Keep the Corks in the Champagne
Here we go with another media frenzy celebrating the official “end of the recession.”Â Truly, this time.Â We really mean it.
Harken back to July 23 of this year, when Mark Carney made it official the first time, declaring in his monetary policy update that the economy was back in the black.Â His bold declaration made headlines, but it sure hasn’t felt like a “recovery” since then: unemployment growing, incomes stagnant, and even real GDP growth non-existent.
Now Statistics Canada’s GDP report for the third quarter adds to the consensus that the recession is over.Â Led by public sector stimulus, a surge in auto production (tied to the U.S. “cash-for-clunkers” program, now finished), and a steady expansion of the financial industry, real GDP eked out an increase of just under 0.1% (rounded up) for the quarter.Â “Annualized” (that is, raised to the 4th power), that means growth at an annual pace of 0.4% (again, rounded up).
Qualitatively, this is within the statistical error of margin of zero growth.Â So again, while it is more evidence that the free-fall in economic activity which occurred from last autumn through this spring has been (thankfully) arrested, this report does not remotely indicate that anything approximating a “recovery” is underway.Â So don’t pop the champagne just yet.
Here are a few cationary nuggets buried within the StatsCan report:
- Without public sector stimulus, GDP would still be contracting.Â Private sector GDP shrank marginally during the third quarter.
- Of course, the finance industry is the brightest light in the private sector — partying like the good old days since the markets turned around in March.Â GDP in the FIRE sector grew a full percentage point in the third quarter.Â By contrast, private non-financial GDP (what I call the private “real economy”) was shrinking at an annualized rate of 1.4 percent.
- A $1 billion boost in auto sector output (as Chrysler’s Canadian assembly plants came back on stream, and all auto exports were boosted by the U.S. incentives) accounts for 150% of the total expansion in Canada’s national GDP in the third quarter.Â So much for the Fraser Instutute’s claim that the rescue of GM and Chrysler was a gigantic waste of money.Â Never mind that it may not actually cost taxpayers a cent; without the auto turnaround, Canada’s GDP would have kept declining.Â I doubt that performance will be repeated in the months ahead.
Of course, whether the GDP is growing or not is hardly the ultimate arbiter of whether the economy is healthy, for all the reasons we know so well.Â But it is important.Â Yet even by this narrowest of criteria, we cannot say that the recovery has arrived.Â Without public sectior stimulus (both here and in America), and withoutÂ the currentÂ rebound in financial exuberance (that is quite likely simply the onset of the next pointless boom-and-bust cycle), real GDP would still be falling.
I am not a brainless pessimist.Â There are a few sunbeams of light in this report.Â Nominal GDP (and hence nominal incomes for all stakeholders) has stopped falling.Â Business investment in machinery and equipment grew slightly in the third quarter, as did exports.Â Those are the major engines of private sector expansion in Canada.Â If those trends continue, then perhaps a genuine, self-sustaining dynamic can be re-established.
I tend to think that won’t happen for another year or two, however, in which case we will continue to rely on increases in public spending to foot the whole bill.Â Yet, perversely, we are now hearing loud calls for fiscal restraint from all levels of government.Â If they start cutting public spending (rather than increasing it), thenÂ the engine of growth at present could be thrown into reverse in the coming months as well.
My base case forecast: real continues to “bounce along bottom” (around zero growth) for the next year.Â Downside risks: more financial distress in the private sector, and/or a shift to fiscal restraint in the public sector.Â Upside risks: none visible.