ARCHIVE: INSIDE OUTLOOK

The Worst Recession—Except for All the Others Glen Hodgson, Senior Vice-President and Chief Economist, Forecasting and Analysis May 1, 2009

After nearly two decades of sustained economic growth, the Canadian economy is back in recession. Various media reports tell us that this is the worst recession since 1991, or 1982, or even all the way back to the Great Depression. But is it really? Or have we just forgotten what a recession looks and feels like?

These are still early days in Canada’s recession of 2008–09.

In fact, these are still early days in Canada’s recession of 2008–09. Canada’s gross domestic product has declined for only one quarter, at an annual rate of 3.4 per cent—although nearly every forecaster agrees that the first quarter of 2009 will be tough and that the recovery won’t emerge until later in 2009 (see Canadian Outlook: Spring 2009). When today’s decline in output and job losses are compared to those of the recessions of 1981–83 and 1990–92, we can see that it is far too early to make any firm declarations about which of these recessions was the most painful.

U-Shaped or V-Shaped

Economists describe recessions as being U-shaped (long and flat) or V-shaped (sharp drop, sharp recovery). Sometimes they can be a bit of both. The 1981–83 recession started like a “U” but ended with a very strong “V” recovery. At the outset, huge increases in global energy prices in 1979–80 were met with a sharp tightening of monetary conditions in an effort to keep inflation under control. Interest rates soared and output plummeted. The Canadian economy contracted for six consecutive quarters and output fell at an annual rate of 4 per cent for four consecutive quarters. Employment also fell for 18 months, contracting at an annual rate of 6 per cent at the bottom of the cycle.

At that point, however, the Canadian economy sprang into recovery, thanks to pent-up demand for both consumption and investment. Growth leaped ahead by 6 per cent in one quarter and by nearly 10 per cent in the following quarter as the Canadian economy roared back to life. Job creation took off and quarterly economic growth was sustained at an annualized rate of 4 per cent or more for more than a year. Good times were back.

The policy response this time has been exceptional—massive intervention in financial systems, record-low interest rates, and substantial fiscal stimulus.

The 1990–92 recession had different and varied root causes. They included external forces, such as bursting asset bubbles in Japan and fundamental global currency realignment; and internal forces, such as tightened monetary conditions designed to squeeze out inflation once and for all. A very different pattern emerged, that of a U-shaped recession for nearly the entire period. Output fell for four consecutive quarters. One quarter in 1991 even saw a decline of 6 per cent (at an annual rate), much worse than the fall-off in the final quarter of 2008. Employment declined in seven quarters over a three-year period. And when the economy eventually recovered, output growth was tepid, never going above an annual rate of 2 per cent for seven quarters and even falling again for a quarter along the way. Not surprisingly, most Canadian governments saw their existing structural fiscal deficits worsen due to weak revenue growth and felt the need to keep spending under firm control—which took energy out of the recovery.

Too Early to Say

What of the recession of 2009? The drivers this time are bursting housing bubbles, a global financial crisis, and a collapse in U.S. demand—particularly for automobiles and housing, where Canada once had considerable trade advantages. And the policy response this time has been exceptional—massive intervention in financial systems, record-low interest rates, and substantial fiscal stimulus.

Almost everyone has a prediction about the recession, ranging from catastrophe to robust recovery. But the simple truth is that we will only really know the depth and duration of the recession curve after the fact. The economy is recoiling today, but we also know that stimulus is on the way.

So for many, this is the worst recession—except for the others that we’ve forgotten.

Glen Hodgson Senior Vice-President and Chief Economist Forecasting and Analysis 613-526-3090 ext. 444