GDP: Is â€œLess Badâ€ the New â€œGoodâ€?
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 todayâ€™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.
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.
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 Canadaâ€™s latest estimate of the “output gap” also implies that more fiscal stimulus is needed.