This is a recession in the 21st century

The past few weeks we’ve seen the dollar sink, the Bank of Canada’s rate drop to .50%, and not-so-great economic reports over the last two quarters have been released.  And with all this comes discussion that Canada is going through a…(whisper) recession.

According to the definition of a recession -- a period of temporary economic decline during which trade and industrial activity are reduced, generally identified by a fall in GDP in two successive quarters – that’s what we’re experiencing. However, this seems to be a very different downturn than previous recessions.  And because the definition puts us squarely in one, it doesn’t mean that the country is slipping into serious economic trouble.

David Madini of Capital Economic said, “The recession may not last much beyond the middle of this year (2015).

Here’s some of the key data.  According to Stats Canada figures, the Canadian monthly trade data are now back to pre-2008 levels. However trade data and deficits are simply movements in capital and may not be the best indicators of the economic health of a nation. The U.S has been in a trade deficit for four decades without much harm – in fact, they seem to have prospered well through it all.

While economists fret about trade data and GDP numbers, consumers just keep buying, despite the struggling loonie.  They’re buying cars.  The housing market is still humming along in most parts of the county. Canada’s imports are higher this year, which is benefitting consumers.  Employment is strong in most parts of the country. And consumer confidence is high.

This may be the best recession ever. Or perhaps this is what a recession looks and feels like in the 21st century. Some economists are now suggesting that, although by definition, Canada is in a recession, the two-quarters rule may not be the best test.

During the recession in the early 1980s Canada experienced higher inflation, higher interest rates and high unemployment.  The Bank of Canada rate hit 21% in August 1981, and the inflation rate averaged more than 12%.

Canadian companies no longer focused on innovation and productivity improvements – they were in survival mode.  Also, high inflation was partly responsible for larger government spending. In the early 1980s, Canada’s unemployment rate peaked at 12%. It took almost four years for the number of full-time jobs to be restored.  Real GDP declined by 5% between June 1981 and December 1982. By 1979, the Canadian dollar was worth 85 cents U.S., which made U.S. imports more expensive. On the other hand, Canada’s major exports declined in price. Combined with high inflation, and interest rates, these high commodity prices reduced the standard of living.

Pretty grim picture. Now fast forward to today’s recession. The inflation rate remains in check at 1%. Canada’s unemployment rate is approx 6.8%, which is considered normal. The Bank of Canada rate is .50%. There is an entire generation of Canadian who have never experienced high interest rates -- today’s low rates are the norm for them. 

After the June employment figures were released, Scotiabank released a report suggesting the country was not in a recession “in any meaningful or broadly defined way.”

Some have billed it the Great Canadian Non-Recession.

Technically, we may in a recession and those in areas impacted by the downturn in the oil industry may be feeling it the most, however, consumers are purchasing big ticket items and home sales were up 3.1% from April to May.

So what’s going on?  Is this a true recession? Or, is this what we can expect future recessions to look like going forward? Perhaps the definition of a recession needs to be updated. The world has certainly changed in the past three decades. Some of the credit has to go to government policies. Policymakers have lived though previous recessions and have put safeguards in place to ensure old scenarios are not repeated.

But more so it might be that just two quarters data numbers is not enough anymore. Douglas Porter, chief economist for BMO Financial Group, says it’s too early to declare a recession – that there are some other indicators such as the three “Ds” – depth, duration and dispersion -- which have not been met yet.

Whatever Canada is going through at this time, it has not had a negative impact on most households… and really, that’s all that matters.

The Volatile Jobs Market

 In December, 2013, the economy lost 45,900 jobs instead of gaining what economists projected would be 14,000 jobs.  The unemployment rate rose to 7.2 per cent from 6.9 per cent in November and the dollar started to tank.

Then Statistics Canada reported on February 7, 2014 that the Canadian economy added 29,400 jobs in January and the unemployment rate declined 0.2 percentage points to 7.0 per cent. Analysts had estimated 20,000 jobs would be added last month.  The unemployment rate also slid 0.2 percentage points from December to 7.0 per cent for the first month of the year as the number of full-time jobs increased.

It’s hard to determine what those numbers mean. Is the economy healthy or not? The January numbers did offset the December losses somewhat, which means the economy is generating approximately 15,000 jobs a month.  That’s not bad, but nothing to write home about, wrote CIBC Deputy Chief Economist Benjamin Tal in his Weekly Market Insight report.

Minister of Finance Jim Flaherty said the said the job trend was good. "This is comforting as we plan the budget and plan modest, steady job growth in Canada," he said in a Globe and Mail report.

But a few economists remain cautious although it does represent a “nice recovery” said BMO Capital Markets chief economist Doug Porter, in a report. “In other words, the underlying trend in job growth is just firm enough to keep up with labour force population growth -- no better, no worse."

A more important indicator is the export market, which many economists and the Bank of Canada hope will lead Canada out of a sluggish economy. The trade deficit has widened $1.7 billion in December. This was a billion wider than the market expected.  Right now, the economy has paused, or at least that’s what a few economists are saying.  

The export market is key to Canada’s growth because without an active export market, Canadian goods are not leaving the country and no outside money is getting in. A healthy export market means more jobs as the manufacturing sector gears up to meet demand. It also means more investor confidence and a growing economy.

 Tal says Canada is in a non-linear recovery, but also says that, economically, the upcoming months will be uninspiring. Add the trade deficit to very low inflation, and a devalued loonie and we have an under performing economy. 

Instead of focusing so much on house prices and debt, a new consideration with our economy is that we are now lagging behind the G7 countries, which have already started their recoveries.