Recession In Canada? Economists Say No, But Good Reason To Believe Otherwise

Canada Recession

First Posted: 01/15/12 06:10 AM ET Updated: 01/18/12 12:54 PM ET

OTTAWA - Is Canada in a recession? A majority of Canadians think so. The data and economists say otherwise.

The issue arose when pollster Michael Marzolini of Pollara reported to the Economic Club recently that an astounding 70 per cent of Canadians felt the R-word applied to today's economy, and a similar number thought the downturn would last at least another year.

The finding was immediately scoffed at by economists and policy-makers who pointed out that the recession officially ended two and a half years ago, in the summer of 2009. Since then, except for a brief skid in the second quarter of 2011, the economy has been growing steadily.

Numbers don't lie, they say. Hardly a day goes by when Prime Minister Stephen Harper and Finance Minister Jim Flaherty — among other government ministers — don't trumpet the fact that Canada has created more than 600,000 new jobs since the slump, much more than the 400,000 or so that were lost.

So why do Canadians feel so poorly?

The main reason is that Canadians likely perceive what is a recession differently than economists, and if numbers don't lie, they can be selective.

The technical definition of recession is when real, inflation-adjusted gross domestic product — the broad measure of economic output — falls in back-to-back quarters. That happened in the fourth quarter of 2008 and the first two quarters of 2009 — a nine month retreat.

But real GDP doesn't tell the whole story, or even the most important story about an economy's health.

Real GDP adjusts for inflation, but not for population. That means a country's economy can be growing simply because the population is rising, and Canada's population increases about one per cent a year. Similarly, residents of a country such as Japan with a declining population, become richer even when their economy is not growing.

Canada's economic performance looks different when population growth is factored out.

By that measure, Canada's per-capita GDP is still 1.4 per cent below what it was prior to the recession, more than three years ago.

"To most people, real GDP doesn't really matter, what matters is per capita income," said Craig Alexander, chief economist with the TD Bank.

Canadians are not doing so well on the issue of net worth, either. While slightly higher, household net worth is below 2008 levels once inflation is taken into account, and income growth has also fallen below the rate of inflation this past year. That means Canadians are poorer and their disposable income is now declining.

"Canadians are looking at things like grocery costs, fuel costs, housing costs, user fees, less net incomes," Pollara chief operating officer Robert Hutton said of his firm's polling results.

"People are just reporting overwhelmingly, 'You know I'm not getting ahead, at best I'm staying even.' "

Perhaps the most trumpeted statistic purportedly showing how well Canada has rebounded is jobs.

The Pollara poll shows Canadians aren't buying it, however. Every week they read about factories shutting down, layoffs, or companies demanding workers accept wage cuts. Last week Toronto's Pearson airport sent out pink slips to 299 workers, on the heels of other layoffs in the city and streamlining of drug research operations in Montreal.

Anecdotal events may impact the perception of bad times, but the macro numbers — if the right ones are cited — also point to weak labour conditions.

The simple calculation is that employment in Canada is about 182,000 above pre-slump levels. That looks great when measured against the U.S., which is still six million shy. And it looks good compared to 2008, as well.

But the fly in the ointment again is population. More Canadians came of working age in the past three years, and immigrants kept arriving — they too are looking for work. To return to pre-slump levels of employment, the economy would have needed to generate an additional 750,000 jobs beyond the pre-slump peak, not merely 182,000.

Canadian Auto Workers economist Jim Stanford, who has studied the jobs record extensively, says the telling statistic is the employment rate, which calculates people working in relation to those of working age, or over 15.

The employment rate peaked in February 2008 at 63.8 per cent, dipped to 61.3 per cent in July 2009 at the tail end of the recession, then climbed to 61.8 in the next year. It has since edged down to 61.7, and is still more than two percentage points below the pre-slump high.

"That means we've fixed one-fifth of the damage, and fourth-fifths of the damage is still with us. That's why it still is recessionary conditions," said Stanford.

Adding to the perception of gloom, said Alexander, is that in many cases people who lost jobs in the recession were not the people who found jobs in the recovery. Most lost jobs were in high-paying manufacturing industries, and most of those created have come in lower-paying service industries.

That does not mean Canadians are right that the country is in recession, however. Even Stanford will acknowledge that.

The confusion stems from the official definition of recession and what Canadians think it is. For most people, recession is a description of a bad economy; for statisticians, it's simply the direction the economy is moving.

Philip Cross, chief economic analyst for Statistics Canada and the person who declares the country in or out of recession, admits he gets grief every time he pronounces the country out of a slump.

