Denial About the Recession
Denial with a capital “D”.Â That’s the only way to describe the reaction to Friday’s stunner from Statistics Canada: real GDP shrank 0.3% (at annualized rates) in the first quarter, and hence Canada is likely already in the recession that our fearless government leaders have been saying can’t happen here.
For months economists have been wondering if Canada could escape riding the coattails of a U.S. downturn.Â The “consensus” view was that strong resource incomes, and our supposedly healthy “fundamentals” (which look weaker and weaker to me every day), have allowed us to “de-couple” from the U.S. economy.Â We may slow down, but we’ll avoid a recession.
I was skeptical of this view.Â But none of us (me included) imagined that Canada would actually be leading the way into recession.Â That’s how it looks now.Â US real GDP grew 0.9% (annualized) in the first quarter, while ours was going the other way.
(I did point out in my Globe and Mail column last week that, by the monthly StatsCan real GDP numbers, Canada has had no real growth since last October.Â When your growth is zero, it’s very easy to slip into negative territory.Â That was before the new data on the March contraction tipped the whole first quarter into the red.)
What’s as shocking to me as the actual numbers (which are very negative) was the “what me worry” attitude — not just of Jim Flaherty (Finance Ministers are paid to keep smiling at a time like this), but the whole economics profession as well.Â It’s as if the economists believe their own rose-coloured view of Canada’s brave new resource-led prospects so fervently, they refuse to let mere statistical evidence get in the way.
Consider some of the glib responses:
“People and companies don’t feel horrible about the current situation.”Â Ted Carmichael at J.P. Morgan.Â Speak for yourself, Ted.Â I spent Sunday out in Oshawa at a rally for jobs.Â Believe me, people there DO feel horrible about the current situation, and it’s getting worse.Â (By the way, the Oshawa metropolitan region, JIm Flaherty’s home base,Â experienced an 18 percent increase in unemployment last month alone — the largest anywhere in Canada.Â Jim’s endless conviction that Canada’s economy is in great shape is beginning to rub his hard-pressed constituents the wrong way, let me tell you.)
Carmichael also noted that this decline in GDP could conceivably be “revised away” once the data is adjusted.Â But by the same token, the estimated decline could become worse.Â And none of this changes the fact that Canada’s real output has slammed into a brick wall far faster than in the U.S.Â Mere zero growth (whether it turns out to be a “technical” recession or not), is disastrous enough.
“The definition of a recession might be met in the next quarter, but the environment might not be recessionary.”Â That’s Carolyn Kwan from Merril Lynch.Â If anyone can tell me what that means, I’ll buy you a double double.Â (I think it means that I’m going to keep sounding positive, no matter what.)
Here are some indirect quotes from Doug Porter at BMO Nesbitt Burns (comments attributed to him in the Globe and Mail):Â “In Canada, however, net worth is on the rise, the real estate market is not collapsing, unemployment is low and shoppers are active.Â Canada’s real GDP numbers, made weak by a plunge in manufacturing and exports, are masking Canada’s strengths.”Â National net worth numbers are skewed by the vast profits being received by the petroleum industry and other corporations.Â And in the end, a country’s propsperty depends on what it makes — not what it buys.Â So the fact that Canadian shoppers are “active” reflects little more than inertia.
(Another tidbit: StatsCan also reported last week that there are now more Canadians working in retail trade than in manufacturing.Â In other words, more Canadians sell stuff, than make it.Â Does anyone remotely believe that that is a sustainable role for a national economy?Â And today the Conference Board has indicated that consumer confidence has hit a 7-year low.Â So much for the happy shoppers.)
And the old mantra is still being heard wide and far that real GDP is now a deceptively weak indicator of Canada’s “true” strength.Â That’s a bunch of wishful thinking as shaky as the old line (from the dot-com boom times) that “price-earnings ratios are no longer a measure of true value.”Â Yes, aggregate national income looks stronger than GDP because of super-high resource incomes.Â But those incomes are not trickling down, remotely proportionately, into personal incomes in Canada.Â And so-called “terms of trade gains” (another statistical construct that you can’t actually SEE anywhere in the real economy) are just as illusory.
Jim Flaherty sums it up for Reuters as follows: “I think, quite frankly, that economic fundamentals, as I have said, are quite strong.”Â There’s nothing more fundamental to economics than peoples’ ability to work productively.Â By that fundamental measure, Canada’s economy is definitely in the ditch.
In short, the economists’ conclusion seems to be that so long as Canadians are happy and keep shopping, it isn’t a “real” recession.Â How objective of them.Â And here I thought economics was supposed to be the “dismal” science.Â In fact, it’s the “mindlessly cheerful” science.
The cold hard facts are increasingly clear:Â Canada’s real output is stalled, and could enter recession sooner (and possibly longer) than in the U.S.Â The self-congratulatory inaction of Jim Flaherty in the face of this emerging weakness will considerably worsen the pain.Â His much-vaunted tax cuts are doing nothing to reverse the damage (tax cuts never prevent recessions, because shell-shocked consumers and businesses alike sock away their tax savings for the rainy day they fear).Â Much-vaunted resource rents can’t single-handedly keep a diverse national economy like Canada’s out of the doldrums (and, by the way, resource rents won’t last forever).Â And we can’t just turn our collective national back on the manufacturing sector (and its stereotypical “smokestacks”), without paying a price: the StatsCan numbers confirmed that it was the fallout in manufacturing, and the auto industry in particular, that threw the whole national economy into the red in the first quarter.
I keep wondering what would have been said if Canada had posted a small federal deficit — rather than a small contraction in national GDP.Â Mr. Flaherty (who has staked his reputation on avoiding a deficit, through spending cuts if necessary, no matter how bad the recession gets) wouldn’t be able to simply deny that anything was wrong.Â And economists would never say “Oh well, it’s only a small deficit that could even be revised away with adjusted data.”Â Rather, the reaction to a deficit (even a small one) would be unmitigated shock and a call to national action.Â To me this reveals the inherent biases of both the Minister, and the economists who supposedly monitor his performance.
Time to wake up and smell the latte, folks.Â The recession is already here.Â And pretending that it isn’t, won’t save a single job.