saying that we’re not in recession is the same thing as saying that what we’re seeing now is about as good as we’re likely to see for many years.
By Stephen Gordon
Most people probably think of the debate over whether Canada is in a recession as one of those glass-half-full versus glass-half-empty things. Pessimists look at five months of declining GDP and call it a “recession,” while optimists look at increasing employment and say that we’re not in a recession. Yet, the real pessimists are the ones saying we’re not in recession.
Making the case that we’re in a recession is basically optimistic: the problems we’re currently experiencing in the economy will be over soon (if it’s not already) and all that is needed it for policymakers to employ the usual array of countercyclical policies. The “no recession” camp is the home of the pessimists: saying that we’re not in recession is the same thing as saying that what we’re seeing now is about as good as we’re likely to see for many years. According to this view, low growth rates are not a passing phase; they’re the new normal.
As it happens, I subscribe to the view that we’re not in a recession, at least based on available data. To the extent that recessions represent a significant, prolonged and generalized reduction of economic activity, the current situation does not meet the criteria. Recessions lasting six months are not unknown, but I don’t find the decline in activity to be significant or generalized.
The effects of the drop in oil prices have been largely confined to the energy sector and Alberta, and haven’t been severe enough to affect employment at the national level: 180,000 more Canadians were employed in July 2015 than when oil prices peaked in June 2014. And employment increased by more than 100,000 in the first five months of 2015, even as GDP was falling.
(I should note here that I am a member of the C.D. Howe Institute’s Business Cycle Council, which decided on the basis of information available on July 22 that there wasn’t yet enough evidence to conclude that Canada had fallen into recession.)
The problem is that while economic activity is holding steady, these activities aren’t generating as much revenue as they used to: estimates for gross domestic income (GDI) — which capture the changes in income produced by changes in the prices of exports and imports — fell by 1.2 per cent in the first quarter of 2015. As far as purchasing power and real incomes go, that reduction in GDI was a much bigger deal than the 0.1 per cent drop in GDP that has generated so much recession chatter.
There’s little point in blaming the Conservative government — or the Liberal government that preceded it — for “betting the farm” on high oil prices. In volume terms, energy and resource exports have remained steady over the past 15 years. The only effect of higher oil prices was to increase the income generated by Canadian exports. No government would have — or should have — tried to deprive Canadians of that windfall.
The end of that windfall is not even the worst of our problems. Let’s put things in terms of a single worker. There are two ways workers can increase their incomes: work more hours or obtain a higher hourly wage. Lower oil prices are the equivalent of a pay cut: less income for the same amount of production.
This is bad enough, but our aging population is compounding this wage cut with a reduction in the number of hours worked. Fewer and fewer youths are entering working age (defined by the Labour Force Survey as those 15 and over) and the “prime” 25 to 54 working-age population is shrinking in all of the provinces east of Ontario. The only age groups showing strong growth are those 55 and over; those 65 or over accounted for more than two-thirds of the growth in the working-age population over the past year. Episodes of weak or negative growth are likely to become more frequent as more workers continue to retire.
There is no quick fix to all of this. The standard countercyclical tool set is of little help here: neither expansionary monetary policy from the Bank of Canada nor fiscal stimulus from the Department of Finance is going to offset the effects of a fall in global oil prices, much less population aging. The problem isn’t the cycle in the short term, it’s the long-term trend.
If there’s a silver lining, it’s that we’re not in unfamiliar territory: low commodity prices, a depreciating dollar and sluggish income growth were issues faced by former prime ministers Brian Mulroney and Jean Chrétien. We have also learned some things about the determinants of long-term growth since then: growth economics wasn’t yet a well-established field of economic study 25 or 30 years ago. Some of these lessons have even made their way into policy: the shift away from corporate income taxes and towards consumption taxes (i.e., the GST/HST) in Canada and elsewhere was a direct result of this work.
So it’s disappointing — if not surprising — that in an election campaign in which the economy is said to be the most important issue, we’ve heard almost nothing about policies to encourage long-term growth. Much of the economics portion of the Maclean’s leaders’ debate, for example, was dominated by bickering over whether or not Canada was in recession. The most intriguing proposal for promoting economic growth came from the Green Party’s Elizabeth May: that the federal government should use its existing powers to reduce barriers to interprovincial trade.
This focus on the short term is probably to be expected in an election campaign. But if — as the various election prediction models currently suggest — the next government does not have the support of a majority in the House of Commons, the dynamics of minority government are unlikely to produce much serious thought about the long term.
Things would be much simpler if only Canada were in recession. It’s our bad luck that we aren’t.
Stephen Gordon is a Professor of Economics at the University of Laval, and a member C.D. Howe Institute’s Business Cycle Council)
Published in National Post on August 18, 2015
