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

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CANADA RECESSION
Is Canada in a recession? A majority of Canadians think so. The data and economists say otherwise. | CP

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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