Is the Great Recession Really Over?
I normally hesitate to make short term economic prognostications and the Bank of Canada could indeed be right that growth might tip over the cusp from negative to positive in the third quarter as the first sign of a “nascent recovery” from the Great Recession.Â As many have noted, including Jim on the National on Thursday night,Â a mildly positive GDP growth rate will not mean that the recession is over in terms which are meaningful to most people, given that unemployment will l continue to rise for some time and wages are at best flat.
That said, I am not at all convinced that the Bank of Canada story line in the latest Monetary Policy Report holds water.
The Bank forecasts Canadian growth of 3.0% in 2010 (year over year increase) compared to just 1.4% in the US, and they also see growth being driven partly by exports (up a forecast 2.0% in 2010) and not just byÂ domestic demand.Â While it may be true that there will be some recovery in the very hard hit US auto and housing sectors which drive a big chunk of Canadian exports, and while there may be some sustained recovery in the oil and mining sectors due to growing Chinese demand,Â I’m hard pushed to see a significant recovery of Canadian exports so long as the US economy remains flat on its back and when we are stuck with a 90 cent dollar. Many would see the Bank of Canada forecast for the US as pretty optimistic, and the fact that we are a commodity-driven economy does not trump the fact that some 80% of our exports still go to the US.
I’m also not convinced by the story line that domestic consumption will revive to at least some degree while the labour market remains so weak. The conventional line is that we will have a GDP recovery in advance of a labour market recovery. But is it not just as plausible to argue that the labour market has to find some sound footing before working families start spending again.Â If we rise to and hit double digit unemployment and wages continue to stagnate or even start falling, will ultra low interest rates still maintain and even increase housing and consumer spending?Â My guess is that we are still very far from the peak recession unemployment rate as the impacts of massive manufacturing job losses start to cascade into private – and even public – services, and that impacts on savings and spending will increase rather than dissipate.
My suspicion is that the Bank has fudged at least a bit on the up side for two reasons. First,Â in fairness, dismal forecasts are unfortunately self-reinforcing.Â Second, had they forecast a continuing recession, they would have had to step up to the plate in terms of quantitative easing and unconventional monetary policy. This taboo subject was gingerly broached in the last Monetary Policy Report, but not a word on it in the new one.
My hope is that the Bank is right, but I fear they are wrong and that this recession is far from over, even in a technical GDP accounting sense.Â And my concern isÂ that the overwhelming desire to normalize monetary and fiscal policy will lead the authorities to nip even a nascent recovery in the bud.