The GDP numbers released on Monday painted a none too pretty picture of the health of the Canadian economy. It perhaps was no shock that the figures released were worse than the BOC had predicted. However, the Globe managed to turn the devastation into hope arguing that:
The glimmer of hope comes from the fact that Canada’s descent into recession last year was faster and deeper than the two previous economic contractions in the early 1990s and the early 1980s.
That suggests a significant portion of the hurt that typically accompanies a downturn has already been felt….
Like Andrew Jackson over at the PEF, I find this alchemy quite odd. Let us actually throw up a graph of real quarterly GDP growth starting with the first quarter 0f 1962 and terminating in the last quarter. First off, as the graph clearly indicates the -0.85% contraction is historically unprecedented for the first quarter of a recession.
Now both the BOC and the wanna-be bulls have argued the steep decline means that we have already absorbed the pain so a quick turnaround is in order. I beg to differ. The recession of the early 80s started with a strong unprecedented contraction in q/q growth and then proceeded to stay in negative territory for the next 5 quarters 4 of which were lower than the initial historically low first quarter drop. The recession of the 1990s started with relatively mild contraction of growth in the first quarter and then snowballed downhill for another three quarters with each quarter being worse than the next.
The example of the early 80s suggests that recession that start with a bang are long and difficult (2 quarters longer), and the recession of the early 90s suggests that recessions that start with a whimper are nonetheless 4 quarter affairs with each quarter worse than the last. Nothing from the last two recessions supports the wanna-be Bulls position.
And quite frankly disseminating overly optimistic predictions is really quite irresponsible. Families are busy trying to figure how to position themselves to shore up their finances and make training and career decision in light of the recession. If families think that in 9 months out the fairytale economy will be back they will fail to make good decisions and suffer all that more hardship than they would have had “experts” and elites provided them with a more cautionary tale.
There is a repeated pattern here: “experts” read business economists, BOC economists and most academic economists have been behind the curve. First clinging to stories of the end of the business cycle, then clinging to fantasies of continentally and globally de-link Canadian economy, then clinging to the story of at best six month slow down, and now clinging to a fairytale turnaround in 9 months. And for the most part the government has gone along for the ride pricing each of the 4 successive stories in and deriving policy accordingly. After getting the optimism wrong for so long is not a little pessimism finally warranted not to mention better fiscal policy?