"Invariably when we say the recession is over, I get a great deal of abuse because people say the level of economic activity is still rotten," he explained.

"When we say the recession is over, what we're saying is the period of things getting worse by the day is over. The level of economic activity could still be unacceptable, but at least you are going in the right direction, rather than the wrong direction."

Canadians may be confused about the definition of recession, agrees Stanford, but they are correct in thinking they are still worse off than they were three years ago.

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  • 1. RISING HOUSEHOLD DEBT

    Canada's household debt burden climbed to yet another record high in the third-quarter, prompting Bank of Canada Governor Mark Carney to call it <a href="http://www.montrealgazette.com/business/Mark+Carney+again+sounds+alarm+rising+Canadian+household+debt/5856418/story.html" target="_hplink">"the greatest risk to the domestic economy</a>." At 150.8, <a href="http://www.reuters.com/article/2011/12/14/us-economy-debt-idUSTRE7BC2DY20111214" target="_hplink">Canada's debt-to-income ratio is now higher than in the U.S. or the U.K</a>. Meanwhile, household net worth fell, which, as many observers have warned, has made Canadians more vulnerable to adverse economic shocks.

  • 2. SLUGGISH CONSUMER DEMAND

    Though BMO's Doug Porter maintains that low interest rates and modest job growth should prevent household debt issue from becoming "a clear and present danger to the outlook in the year ahead," he predicts that the debt burden is likely to increase. Unlike in the U.S., Canada's consumer recession was "very mild," leaving scant room for growth in consumer spending, he says. "At best, we see consumer spending growing in line with income next year," he said. "We've actually pegged it a little bit below income growth next year ... at less than two per cent in 2012." (FREDERIC J. BROWN/AFP/Getty Images)

  • 3. EUROZONE INSTABILITY

    When TD cut its 2012 outlook for the Canadian economy earlier this week to 1.7 per cent, the bank cited a deepening fiscal crisis in the eurozone as one of the primary factors. More bearish than BMO, which on Thursday held its expectation for Canada's GDP growth next year at two per cent, TD is forecasting "a deterioration of financial conditions and a significant European recession in the first half of next year." "<a href="http://www.td.com/document/PDF/economics/qef/qefdec11_can.pdf" target="_hplink">A deepening recession in the region will exert a significant drag on the global economy</a>," the bank maintained. "Canada will be negatively impacted through weaker commodity prices, confidence and export growth. Labour markets will also soften as a result." (ERIC FEFERBERG/AFP/Getty Images)

  • 4. CHINA LOSING STEAM

    The signs are abundant that the world's largest economy is cooling. Mounting local government debt and slowdowns in everything from industrial production to <a href="http://www.cbc.ca/news/business/story/2011/12/09/china-economy-slows.html" target="_hplink">the housing market has led many to predict softer economic growth in 2012</a>. "<a href="http://www.npr.org/2011/12/13/143623874/after-boom-chinas-property-market-heads-lower" target="_hplink">Real estate is a locomotive industry that leads at least 58 other industries</a>," Cai Weimin, who runs a real estate think tank in Shanghai, told NPR. "Doomsday probably won't come true in 2012, but for the Chinese economy, 2012 will be a very tough year. (Aaron tam/AFP/Getty Images)

  • 5. GROWING INCOME GAP

    As Canada's rich-poor divide widens, some experts warn that the concentration of wealth at the top of the income distribution and stagnating wages for everyone else could be a drag on the economy. Though Canada's income gap is not as pronounced as in the U.S., Canadian Centre for Policy Alternatives economist Armine Yalnizyan argues that the growing divide is bad for business all the same. <a href="http://www.huffingtonpost.ca/news/mind-the-gap" target="_hplink"><strong>Mind The Gap: Our examination of Canada's growing income divide</strong></a> "<a href="http://www.canadianbusiness.com/article/39123--inequality-is-bad-for-business" target="_hplink">Real growth in purchasing power has been restricted to a small fraction of Canadian consumers</a> in what is already a small market," she maintained in an op-ed in Canadian Business magazine. "Throttling aggregate demand slows the economy for everyone." Anne Golden, president and CEO of the Conference Board of Canada, echoes this sentiment. "Growing inequality distorts consumer patterns," she told The Huffington Post in a recent interview. "Most businesses, except maybe for Porsche [dealerships], rely on rising purchasing power of the many, not the few, to deliver growth and profits." (ADRIAN DENNIS/AFP/Getty Images)

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