 | | Michael Burt
Associate Director
Industrial Outlook, Trade & Investment |
When conducting a post-mortem of the most recent recession in Canada, a couple of outcomes stand out. First, the recession was mild here. Among major developed economies, Australia was really the only industrial country to fare better, as they avoided a recession entirely. Second, employment actually declined by less than GDP. This rather unusual result suggests that productivity in Canada actually fell as a result of the recession. The key factor explaining both these outcomes is that this recession, more than any other in recent history, was an import.
If we go back to the summer of 2008, what do we see? Labour markets were tight, income and corporate profit growth were strong, and governments were generally running balanced budgets. For the most part, our financial institutions only took baby steps into the excesses of subprime and exotic lending activity that nearly sank many of their global peers, and housing markets had continued to remain healthy despite significant ongoing weakness in many other markets, particularly the United States. In short, there was some evidence of froth in the Canadian economy after several years of strong economic growth and the commodity price surge, but there was little indication of significant imbalances in the Canadian economy.
Then the global financial crisis and subsequent recession occurred, and it is through our links to the world economy that the recession spread here. The primary transmission mechanisms were commodity prices and exports. Lower commodity prices affected a variety of products including many industrial metals, agricultural products and inputs like potash, and oil and particularly natural gas, all of which led to lower production and investment. Thanks to factors like the strong Canadian dollar and increased international competition the manufacturing sector had already been struggling prior to the recession. It only aggravated and accelerated the downturn in manufacturing.
Although the declines in economic activity in some of these goods producing sectors were staggering, the spill over into the services sector was minimal. It was only in those industries most closely tied to trade in goods that a commensurate decline in activity was recorded, namely wholesale trade and transportation services. Many other components of the services sector actually expanded through the recession, including even the financial services industry. The end result is that output in the services sector has been little changed over the past eighteen months.
The broad services sector is much more labour intensive than most of the goods producing industries that have shrunk over the past two years. In fact, service positions account for nearly 80 per cent of employment in Canada. Thus, even though exports are equivalent to about one third of GDP, only about 13 per cent of employment is directly dependent on exports. Since the decline in output was primarily focused on exports, the other 87 per cent of jobs were generally only affected in minor and indirect ways. This is a key contributor to the small decline in employment.
One other factor that likely limited the decline in employment through this recession was employers’ belief that the recession was temporary and that skill shortages would quickly re-emerge once the recession was past. Indeed, some skill shortages have persisted through the recession. For example, the unemployment rate for nurses has actually fallen over the past eighteen months.
However, the effects of the recession will linger for the broad services sector. Perhaps the longest lasting impact will be the large fiscal deficits for federal and provincial governments, which are expected to persist for years. Government-provided health and education services combined account for 31 per cent of services employment and large deficits are expected to limit job creation in these industries. As a result, although the services sector came through the recession rather lightly, its growth prospects have been significantly diminished over the near to medium term.