L-Shaped Recovery?

Flat Gross Domestic Product (GDP) figures for July provide a sobering reminder that the technical end of a recession may not imply a rapid recovery. Output appears to have stopped shrinking, but this morning’s release suggests stabilization rather than growth.

Rounding to the nearest billion, all-industry GDP has been $1,184 billion for three months. It had peaked at $1,241 billion in July 2008. (These figures are in chained 2002 dollars.)

Simply to get out of this hole, Canada’s economy needs to expand by 4.8%. Even if we quickly achieved and sustained brisk growth of 3.6% per year (0.3% per month), it would take the rest of 2009 and all of 2010 just to get back to where we were before the crisis.

Whatever path output takes, the labour market will be even slower to recover. Businesses can initially ramp-up production by having existing employees work more hours and by taking advantage of productivity improvements. Only after exhausting these avenues will most employers start hiring again.

Although the pace of layoffs has slowed, layoffs may still exceed hiring. Hiring must consistently exceed layoffs to increase total employment.

As Statistics Canada reported yesterday, our population has continued to grow. Even when employment returns to pre-crisis levels, it will still be smaller relative to Canada’s potential workforce. Therefore, we seem bound to repeat the experiences of the early 1980s and early 1990s, when unemployment kept rising long after the recession had officially ended.

This outlook underscores the need for greater public investment to propel a more meaningful recovery. Additional stimulus may be needed to get output growing and will certainly be needed to create jobs even after output growth resumes.

UPDATE (October 1): Quoted by The Toronto Star and Canadian Press

10 comments

  • I am hesitant to focus on economic growth as the key element to recovery – as is done by current media outlets. We had relatively stable decent growth for a generation before this current downturn, yet, most Canadian families have seen their nominal incomes remain the same and their real incomes fall. The income gap, to be sure, has widened, at the very same time as access to puiblic goods and services, as well as their quality, have dropped significantly. Tuition rates have increased far outpacing income growth let alone wage growth. These facts coupled with homelessness, child poverty, senior poverty, etc. were not dealt with during high growth, they are ignored during this recession, and I see no reason to suspect that 3 or 4% growth will improve their lot at all. We need measures that deal not just with the size of the pie, but how the pieces are cut and divied out to the masses.

  • I completely agree. There were many severe economic, social and environmental problems before the crisis. Simply restoring that state of affairs should not be our ultimate goal.

  • Quit griping and have faith, Erin. Our Economist-in-Chief says we’re soon going to have the lowest corporate tax rate in the G7 and this will make for a great ad campaign slogan.

  • But Tim Hortons has already returned. What further wonders could low corporate taxes possibly achieve?

  • My gut still says: W. But imagine the peak in the centre is half the height. Maybe you are right: L. But then it is the length of the foot that matters. I am sticking with my optimistic forecast of a minimum of three bad years. I will be happy to have my guts pulled out on this one.

  • My gut is saying we’ve just hit a plateau.

  • Simply put, we are barely seeing a leveling in but a handful of key indicators. Many worker based indicators- i.e. ones that actually mean something for the working people of the country are still dropping- albeit, potentially less fast.

    Consumer spending is derelict- and this is with apparently major amounts of government stimulus.

    Consumer bankruptcies are still rising here in Canada, retail sales are still declining, and news out of the US is the housing sector has still not bottomed out.

    Some may think we have stablized the financial sector, but given it will take quit a bit of time for regulations to take hold in the financial sector, that is if the political will is maintained, which from the G20 last week one could conclude that will is waning, then we could see ourselves getting thrown right back into the same jack pot we were in last fall.

    Not sure of what shape we are at, cause I really cannot put my focus on any one indicator to dictate to me what the meaning of a recession is. I would say in a more worker friendly world- I would say we are coming out of a recession when a combination of lower unemployment, a trend towards less precarious employment, higher wages, less consumer bankruptcies, some kind of indexed measure for moving towards environmentally sustainability of the economy, and then if these are all meeting some accepted benchmark for a normal non-recessionary notion, then I would conclude that the recession is over.

    The General progress indicator is the closest I seen of such a measure.

    I still feel we are far from some kind of worker friendly recovery- given the turbulence from many complications will linger for a long time given the politics of the day and the lack of organized resistance- maybe this is the new normal.

    Germany is an example of the new politics. How can an right wing government make an appearance amidst the fundemental breakdown of everything right wing in terms of economics.

    That should be a real eye opener for progressives.

    So should Harpers rise in the polls amidst the economic carnage that his policies have unleashed into our system.

    The financial sector in Canada had to be bailed out as credit markets froze up, the only containment we had was the housing market not taking the hit that the Americans did. Oil prices at the front end could have been managed, as so could the dollar that only accelerated the demise of our manufacturing jobs.

    I could write pages of what they did wrong- ultimately the support less government, less regulation, and the ideology that got us into this mess- yet those polls stand towering over us, and in the long shadows of a setting sun, we see our potential of righting this wrong lost in the dieing echos of Obama’s Stimulus- as Canada’s journey out of recession is definitely “Made in USA”

    Gravity, despite Einstein’s courageous attempts, is still not well understood and so too are the forces that convince the populace of what keeps their pay packets heavy.

    pt

  • PT wrote:

    “Germany is an example of the new politics. How can an right wing government make an appearance amidst the fundemental breakdown of everything right wing in terms of economics.”

    Well, sorry, but Merkel’s success is in part do to the fact that the neoliberal ideas that were discredited were those brought in by Schroeder’s Social Democrats. If New Labour bites it in the next general election are we to conclude that Britain moved to the right? Can you get more right wing than New Labour? If the NDP were to get elected in BC in the next general election on their made in Bill Vander Zalm land, right wing, populist tax revolt would we want to consider that a sign of hope for the left in BC?

    How many times do we have to see this bad movie?

  • My response Travis-

    Yes in labels these two cases you point out did bring in a whole series of neoliberals economic reform. I think it is what they called the third way- basically a move to the center by formerly left leaning parties.

    We may not have seen this movie- if we get a series of right wing govts like a Harper Majority- then I will just say this- you haven’t seen nothin yet!

    But your point is well taken and yes the left seems to move to the center when getting close to power.

  • So given we all agree we are in for rough 3 or so years and given we all agree that there is not really a left or least one that is going to run on tax increases what do you all think we should cut first or privatize first?

    I say we privatize the Bank of Canada by selling it to Goldman Sachs.

    I am sure Marky Mark Carney can handle the transition:)’

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