Canadian Recession: It’s Official

This morning, Statistics Canada revealed the country’s worst-kept secret: the economy contracted for a second consecutive quarter in the first three months of 2009. Adjusted for inflation, Gross Domestic Product dropped by 1.4%. If this trend continued (and compounded) for a year, the Canadian economy would be 5.4% smaller. On the other hand, this decline was not bad enough to break the record set in 1991.

Labour Income and Consumption

An important bright spot over the past year of economic weakness had been that labour income continued to rise modestly, at least before inflation. Even in the fourth quarter of 2008, total labour income edged up by 0.6% in current dollars.

The first quarter of 2009 reversed this trend. Labour income dropped by 0.7%, falling below the level experienced in the third quarter of 2008. This sharp reversal confirms that the elimination of jobs and the reduction in paid hours for employed workers outweighed ongoing increases in average hourly wages.

Since Canada’s population continued growing and consumer prices continued rising throughout this period (albeit at a slow pace), any absolute decline in labour income is devastating. As Canadian households try to save more out of shrinking income pool, the outlook for consumer spending is poor.

The Private Sector

Today’s figures indicate that business invested 11% less in machinery and equipment along with 3.8% less in structures. Balance-of-payments data released last week indicated that Canada’s trade deficit in goods and services doubled between the fourth quarter of 2008 (-$2.6 billion) and the first quarter of 2009 (-$5.3 billion). Therefore, the household, corporate and external sectors are all drags on economic growth.

Are Governments Doing Enough?

Government is the only remaining sector that can offset these declines to stabilize the overall economy. Stimulus packages are explicitly intended to serve this purpose. The first quarter of 2009 is the end of the 2008-09 fiscal year. Stimulus packages do not officially start until the 2009-10 fiscal year. Nevertheless, one would have expected governments to begin injecting demand into the economy as quickly as possible.

However, in inflation-adjusted dollars, there has been almost no increase in government purchases of goods and services in 2009. In the first half of 2008, before there was a global economic crisis or a commitment to fiscal stimulus, such purchases rose by more than 1% per quarter. Between the fourth quarter of 2008 and the first quarter of 2009, this pace fell to just 0.3%.

This meagre increase in public spending offset essentially none of the decrease in private spending, investment and exports. One can only hope that stimulus spending materializes in the second quarter of 2009.

UPDATE (June 2): Quoted by The Toronto Star

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