Denial About the Recession
Denial with a capital “D”. That’s the only way to describe the reaction to Friday’s stunner from Statistics Canada: real GDP shrank 0.3% (at annualized rates) in the first quarter, and hence Canada is likely already in the recession that our fearless government leaders have been saying can’t happen here.
For months economists have been wondering if Canada could escape riding the coattails of a U.S. downturn. The “consensus” view was that strong resource incomes, and our supposedly healthy “fundamentals” (which look weaker and weaker to me every day), have allowed us to “de-couple” from the U.S. economy. We may slow down, but we’ll avoid a recession.
I was skeptical of this view. But none of us (me included) imagined that Canada would actually be leading the way into recession. That’s how it looks now. US real GDP grew 0.9% (annualized) in the first quarter, while ours was going the other way.
(I did point out in my Globe and Mail column last week that, by the monthly StatsCan real GDP numbers, Canada has had no real growth since last October. When your growth is zero, it’s very easy to slip into negative territory. That was before the new data on the March contraction tipped the whole first quarter into the red.)
What’s as shocking to me as the actual numbers (which are very negative) was the “what me worry” attitude — not just of Jim Flaherty (Finance Ministers are paid to keep smiling at a time like this), but the whole economics profession as well. It’s as if the economists believe their own rose-coloured view of Canada’s brave new resource-led prospects so fervently, they refuse to let mere statistical evidence get in the way.
Consider some of the glib responses:
“People and companies don’t feel horrible about the current situation.” Ted Carmichael at J.P. Morgan. Speak for yourself, Ted. I spent Sunday out in Oshawa at a rally for jobs. Believe me, people there DO feel horrible about the current situation, and it’s getting worse. (By the way, the Oshawa metropolitan region, JIm Flaherty’s home base, experienced an 18 percent increase in unemployment last month alone — the largest anywhere in Canada. Jim’s endless conviction that Canada’s economy is in great shape is beginning to rub his hard-pressed constituents the wrong way, let me tell you.)
Carmichael also noted that this decline in GDP could conceivably be “revised away” once the data is adjusted. But by the same token, the estimated decline could become worse. And none of this changes the fact that Canada’s real output has slammed into a brick wall far faster than in the U.S. Mere zero growth (whether it turns out to be a “technical” recession or not), is disastrous enough.
“The definition of a recession might be met in the next quarter, but the environment might not be recessionary.” That’s Carolyn Kwan from Merril Lynch. If anyone can tell me what that means, I’ll buy you a double double. (I think it means that I’m going to keep sounding positive, no matter what.)
Here are some indirect quotes from Doug Porter at BMO Nesbitt Burns (comments attributed to him in the Globe and Mail): “In Canada, however, net worth is on the rise, the real estate market is not collapsing, unemployment is low and shoppers are active. Canada’s real GDP numbers, made weak by a plunge in manufacturing and exports, are masking Canada’s strengths.” National net worth numbers are skewed by the vast profits being received by the petroleum industry and other corporations. And in the end, a country’s propsperty depends on what it makes — not what it buys. So the fact that Canadian shoppers are “active” reflects little more than inertia.
(Another tidbit: StatsCan also reported last week that there are now more Canadians working in retail trade than in manufacturing. In other words, more Canadians sell stuff, than make it. Does anyone remotely believe that that is a sustainable role for a national economy? And today the Conference Board has indicated that consumer confidence has hit a 7-year low. So much for the happy shoppers.)
And the old mantra is still being heard wide and far that real GDP is now a deceptively weak indicator of Canada’s “true” strength. That’s a bunch of wishful thinking as shaky as the old line (from the dot-com boom times) that “price-earnings ratios are no longer a measure of true value.” Yes, aggregate national income looks stronger than GDP because of super-high resource incomes. But those incomes are not trickling down, remotely proportionately, into personal incomes in Canada. And so-called “terms of trade gains” (another statistical construct that you can’t actually SEE anywhere in the real economy) are just as illusory.
Jim Flaherty sums it up for Reuters as follows: “I think, quite frankly, that economic fundamentals, as I have said, are quite strong.” There’s nothing more fundamental to economics than peoples’ ability to work productively. By that fundamental measure, Canada’s economy is definitely in the ditch.
In short, the economists’ conclusion seems to be that so long as Canadians are happy and keep shopping, it isn’t a “real” recession. How objective of them. And here I thought economics was supposed to be the “dismal” science. In fact, it’s the “mindlessly cheerful” science.
