Economic downturns are never pleasant but this one stands out for all the wrong reasons.
The C.D. Howe Business Cycle Council announced on May 1 that the Canadian economy entered a recession in the first quarter of 2020. Monthly GDP peaked in February, then fell by 7.5 per cent in March and, according to Statistics Canada’s flash estimate released June 30, by a further 11.6 per cent in April. These declines wiped out all the growth in Canadian real GDP since August 2010 and represent the steepest, fastest slide in the 59 years for which we have data.
Though there are some positive signs in May’s economic data — a 1.8 percentage point increase in employment, increases in hours worked, exports and building permits, as well as preliminary information indicating a three per cent increase in real GDP — it is going to be a long road to get economic output back to where it was pre-COVID-19. Comparing this recession so far with past Canadian recessions gives an indication of the length of that road.
There have been five recessions in Canada since 1961. If May is truly the beginning of our economic recovery — and that’s a big if, given concerns about a second wave — that would make April the recession’s trough. With GDP peaking in February and hitting bottom in April, the recession lasted only two months, by far the shortest of the five. Even the relatively mild recession of 1974 lasted five months.
The striking thing about the COVID-19 recession is just how fast and how far GDP dropped. That’s not necessarily a surprise: large parts of the economy were shut down by law, after all. But from peak to trough, real GDP has fallen 18 per cent in two months. None of the other four recessions even comes close. In the severe recession of 1981, GDP fell a little over five per cent but it took 16 months to reach the trough. During the financial crisis of 2008-09 GDP fell a little over four per cent in seven months.
Another way to think about the impact of a recession on economic activity is to ask how much cumulative output is lost from its pre-recession peak, if we assume throughout the downturn that, at a minimum, the economy should be operating where it was at its peak.
As an example, imagine a $2 trillion a year economy in February — pre-COVID — which, if we assume we produce the same each month, works out to $167 billion a month. Now, imagine the economy shrinks 10 per cent in March and another 10 per cent in April — which is close to what actually happened in Canada. That would mean $17 billion (10 per cent of $167 billion) in lost economic output in March, and another $15 billion (10 per cent of $150 billion) in April. However, in April the original $17 billion continues to be lost. Why? We’re assuming the economy should be operating at $167 billion, so April’s shortfall totals $32 billion, and the cumulative loss over the two months is $49 billion ($17 billion in March and $32 billion in April). In percentage terms, those two 10 per cent monthly losses add up to a cumulative loss of 29 per cent.
Moving from example to reality, this peak-to-trough cumulative measure indicates that the COVID-19 recession has already been more severe, at nearly 26 per cent, than the 21 per cent loss in economic activity during the Great Recession. It also dwarfs the cumulative declines of the 1974 recession. However, the loss so far is much less than in the recessions of 1981 and 1990, during which the cumulative peak-to-trough falls in real GDP were 37 per cent and 51 per cent, respectively. Though they came to a bigger total, those declines in GDP were much more gradual, spanning 16 and 25 months, respectively, giving them more time to accumulate.
On the other hand, the recoveries after these recessions — which we define as the number of months from the recession’s trough to the first month in which real GDP gets back to its previous peak value — were much quicker than many forecasters think the COVID-19 recovery will be. If recovery does turn out to be slow, the cumulative GDP loss from peak to recovery will have plenty of time to add up.
The final tallies for cumulative GDP loss (i.e., peak-to-trough-to-peak) during the 1981, 1990 and 2008 recessions were 62, 61.5 and 49 per cent, respectively. If May GDP growth comes in at three per cent, the cumulative loss from February until the end of May will already be around 40 per cent. Only a month or two more of this recession would push the cumulative loss past those of the earlier recessions. With some predictions indicating it will take until at least the end of 2021 for Canadian GDP to return to its pre-crisis level, we are set to blow past these historical losses.
Despite all this doom and gloom we can end on a positive note. Our policymakers, both fiscal and monetary, have responded with unprecedented support. There are obvious barriers to how long and how large this support can be. But these numbers explain why it is necessary.
Published in the Financial Post
Jeremy Kronick is associate director of research at the C.D. Howe Institute, where Farah Omran is a policy analyst and 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.
