Recession

Canada’s report card ranking improved during the recession—from 13th place in 2006 and 2007 to 6th place in both 2008 and 2009.

It may seem counterintuitive that Canada’s ranking improved during the recession. But this is a relative ranking. Canada’s actual performance deteriorated—income per capita fell, GDP contracted, employment dropped, and the unemployment rate rose from 6.2 per cent to 8.3 per cent. However, relative to its peers, Canada’s deterioration during the recession was much milder.

The economic contraction in Canada was less severe than that of some of its peers. In 2008, Canada’s GDP actually grew, while six peer countries suffered negative growth. In 2009, all peer countries except Australia saw GDP fall, but Canada’s contraction was much milder than many of the other countries. For example, Ireland’s and Finland’s GDP fell by about 8 per cent, and the GDP of six countries—Denmark, Germany, Italy, Japan, Sweden, and the U.K.—fell by 5 per cent. Canada’s GDP fell by 2.5 per cent in 2009.

Another area in which Canada performed relatively better was its labour markets. While employment in Ireland, Japan, and the U.S. fell in 2008, employment rose in Canada. And while employment dropped in all countries except Australia in 2009, Canada’s job losses were less severe.

Canada’s employment performance resulted in a rise in the unemployment rate in 2009—from 6.2 per cent in 2008 to 8.3 per cent in 2009. While the increase was not trivial, it was much lower than in Ireland and the United States.

Canada weathered the global financial crisis and recession better than many of its peers, principally as a result of the better policies and regulations already in place. A well-defined system of financial regulation, more prudent management practices, and more effective regulatory oversight prevented Canadian financial institutions from becoming over-leveraged against their capital base and discouraged them from entering the high-risk credit market, which includes sub-prime mortgages. Sub-prime mortgages were rare in Canada, something that protected the housing market from a sustained decline. Canada was also in a much stronger position going into the recession thanks to its low and declining fiscal debt, budgetary surpluses, and low and well-anchored inflation targets. Although the Canadian economy was pushed into recession by the strongly negative U.S. and global forces and by a collapse in some key commodity prices, GDP and employment growth both began to recover in the third quarter of 2009.

The “Irish miracle” came tumbling down because of profligate lending by Irish banks in support of a bubble housing market. Ireland joined countries such as the U.S., Britain, and Spain as victims of housing bubbles that began to burst in the fall of 2008. The bursting of the Irish property bubble and the collapse in credit quickly spilled into the overall economy through a sharp contraction in GDP and employment. Of Canada’s peers, Ireland was hit hardest, falling from first place in the 2007 Economy report card to last place in 2008.

Australia was the only major OECD country to avoid the 2008–09 recession, and was one of only two OECD countries to record positive employment growth during the recession. Its deep trade and investment relationship with China and other Southeast Asian economies insulated it to a great degree from the financial meltdown. Australia rose from 7th place in the 2007 Economy report card to 2nd place in the 2009 report card.

The global economy has now emerged from an exceptional event: the first synchronized global recession since the Second World War. The recession was caused by a financial crisis that was unprecedented in scale. The central lesson to be learned from this dramatic event is that the design of government policy and the speed of that policy response can make a huge difference in preventing or mitigating the worst of a recession. To illustrate this, members of the forecasting and analysis team at The Conference Board of Canada have identified and assessed 10 lessons, set out in our book Crisis and Intervention: Lessons From the Financial Meltdown and Recession. These insights should be of value to readers in Canada and globally.

The eight indicators and underlying methodology used to assess Canada’s relative performance in the Economy category provide an accurate picture over time. Nonetheless, every methodology adopted to do economic analysis will have its limitations, and ours in no exception. The financial crisis and recession was largely driven by two main cyclical factors that are not a formal part of the Economy methodology, but were clearly critical to economic performance among OECD countries in 2008–09: the sustainability of the residential housing market and the availability of credit.

First, housing starts, sales, and especially prices had grown rapidly in the early 2000s in a number of OECD countries—notably the U.S., U.K., Spain, and Ireland. In retrospect, it is clear that a housing bubble had formed in these economies, driven by speculative forces and easy access to credit. The rupturing of that bubble was a major factor behind the recession, and ultimately influenced many of the other economic indicators used in our scorecard methodology.

Second, easy credit was a major contributing factor to these housing bubbles, and the quick withdrawal of access to credit on a global scale helped to turn the financial crisis in the fall of 2008 into a global recession.

Rather than including these and other cyclical indicators in the Economy scorecard, we focus on key macroeconomic outcomes (like GDP growth, inflation, employment growth, and unemployment) and structural indicators of overall competitiveness (like FDI performance) over time. When warranted, we highlight specific cyclical forces, like trends in the housing market, that are having a significant influence on immediate outcomes.

The methodology used to assign grades to the recession data was the same as that described for the regular report cards in the Methodology section, except for indicators where growth was overwhelmingly negative.

Usually, report card grades of A–B–C–D are assigned for each indicator by calculating the difference between the top and bottom performers and dividing this figure by 4. A country would normally receive a grade of “A” on a given indicator if its score is in the top quartile, a “B” if its score is in the second quartile, a “C” if its score is in the third quartile, and a “D” if its score is in the bottom quartile.

The global recession, however, caused a situation where GDP growth in 2009, for example, was negative for almost all the peer countries. Using the regular methodology would result in countries with negative growth being assigned an “A” grade. This did not make sense to us. In those cases, we instead constrained the formula so that countries with negative growth rates receive either a “C” or “D” grade.