Economic Blackout: Today’s GDP Figures

Numbers Worse than Official Expectations

Real GDP dropped by 1% in December 2008, as large a monthly decline as in the August 2003 blackout. The difference is that, whereas August 2003 was an aberration, December 2008 continues a worsening trend.

During 2008 as a whole, the economy eked out 0.5% growth, which falls short of the 0.7% forecast by both the 2009 federal budget and the Bank of Canada’s most recent Monetary Policy Update.

Implications for Monetary Policy

Before the Bank of Canada’s January 20 interest rate announcement, I suggested that it should cut its target rate to zero because the economy needs all the stimulus it can get and inflation is no longer of concern. Today’s GDP numbers give further credence to the view that the central bank must cut interest rates as much as possible.

Public Sector to the Rescue

In inflation-adjusted terms, GDP rose by only $6 billion between 2007 and 2008 (i.e. from $1,320 billion to $1,326 billion). Current government expenditures on goods and services increased by $9 billion (i.e. from $258 billion to $267 billion). In other words, without public spending, Canada’s economy would have contracted between 2007 and 2008. This revelation highlights the importance of fiscal policy in mitigating the economic crisis.

UPDATE (March 3): Quoted by Canadian Press and The Toronto Star


  • It is notable that the personal savings rate jumped very sharply in the fourth quarter to 4.7% of disposable income – a huge $15 Billion increase from the previous quarter. No omens for a quick recovery there.
    The only good news here is that labour income was quite strong in the quarter – just how long that will last is another question.

  • Roubini comments on the savings numbers for the US:

    “The January personal spending numbers were up for one month (a temporary fluke driven by transient factors) and personal savings were up to 5%. But that increase in savings is only illusory. There is a difference between the national income account (NIA) definition of household savings (disposable income minus consumption spending) and the economic definitions of savings as the change in wealth/net worth: savings as the change in wealth is equal to the NIA definition of savings plus capital gains/losses on the value of existing wealth (financial assets and real assets such as housing wealth). In the years when stock markets and home values were going up the apologists for the sharp rise in consumption and measured fall in savings were arguing that the measured savings were distorted downward by failing to account for the change in net worth due to the rise in home prices and the stock markets.

    “But now with stock prices down over 50% from peak and home prices down 25% from peak (and still to fall another 20%) the destruction of household net worth has become dramatic. Thus, correcting for the fall in net worth personal savings are not 5% – as the official NIA definition suggests – but rather sharply negative. In other terms given the massive destruction of household wealth/net worth since 2006-2007 the NIA measure of savings will have to increase much more sharply than has currently occurred to restore the severely damaged balance sheet of the households. Thus, the contraction of real consumption will have to continue for years to come before the adjustment is completed.”

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