GDP: Is “Less Bad†the New “Good�
Statistics Canada has revealed that, adjusted for inflation, Gross Domestic Product (GDP) declined by 0.1% in February. This decline is on par with September and October, but far less severe than November (-0.7%), December (-1.0%), and January (-0.7%).
There are grounds for hope in that a slower pace of decline is a necessary precondition for a return to economic growth. On the other hand, the monthly figures are cumulative, so February constituted a further decline from a baseline that had already fallen very far.
Goods vs. Services
A striking contrast in today’s release was between goods production and service production. Goods-producing industries contracted while service-producing industries grew slightly. Specifically, goods production decreased by 0.6% in February, more than September or October but still less than November, December and January. Service production expanded by 0.1% in February, its first increase since September.
Employment Implications
Even if this slower pace of decline foreshadows a return to growth, it will take some time to return to the pre-crisis level of output. Meanwhile, population will continue to increase and productivity will continue to improve, so an even higher level of output will be needed to restore pre-crisis rates of employment. In both the early 1980s and early 1990s, a year of real GDP contraction was followed by a few years of high, or even rising, unemployment.
An initial recovery in output is likely to involve employers having their existing employees work for more hours and taking advantage of productivity improvements. Only after these avenues are exhausted will employers look to hire more workers.
Wages tend to be lower in service production than in goods production. If the recovery is dominated by service industries, average wages may be sluggish. Any optimism about GDP will not quickly translate into labour markets.
Policy Implications
Therefore, the quick jolt of fiscal stimulus aimed at reviving GDP growth should be supplemented with a longer-term program of public spending and investment to create jobs while serving other important social purposes.
The industries that shrank the most in February were utilities (-1.2%) and construction (-2.1%). These are also the sectors that would most immediately benefit from greater investment in public infrastructure.
Finally, the Bank of Canada’s latest estimate of the “output gap” also implies that more fiscal stimulus is needed.
UPDATE (May 1): Quoted by Globe and Mail Update, The Toronto Star, Financial Post and Ottawa Citizen
Wake me up when the quarterly data is out. Typically (the last two recessions) involved 4-5 quarters of negative growth we are only in the second quarter of this recession. Moreover neither of the previous two recessions involved a synchronised global recession and a systemic financial crisis.
On the output gap.
The argument being firmed up in more conservative corners is that the output gap is in fact shrinking because much of the capacity that is being moth balled is not coming back. Hence it is not a demand crisis it is a supply crisis.
I am not sure about that, but even so it does not clinch the argument against fiscal spending it simply directs attention to *capacity increasing* fiscal spending.
Interesting though how some economists are falling all over themselves to argue against fiscal policy. I guess they are feeling the cold of the shade after thirty years in the warm glow of the sun.