The Recession Spreads

While this morning’s American GDP numbers were less bad than expected, this morning’s Canadian GDP numbers were worse than expected. May saw the second-deepest decline of any month so far in 2009. Indeed, May’s 0.5% contraction was almost as bad as January’s 0.6% contraction.

Sectoral Breakdown

Like January and the intervening months, May was characterized by flat output from the service sector and lower output from the goods-producing sector. While overall goods production dropped by about the same amount in May as in January (1.6% versus 1.7%), there were important changes within this sector.

Manufacturing and construction declined only half as fast in May as they had in January. But agriculture, mineral extraction and utilities, which had more stable earlier in the recession, posted large declines. The recession appears to be spreading to a wider range of industries.

Implications for Recovery

An obvious question is whether today’s worse-than-expected numbers undermine the Bank of Canada’s forecast of a third-quarter recovery. Of course, there is a risk of the downward momentum from May continuing.

On the other hand, today’s downward revision of US first-quarter figures meant that the second-quarter figures entailed a smaller percentage decrease. Similarly, a bad second quarter in Canada would lower the bar against which the third quarter will be compared. The lower the bar, the easier to achieve a percentage increase.

Implications for Policy

Today’s numbers provide a sobering reminder that a recovery has not yet occurred. The economy will not cure itself without further policy interventions. As argued previously, the government should redouble its program of public investment.

A Canadian dollar above 90 cents has reemerged as a major challenge for goods-producing industries that sell much of their output into foreign markets. (By comparison, most service industries produce and sell in the same currency and are therefore less vulnerable to exchange rates.)

The Bank of Canada has identified the strong Canadian dollar as an issue in recent interest-rate announcements. Yet it continues to pride itself on a policy of nonintervention in currency markets. In an era of unconventional monetary policy, it is time for the central bank to revisit this stance.