We knew the number would be big. Just how big was the question.
Statistics Canada released its initial estimate of second-quarter GDP on Friday. Output dropped by 11.5 per cent compared with first-quarter GDP and by a little over 13 per cent compared with the second quarter of 2019. This is the largest recorded quarterly decline since Statistics Canada began reporting quarterly GDP numbers in 1961.
The estimate was scary enough but the way it was reported may have caused either unnecessary panic or unnecessary pessimism. Media reports emphasized the “annualized” change in GDP, which was a drop of 38.7 per cent, which is worse than scary. Does this mean Canadian GDP will actually wind up falling almost 40 per cent, as it did in the Great Depression of the 1930s? Almost certainly not. In fact, in the current context, using the annualized rate of change is misleading.
Calculating the annualized change in GDP involves assuming the second-quarter contraction will continue at exactly the same pace for four full quarters. After two quarters, a quarterly growth rate of -11.5 per cent would translate into a decline of 21.7 per cent; after three quarters, 30.7 per cent; and after a full year, 38.7 per cent.
But the contraction almost certainly won’t continue at the same pace for four quarters. The Canadian economy already turned a corner in May. The second-quarter growth number resulted from a very large drop in GDP in April followed by growth in May (4.8 per cent) and June (6.5 per cent). Last Friday’s release by Statistics Canada suggested growth continued in July, albeit with a more modest monthly increase of approximately three per cent. As long as we can avoid a second wave of infections so large that restrictions on economic activity have to be imposed again, Canada’s recession will actually have ended in May, when growth resumed.
The C.D. Howe Business Cycle Council, which we co-chair but aren’t speaking for here, defines a recession as a pronounced, protracted and pervasive decline in real output, as measured by GDP. If growth does continue, this recession will have been the shortest in Canadian economic history, with the peak of the previous expansion occurring in February and the trough of the business cycle in April. (It will still be a two-quarter recession, however: GDP fell by 2.1 per cent in the first quarter, with the steep decline in March swamping feeble growth in January and a basically flatline February.)
To put all this in perspective, the recession that began in June 1981 lasted fully 16 months from peak to trough while the recession of the early 1990s lasted 25 months. In both cases, however, the peak-to-trough contraction of GDP was much milder than we have just experienced, at 5.3 per cent and 2.2 per cent, respectively. The granddaddy of Canadian recessions was, of course, the Great Depression. Contraction started in October 1929 and continued uninterrupted until February 1933, a total of 39 months, with industrial production down by just over 40 per cent from peak to trough. In that case, the 40 per cent decline was truly 40 per cent.
Since the beginning of the pandemic many Canadians with time on their hands have become recession-watchers. During a short, sharp downturn heavily influenced by policy lockdowns meant to be temporary, however, they should keep in mind that annualized changes in quarterly GDP are not a meaningful indicator of the pandemic’s ongoing economic effects. The year-over-year decline of 13 per cent from the second quarter of 2019 is a much more helpful indicator of what has happened.
Published in the Financial Post
Jeremy Kronick is associate director of research at the C.D. Howe Institute, where Steve Ambler is David Dodge Chair in Monetary Policy. Ambler is also a professor of economics (retired) at the École des sciences de la gestion, Université du Québec à Montréal.