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.  As many have noted, including Jim on the National on Thursday night,  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 by  domestic demand.  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,  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.  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?  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,  in fairness, dismal forecasts are unfortunately self-reinforcing.  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.  And my concern is  that the overwhelming desire to normalize monetary and fiscal policy will lead the authorities to nip even a nascent recovery in the bud.


  • Andrew,

    The problem I have with the fudge factoring and the wishful thinking aspect, with the projections of the BOC is where it leads policy makers.

    Sure we all want to see the economy rebound, but we also know that it takes policy, especially with the qualitative aspects of this recession, deep- calamity credit markets- and ratcheted down social safety nets, that many people hit the ground when they fall.

    Does this mean we have less pressure for improved EI spending, does this mean we have less pressure for change within the overhaul of the financial industry.

    Economic Positivism is a dual edged sword, and on the edge I would say does a lot more damage when bandied about within an environment of such economic bloodshed that we have witnessed.

    I found it quite jouvenile actually that given the dynamics, the BOC govenor changes his mind so dramatically again in such a short space of time. Does the guy actually have any clue, is what I am left believing.

    I mean it was up then it was down and then it was way down and now it is over the top again. Knee jerk should be Carny’s nickname.

    The domestic demand aspect is a joke, the Amercian linkage is key as you point out and what’s up with china, will have some impact.

    I still believe we are just witnessing a bit of stability due to the public stimulus in the US, it will be an interesting next 6 months.

    Business investment is the key and like I mentioned on a previous post, there is not even a pulse there.

  • Thank you indeed for your voice of reason. I was incredulous that the BOC would issue such a statement.

    I’m not questioning the data but like you I have a real problem with its analysis.

    At the end of the day, if our largest trading partner still isn’t buying, how on earth can we be selling?

  • Maybe they hope that the worst will be over, for the people who count, that is the investing class.

    They’ll simply re-define “recession” to exclude those poor saps who have to work for a living.

    The last bubble economy was built on a huge scam on Wall Street and growing levels of consumer debt. Both of those things were unsustainable. What’s going to drive the economy now?

  • Well according to This questionnaire
    USA is the last country in the world, which will come out of recession. Apparently it is based solely on people’s opinions, but the fact, that basically 75% of 100% USA citizens think, that recession is not over yet and 17% of them think, that it will not even be over until 2-3 years, is not realistic. I have no idea, whether people have serious financial problems or they just don’t think realistically.

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