It’s ALL About Doom and Gloom

One of the silliest leads to an economic story I have read in a long time is on the front page of today’s Globe under this headline:

“It’s Not all Doom and Gloom: GDP’s Drop Suggests Recession Will be Short.”

The huge drop in output last quarter is perversely seen by the writer and some supporting bank economists as good news,  since a faster and deeper descent into recession than  the norm apparently sets  the  stage for a quicker jump out of a downturn.

I see no logic to this. If we were on the brink of a serious and long downturn, why would it not start with a terrible quarter?

One could argue that previous recessions were  imposed by monetary policy, so very bad news initially would prompt a quicker easing up on the deflationary brake than woudl otherwise be the case.  But this is not a case of a policy induced recession. Instead, the question is whether easier monetary policy is pushing on a deflationary  string.

The story cites the Bank of Canada January forecast as a basis for optimism. Curious, then, that the Bank of Canada today revised down its outlook after looking at the dismal last quarter numbers, commenting as follows:

“National accounts data for the fourth quarter of 2008 and other indicators of aggregate demand point to a sharper decline in Canadian economic activity and a larger output gap through the first half of 2009 than projected in January. Potential delays in stabilizing the global financial system, along with larger-than-anticipated confidence and wealth effects on domestic demand, could mean that the output gap will not begin to close until early 2010.”

The  relatively rosy scenario of a  turnaround in 2010 itself assumes that the financial system stabilizes (little sign of that in the US yet) and that the US and Canadian stimulus packages are big enough to offset  sharp rises  in the savings rate,  continuing declines in exports, and the effects of the unwinding of the US housing bubble. I don’t think so – and I expect that the next IMF forecast will project an actual contraction of global output in 2009.

If I was the  Minister of Finance or the Governor of the Bank of Canada,  I would not be very inclined to take the gloomiest possible view of our prospects.  Lack of confidence is indeed self-reinforcing to a sginificant degree.

But there is also little point in bank economists and the media peddling facile stories of a qucik turnaround, which won’t happen unless and until we get much more radical actions by the G-20 and others.

On which I’ll blog at greater length later.


  • It must be one of those days, as I was thinking the same when I read this story.

    It brings forth visions of shaman Carny hovering over the carcass of the economy, shaking his fists and pointing at the deep wounds in the body pronouncing that, given the amount of blood flowing, the economic body in this bloody mess will soon rise up and again defend us villagers against the evil spirits of starvation.

    You might not have had exactly these same visions, but really, come on, is there nothing better to fill up that news space with.

    Crowd sourcing is obviously becoming the newspaper industry business model and hence its demise. (the end of quality in for profit news).

    Give me at least one data byte, one table, one chart one sentence, one bar of a song, one line of poetry, one tidbit of evidence that may even remotely suggest that the economy will quickly turn around and then we’ll debate it. Wishful thinking Mr. Carny and the rest of the Harper crew at the PCO enforcing this optimism on the BOC.


  • I put up a post with a chart tracking q/q real GDP growth going back to q1 1962. There does not seem to be any historical precedent for the BOC and Globe’s optimistic predictions.

  • This reminds me of a famous line from a renowned québécois politician from the 60’s who has been quoted as having declared during an election (approximate translation)
    “The party in power has brought us to the brink of catastrophy, with the Union National we will take a bold step forward”.

    On a more serious note, though the stock market has plunged significantly in the past year, every major daily slide has been followed by a dead cat bounce, and after every bounce the press and pundits have tried to convince us that the worst is behind us.

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