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Glen Hodgson
Senior Vice-President and Chief Economist |
For the past six weeks or so, media pundits and some economic forecasters have been quick to leap to the conclusion that “we are in an economic recession”. The word “recession” has been used liberally in the media, but it is often used to mean a growth slowdown, rather than the generally accepted definition of an actual decline in output or income for two or more consecutive quarters. Moreover, the definition of “we” has been very elastic; at times “we” has meant the global economy, or the industrial world, or the United States, or Canada and various provinces or regions, with scant reference to the current facts or to a serious forecast of future economic trends. For the record, our view is that the U.S. is in recession and Canada and the global economy are not, although things will be tight for Canada over the coming year as described in detail in our just-released Canadian outlook.
This slippery use of both “we” and “recession” has an important psychological dimension that is feeding the current loss of confidence. Confidence among consumers and investors is an important element in keeping the wheels of commerce moving, or in slowing them down. If we are confident in the economy as a whole, in our job prospects and in our ability to keep earning, we are likely to buy more, to invest more and to take long-term decisions in favour of more buying and more investment. This positive attitude creates upward momentum in the economy.
If, however, consumers and investors are influenced by all the recession talk, adopt a more negative attitude and suffer a drop in confidence, then we are less likely to buy and invest and to take long-term decisions. We hunker down, retrench personal and investment spending in an effort to husband cash -- and end up making the overall economy even worse through a pull-back in aggregate demand. The psychology of recession becomes a self-fulfilling prophecy – if we feel bad, things do indeed get worse.
In October, Canada’s consumer confidence index fell to its lowest point since the third quarter of 1982—a time when the Canadian economy was mired in recession, which is not the case now. October’s drop in consumer confidence cut across all regions of the country. The hyperbolic tone of recent news coverage and the recent stock market volatility are almost certainly causing consumers to overstate their concerns, and this reduced confidence will have a negative effect on consumer spending growth.
There is another angle to the psychology of recession. About 40 per cent of our workforce and consumer base – those under about 40, or the so-called “Generation Y” – have never personally experienced a recession during their working lives. The last recession in Canada was in 1991-92, when Generation X was searching vainly for employment but Generation Y was still in school. Since Generation Y has never known a recession as an adult, they do not have the same basis for forming a personal impression of how severe a recession is -- or the fact that most of us emerge from it largely unscathed.
Moreover, older adults may also have had bad personal experiences in previous recessions and project those past negative experiences onto current circumstances, warranted or not. All of this could lead to an over-reaction – a magnified fear of recession. (Personally I was a Baby Boomer leaving grad school during the 1981-82 recession, and know first-hand the challenge of trying to find a real job during a sharp economic slowdown. But I suspect I’ll be able to keep my current job and I keep spending accordingly.)
In short, psychological forces mean that we may be over-reacting to the bad news, adding to the loss of confidence and increasing the risk of a downward economic spiral. As FDR said in his 1933 inaugural address as U.S. president, the only thing we have to fear is fear itself. This psychological dimension of recession makes the early and strong intervention by monetary and fiscal authorities all the more important. Smart policy intervention can help. Monetary authorities can provide injections of liquidity, and governments can use fiscal policy to boost demand, thus breaking the downward spiral in the economy -- and in confidence.