Evidence Mounts that 2015 Downturn was no Recession

The C.D. Howe Institute’s Business Cycle Council met on Tuesday, 13 December to review its assessments of Canadian business cycle dates following the most recent revisions to Gross Domestic Product (GDP) data. The Council determined that it is not possible to call the first two quarters of 2015 a recession.  While GDP contracted in both Q1 and Q2 2015, the downturn was restricted to only a few industries, and national employment expanded over this period.

The C.D. Howe Institute Business Cycle Council, chaired by Steve Ambler, is an arbiter of business cycle dates in Canada.  The Council meets on an annual basis, or as warranted when economic conditions indicate the possibility of entry to, or exit from, a recession. The Council also acts as a conduit for research aimed at deepening understanding of how the economy evolves and to provide relevant information to decision makers.

In deciding on the occurrence and timing of a recession, the Council looks at three dimensions: duration, amplitude, and scope: how widespread a downturn is.  The most recent revised data suggest that GDP contracted in both Q1 and Q2 2015, by 0.2 percent and 0.1 percent, before rebounding in Q3. A member highlighted, though, that Gross Domestic Income (GDI) continued to fall.  However, employment increased by 0.2 percent in both quarters, implying, if any, a Category 1 recession, the weakest category¹ A Category 1 recession has a mild drop in GDP and no decline in employment. At the other extreme, Category 5 recessions involve rapid contractions over an extended period of time. See the Cross and Bergevin (2012) C.D. Howe Commentary Turning Points: Business Cycles in Canada since 1926 for more detail..  One Council member pointed out that this was the same scenario faced in 1980 when the Council called a Category 1 recession.  However, most Council members were not ready to make a similar call for 2015 as the C.D. Howe Institute’s diffusion index registered above 50 in both Q1 and Q2, implying that the mild contraction in GDP was not widespread, in contrast to 1980.

Members of the Council pointed out that further GDP revisions are possible. Re-benchmarked numbers are not published until three years after the quarter in question.  However, Council members judged that revisions at the industry level were unlikely to move the diffusion index decisively. Therefore, Council members determined that it was appropriate to conclude that subject to major changes to industry-specific GDP data, the first two quarters of 2015 cannot be characterized as a recession.