Published in the Financial Post on July 28, 2015
Steve Ambler is a professor of economics at the Université du Québec à Montréal and the holder of the David Dodge Chair in monetary policy at the C.D. Howe Institute.Colin Busby and Jeremy Kronick are Senior Policy Analysts at the C.D. Howe Institute in Toronto.
No practicing economist defines recession as two consecutive quarters of negative GDP growth
Bank of Canada Governor Stephen Poloz occasionally has been described as using immoderate language, as in his description of Canada’s economic performance in the first quarter of 2015 as “atrocious.”
More recently, he has received criticism for refusing to speculate on whether Canada is currently in a recession and for characterizing such speculation as “unhelpful.” In our view, however, Governor Poloz’ erring on the side of caution, in refusing to use the “R” word, was entirely appropriate.
It is yet unclear whether the performance of Canada’s economy will qualify as a “technical recession” in the first two quarters of this year, if that is defined as two consecutive quarters of negative growth in output, as measured by gross domestic or GDP. Nonetheless, that definition that has no official status and no practicing economist uses it.
Economists (including the C.D. Howe’s Business Cycle Council and the Business Cycle Dating Committee of the National Bureau of Economic Research in the U.S.) focus on three criteria for calling a recession. First, the overall decline in economic activity must be significant. Second, the decline must be prolonged. Third, the decline must be widespread, extending over different sectors of the economy and to other measures of economic activity such as employment.
It is unclear at this time whether the decline in Canada’s GDP is significant. GDP shrank by 0.2 per cent in the first quarter of 2015 according to Statistics Canada. These figures are subject to revision, and the announced decline is not statistically significant given historical data on Statistics Canada’s revisions of its preliminary numbers.
On the basis of preliminary estimates by Statistics Canada, growth was also negative in April. Whether growth will be negative over the second quarter is uncertain. It may be the case that Canada will experience two consecutive quarters of negative growth but, even so, several series are positive and point to a possible turnaround before the end of the second quarter. For this reason, the second criterion of duration may fail to hold.
The overall GDP numbers have been pulled down by the poor performance of the energy sector subsequent to summer 2014’s drop in world oil prices. Output in the manufacturing and construction sectors has also declined, but retail, real estate, and wholesale have all been growing. On the whole, a little over half of the industry sectors that go into the calculation of GDP have expanded over the first four months of 2015.
For these reasons, the decline in GDP has not, on the evidence, been sufficiently deep or widespread to warrant calling a recession at this time. Further, employment figures are even less convincing of a recession at present than output. The national unemployment rate has fallen to 6.8 per cent in June, from 7.0 per cent last year.
The employment rate in the economy is identical to where it was last June. Total employment is up 1.0 per cent over the previous year, and employment growth was positive in each of the first two quarters of 2015. Part time employment is down, minus 1.7 per cent from a year ago, but full time employment is up by 1.6 per cent. Employment numbers are known to be quite volatile, but they are less subject to revision than GDP.
Because of the possibility of revisions, and without May and June figures for GDP at hand, and given, at worst, stable employment numbers, it is simply too early to make a well-informed call.Simple rules of thumb can inform the public debate, but we need better and less conflicting, more comprehensive measures to tell a broader picture prior to making any recession proclamations.
On this, the Governor’s caution was warranted.