Canada experienced a recession that was less severe and shorter than in the other Group of Seven nations, Statistics Canada said Thursday in a special report. Furthermore, it was nowhere near as «severe» or nearly as long as the downturns the country faced in the early 1980s and 1990s.
The key reason, the agency said, was that Canadian companies and governments had better balance sheets compared to their industrialized peers going into the start of the recession — the result of advantageous terms of trade from the commodity bull run.
Between the third quarter of 2008 and the third quarter of 2009, real GDP in Canada fell by 3.3%, compared to a total decline of 3.7% in the United States and even larger declines in Europe and Japan.
«To the degree that the 2008-2009 global recession originated in balance sheets, strong balance sheets in Canada stood it in good stead to endure the recession and emerge into recovery,» said Philip Cross, the agency’s chief economic analyst, in the report. «The recession was shorter and milder in Canada than in other G7 nations, partly because the flow of credit was not disrupted as it was in other nations and a large pool of savings was available to finance spending when income fell temporarily.»
The mildness of this recently passed recession was evident in terms of the job market. The number of people on payrolls from the start of the recession to its end dropped just 1.8%, or less than GDP did from peak to trough. Part of the reason can be attributed to a federal government initiative that allowed companies to retain employees for shorter work weeks, in exchange for Employment Insurance benefits for the days the employee did not work.
The recent downturn has been dubbed the great recession, as major banks failed and policy makers were forced to come in and prop up the financial system with trillions of dollars. But in a historical context, the recessions of the early 1980s and early 1990s in Canada were deeper and more devastating, Mr. Cross noted.
The recession of early 1980s lasted six quarters, saw real GDP fall 4.9% from peak to trough, and saw jobs decline by 5%. Meanwhile, the early 1990s witnessed a four-quarter recession in which GDP dropped 3.4% peak to trough, and payroll numbers decline 3.2%.
One reason for the relatively mild slump this time around, Mr. Cross said, was «that Canada was better positioned to weather the global recession than other large western economies, primarily due to savings as reflected in our national balance sheet.»
Canada benefited from a tremendous terms-of-trade advantage, as emerging markets craved the natural resources this country had to offer. This allowed the federal government to record massive budget surpluses, even though growth in program spending was outpacing gains in population, inflation and at times GDP.
Also, corporations had used years of record earnings to reduce debt-to-equity ratios to an all-time low, Mr. Cross said.
Still, Canada felt the bite of this recent recession, most notably on the trade front, as earnings from exports fell 22% in 2009. Firms responded by paring back spending on machinery and equipment as business investment dropped by a record 14% last year, the report said, with mining and manufacturing accounting for the bulk of the fall. Overall, firms cut $41-billion from capital purchases, or four times the amount companies cut from their payrolls.
This likely explains why Canadian productivity deteriorated during the recession, something that had never happened before. Canada’s productivity record has been labelled «abysmal» by Bank of Canada governor Mark Carney, and has called on companies to begin poring money into capital equipment to take advantage of growth-oriented but low-cost emerging markets.
Source: Financial Post.
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