The cold hard facts are increasingly clear: Canada’s real output is stalled, and could enter recession sooner (and possibly longer) than in the U.S. The self-congratulatory inaction of Jim Flaherty in the face of this emerging weakness will considerably worsen the pain. His much-vaunted tax cuts are doing nothing to reverse the damage (tax cuts never prevent recessions, because shell-shocked consumers and businesses alike sock away their tax savings for the rainy day they fear). Much-vaunted resource rents can’t single-handedly keep a diverse national economy like Canada’s out of the doldrums (and, by the way, resource rents won’t last forever). And we can’t just turn our collective national back on the manufacturing sector (and its stereotypical “smokestacks”), without paying a price: the StatsCan numbers confirmed that it was the fallout in manufacturing, and the auto industry in particular, that threw the whole national economy into the red in the first quarter.
I keep wondering what would have been said if Canada had posted a small federal deficit — rather than a small contraction in national GDP. Mr. Flaherty (who has staked his reputation on avoiding a deficit, through spending cuts if necessary, no matter how bad the recession gets) wouldn’t be able to simply deny that anything was wrong. And economists would never say “Oh well, it’s only a small deficit that could even be revised away with adjusted data.” Rather, the reaction to a deficit (even a small one) would be unmitigated shock and a call to national action. To me this reveals the inherent biases of both the Minister, and the economists who supposedly monitor his performance.
Time to wake up and smell the latte, folks. The recession is already here. And pretending that it isn’t, won’t save a single job.
I worked in Industrial Automation in Ontario from 2002 to 2006. I am not an economist, but the signs from within the industry were bad, ever since. Most of our customers were just “slowly dying”.
Thanks for speaking out the truth.
B.A.J
Gee I dunno Jim maybe if you cast your net a little wider you would be able to find economists and political economists who had been mocking the de-linking hypothesis for some time from any number of angles. In fact maybe industry economists should be discounted as hyper specialized spin doctors and the label of economist stripped from them altogether. Of course that would leave just academic economists and we know for the most part that the world is flat there too.
Just for posterity and to toot my own horn on March third I wrote this:
http://rppe.wordpress.com/2008/03/03/and-the-winner-of-the-delinking-debate-is/
Travis Fast
Wow. The time lag I predicted was almost non existent. According to the new StatsCan report the economic output contracted by 0.7% in December. I would claim some savvy in my prediction that decoupling was a myth, but any child with grade eight math knew that the Delinking story was fantasy. And now things are going to get worse. We have a high dollar, an economic apologist for a finance minister, and a massive shock still rippling through the markets. Mark my words this is the beginning of a significant switch point. Now we are going to get to test drive the lean mean welfare state that the Liberals built and the Cons prostrated.
Given all the emotion today with the GM announcements and such, you would think Flaherty would give us a reprieve. Talk about a bad case of denial, “Denying” all day long that we are indeed already in choppy economic waters and about to become deluged with more woe and grief.
Such a fine specimen he is of that neo-con party. In the face of utter collapse of many people lives in his own riding, he takes the sound bite opportunity he is afforded today to reassure us all, that indeed the economy is just fine.
He must have been one of those kids that enjoyed pulling the wings off butterflies just to see how they would react.
What kind of democracy allows such bald faced fringe monkeys to take such cabinet portfolios as his. Oh woe is the land of the free and the confused that use a maple leaf as its banner.
I must also say that GM basically crossed a line today that to me, is way beyond anything that is remotely acceptable in the land of collective bargaining. They make have just put one of the biggest dents into labour relations wall that has not been witnessed in a long long time. So much for all those cooperative Labour management models, and interest based bargaining gurus. GM and their plant closing experts on the executive payroll, crossed into a land that jeapordizes the whole insititiution of collective bargaining in Canada. Legally I am not an expert but their has got to be some recourse, if the language within the contract is crystal clear with regards to the truck plant.
You think they would have at least let the dust settle, that just shows the bold faced we don’t give a phrack attitude this new breed of executives have. THey love the cash and I guess they will do just about anything for those big salaries.
Quite a sad day for one of our finer unions.
They need to start fighting back in a similar manner. Unprecedented, cold hearted attacks such as GM’s will call for similar counter measures. What can be done?
As you might have imagined, the GM plant closing has made the headlines for a second day in a row.
One point that seems to resurfacing quite a lot, is that GM is justified in shuttering the plant for many seemingly rational reasons, high fuel costs are changing consumer behaviour, high dollar makes it more expensive for Canadian labour, and the list goes on. The media seems to have painted the CAW into a corner that makes the GM actions within some acceptable corporate decision making outcome.
Rarely is it mentioned that GM signed a contract 2 weeks ago that basically the senior management gave the CAW representatives their word in a legally binding document that they would not shutter the plant. And hey you can say that potentially the contract language may stipulate some auxiliary, down the road decision making process was put in place in case the sky decided to fall. It would seem the CAW bargained this in good faith, and under the guise of trying to entice future products within the plant seemed quite open with such a clause.
