Blogs & Comment

Is the recession really, truly over?

It’s the question everyone wants answered: when will the recession end? Yesterday, the Bank of Canada’s governor responded to all those wondering when the downturn (or financial crisis, or Great Recession or almost-but-not-quite depression) will be over. And his answer? Today!
At a press conference Carney said “growth in Canada should resume this quarter” with an annualized rate of 1.3%. Still, the economy will shrink this year, but will grow by 3.0% in 2010 and 3.5% in 2011.
Sounds pretty great, right? Cue the celebrations! Pop open the champagne! Umm… not so fast.
In the past Carney has looked maybe a bit to much on the bright side, most notably in February, when he said we’d see 3.8% growth in 2010. While he’s been relatively cautious since then, his latest announcement is a tough one to swallow, especially as layoffs continue.
Now, there’s no doubt the economy is improving. Markets are up, consumer confidence is stable, bidding wars have become the norm again (at least in Toronto and, as a friend told me last night, in Ottawa), but that doesn’t mean the recession is over quite yet.
TD economist Richard Kelly isn’t prepared to say Canada is recession-free. He told me this morning that while we’ll likely see some growth in Q3, Carney’s “growth rates seem optimistic in term of what they have planned for 2010.”
“Even given their own forecasting,” he continues, “we still have a very weak U.S. economy, a weak global economy, and yet they have the Canadian economy outperforming all the typical relationships. [The BoC] is building up the decoupling of Canada from the rest of the world.”
Kelly points out that you can’t only look at the baseline GDP number to get a sense of a recovery, and while that stat will likely improve, you have to “see what’s happening in the unemployment market and business investment to get a sense of the broader issue.”
Derek Holt, vice-president of Scotia Capital Economics, agrees. He says that in a very narrow and technical sense the recession is over, because the cycle of quarterly declines will have ended with Q3’s positive growth, but the BoC has “removed from the picture a lot of the risks that are front and centre.”
In fact, says Holt, we may see a “double dip risk” in the latter part of 2010. What he’s saying is that the last couple quarters of next year may actually be negative. “We could be having one or two single quarters that pop GDP growth higher, but next year at some point we might be back in the soup,” he explains. “The GDP pop is what happens when you go from total shutdown mode and then flick the switch back on on production, giving a one time life to growth. To sustain this you need a backdrop of business investment a [more active] consumer. But we’re going to have a cautious global consumer next year.”
To be fair to Carney, he did warn Canadians that just because the recession is over doesn’t mean we’re all going to be living the good life again. “We are on track for the recovery both in Canada and globally, he said. But it’s early days. It’s a long road.”
But still, Kelly thinks his projections are off. TD estimates that Canada’s growth will be about 1.5% in 2010, while Q3 will look “marginally negative or flat.” He does say that Canada and the U.S. will come out of the recession by the end of the year, we’re just not there yet.
Stewart Hall, a CIBC economist, however, does think the recession is over. “We’re going to put a pin in the recession this quarter,” he told me. “We’re beginning to bottom out in a lot of the economic metrics as well.”
However, he too thinks Carney’s 2010 projection is far too optimistic, with CIBC predicting 1.1% growth next year. “His forecast seems fairly robust, even though his comments suggest we’re on a long road to recovery,” says Hall. “While the recession wasn’t nearly as deep in Canada, externally it was brutal we’ve had the worst downturn of global economic growth since WWII and that means we’ll see a more protracted process.”
While it’s clear the economy is recovering, there is a danger in saying the recession is over when there are still serious economic issues wreaking havoc on the globe. If people believe that we’re out of the woods, they might get too overconfident. If that happens we could be in for another rude awakening.
“The number one risk to all of this is doing too much cheerleading to the point the markets get convinced it’s all over,” says Holt. “Then people dump bonds, which push up yield costs, that spills over into household borrowing costs, commodities get carried away and energy and gas goes upwards and this all happens very prematurely. If you talk that up too aggressively you only serve to raise the double dip risks going off next year.”