Economic Blackout: Todayâ€™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 Canadaâ€™s most recent Monetary Policy Update.
Implications for Monetary Policy
Before the Bank of Canadaâ€™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. Todayâ€™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, Canadaâ€™s economy would have contracted between 2007 and 2008. This revelation highlights the importance of fiscal policy in mitigating the economic crisis.