blanchot.


Over the last month, I admittedly got so caught up in the rhetorical swirl of the coming disaster that I woke up December 1st expecting statistical confirmation that Canada slipped into recession in 2008 only to learn that the economy in fact grew 0.3% in the third quarter (  Slap!  It serves me right for being slack in watching the figures unfold.  Such a wake-up call suggested I step back from the fray over where we’ll be in six months’ time and re-trace the path the economy has taken over 2008.  Then, maybe a more measured sense of where we are going will emerge. 


Among the various graphs and figures perused, here is my candidate for chart of the year: the transition paths of Canada and the United States since July 2007.  If anyone was skeptical of structural difference between these two countries, this should allay any doubt.


Since the credit crisis, the US economy has taken the most interesting path though the unemployment-inflation (Phillips) space.  Beginning in July 2007 with historically low unemployment of 4.2% and inflation of 2.4% in July 2007, the US economy first began to exhibit rising inflation and then rising unemployment, peaking in August 2008 at 5.7% unemployment and 5.6% inflation.  This sparked concerns of stagflation.  Since then, inflation dropped off sharply, with unemployment continuing to rise.  The nature of the disaster was reconsidered: stag-deflation is now the threat!  In November, inflation dropped to 1.7% while unemployment hit 6.7%. 


Canada, on the other hand, has displayed relative stability at 6% unemployment and 2% inflation.   Inflation flared between June and September 2008, the period of the commodity price peak-and-collapse.  This episode prompted the Bank of Canada to resist cutting rates at the June, July and September fixed announcement dates.  Then in October and November, unemployment started to lift off while inflation dampened.


What does the chart mean at a deeper level?  I’ll serve up a few ideas.  Two different economies, one a small open one, the other large, intimately connected in both trade and financial channels. This connectivity brings complexity – making it more difficult to discern how the Canadian economy will be affected.  Non-linear potentialities abound.  The positive feedback provided by US demand for Canadian export goods means a lagged and deep slowdown for Canada.   Processes at work apart from the credit crisis have set up Canada’s competing export sectors – primary commodity producers and manufacturers – to both take a hard hit in this unwinding.  I argue that prices, both commodity and currency as well as import prices, have been the bigger factor behind the evolution in the Canadian economy in the past 12 months than has credit supply, specifically in explaining the unemployment rate and inflation rate up to now.  Now with the construction industry softening due to slowing investment activity, another source of private demand sputters. 


Finding the right metaphor to describe the evolution of the economy can make great Christmas party conversation – how about the tsunami building off-shore threatening to hit sometime soon while a simmering volcano in the hinterland threatens to explode?


Of course, there is probability, of an increasingly black swan variety, that we’ll wake up sometime in 2009 and discover in the headline GDP numbers that the disaster has already passed!





Enjoy and share:


Comment from Nick Rowe
Time: December 21, 2008, 10:20 pm

Neat picture!

I was tempted to say that explicit inflation targeting in Canada has made the difference, but maybe I should wait a year before saying that. My fear is that the Canadian picture will look like the US picture, lagged a year. Probably wrong (and hope I’m wrong), but it’s too early to say.

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