Yet GM back doors the whole process, hangs these representatives out to the membership and put its entire labour relations system into a state of mistrust and cause for a higher state of adversarial level in some many years. All for what? They still need to produce trucks, they are a utility vehicle that now matter how high fuels prices rise there will be a need for pick-ups.
Why would these corporate types put the whole system in such a state as to have their head quarters surrounded. Their actions will cost them so, so much more in cross over employee moral effects and the associated productivity effects, that the rationality of the decision is beyond and notion of acceptable actions.
Is this how we want to move towards solving the future crisis of adjustment and change within corporate Canada. Abandoning the collective bargaining system and the associated cultural trappings within the space of industrial collective action. I do not hear any corporations shunning the activities and behaviour of GM. In fact if anything there seems to be an cheer leading in the air and it is being led by the tories, and the master himself Flaherty.
Why has foreign based management decision making process being allowed to walk rough shod over our collective bargaining system. And I really don’t give a phrack if the CAW can go to the OLRB, as the OLRB is not going to order the plant remain open.
The collective bargaining system is based upon a very socially intimate level of trust and that was I thought, established during the new deal. Maybe this is the dawn of the new, new deal, and if that is the case, then hey, why can’t labour start wild catting all over the phracking place.
The corparet type had better realize that given the future and the sweeping changes that are going to be need to make the adjustments to accommodate these fairly complicated economic needs, you can’t be treating your workers with such a total lack of disrespect. You cannot have your cake and eat it too. You want labour peace it comes with the process of trust and respect.
And please do spare us progressives with sorry assed notion that the language in that contract was not clear and GM is only acting on its interpretation of the language as that will only get you corporate types to hell in a hand basket a lot quicker than your realize.
My thinking is, if you wonder why GM is where it is, you have to look no further than that executive board room. What a bunch I must say, and to think we have entrusted this group to rule over the largest maker of vehicles in the world. And to think that have their hands on the worlds ecosystem, phrack I wouldn’t let them manage my ant farm.
Quite sad, we are doomed for sure.
The decline in Canada’s GDP is all the more disturbing when you place things in perspective. Apart from the natural resources boom our economy has been driven by a very similar housing cycle to that of the U.S. In the U.S., the housing boom created a disproportionaley large share of employment (I have seen estimates in the range of 40%). As the housing boom appears to be just ending here in Canada, our economy has up until very recently been benefiting strongly from the same trend. The fact that GDP in Canada is declining therefore points to much more serious problems in the Canadian economy. The main suspect is the sharp decline in the manufacturing sector, where on top of a generalised decline (seen in the U.S.) Canada must also contend with an over-valued dollar. As the housing sector continues to weaken in Canada, expect the economy to decline further. My guess is that this could be quite rapid, because the downturn in Canada’s housing sector coincides with the worst yet seen in the credit crisis. I suspect this is the reason for the unprecedented slump we are seeing in the UK housing market.
The GDP report for today would suggest further “official” evidence that we are sliding into recession.
The second quarter estimates for GDP if in negative space will be instrumental in bringing acceptance that we are indeed in a recession.
Of course the Bank of Canada seemingly has the most magic in its crystal ball, and after todays report, most bankers although a bit shocked by today’s monthly release, held up the BOC’s projections as proof that statistically we will not fall into recession.
It is definitively contentious political space in defining when and or if we are in recession. Officially it is the 2 quarters of negative growth.
However, given the timing of an election call and other such heady notions, I am sure we will see some new definitions of what exactly qualifies numerically as a recession. For myself personally, if signposts are to be effective, they must signify to policy maker’s that indeed we are within a space that requires action, rather than being within the reality of the economic space and spending all one’s energy denying that we are within that space.
Which seems to be the case now. That is, the nation’s manufacturing sector has been in decline since 2002, it is the driver of the economy, and no matter how you slice up the wealth generating numbers of our economy, you are going to come up with manufacturing as the lead horse that pulls us along.
If the lead horse in one’s economy is in recession, then it will not take long for the core of the remaining economy to fall in line with manufacturing. They are differences, say from the early 90’s recession, but manufacturing is still the king.
So then by that logic, would it not be more useful to have a measure that signifies to policy makers while in the midst of recessionary winds that actions are required, rather than waiting until the entire economy is in full recession.
The whole process of numerical “official” recession seems convoluted and highly political, rather than be a useful policy instrument.
Our current governments, especially at the federal level have an uncanny ability to paint out economic landscape with such sweeping strokes of optimism, that the distortion has become more of a side show than the underlying picture.
Accordingly then, I say we are in recession and lets get on with the policy for such economic landscape.
Harper has got to get his head out of Alberta and into Ontario and QUebec.
paul t.