Ladies and gentlemen, the recession is over. Or at least it seems to be winding down. Unless it isn’t. The past few weeks have been a little dizzying for those not accustomed to the wildly contradictory messages common in the world of economics.
What is a poor citizen supposed to think when Bank of Canada governor Mark Carney comes out one day and says the recession is all but over, and then Finance Minister Jim Flaherty (backed by a passel of big bank analysts) emerges a day later to throw cold water on the idea.
Is the recession over or what? As is so often the case in the world of economics, the answer is “yes and no.”
Carney and Flaherty were speaking honestly and accurately about two separate but related realities. Carney was referring to the technical definition of a recession, and the news there is encouraging. All signs suggest that Canada’s economy is growing again, and will likely grow more toward the end of the year. Commodity prices have rebounded, housing has stabilized and job losses are slowing. That means that the pressure will soon be on for Carney to squeeze off the easy money tap, to keep inflationary pressures at bay.
Flaherty, on the other hand, is a politician, and he knows that his primary audience is not made up of Bay Street bankers, but ordinary folks. Last fall, he made some big mistakes: at first rejecting the notion that Canada had anything to fear from the deepening economic crisis around the world, then insisting that the slowing economy would not drive the federal budget into deficit. Wrong on both counts. He’s now learned that the worst mistake he can make is seeming out of touch, and telling Canadians that everything is fine when they are still scared and suffering.
In the wake of Carney’s upbeat assessment, many commentators chuckled that the Great Recession was a dud that left Canada with little more than scrapes and bruises. Yes, it could have been worse, and it was worse elsewhere. But before we get all smug, let’s take a page from Flaherty’s book and keep a couple of things in mind. The 5.4 per cent economic contraction in the first three months of this year was the second-worst such downturn in the past 50 years. For the thousands of Canadians who lost jobs, saw retirement and college dreams crumble, it was nothing to scoff at. Carney is right—brighter days are in sight. And Flaherty is too: while the disease may be receding, for many the pain will linger.
GRAPH OF THE WEEK: The largest earnings decline, ever
How badly has the recession hit corporate profits? The latest numbers show a stunning 98 per cent drop in expected earnings since the 2007 peak. If current estimates hold, in a few months the U.S. could mark the first 12-month period ever in which S&P 500 earnings per share were negative.
THE GOOD NEWS
One really hot July
Market-wise, July was on fire. The Dow Jones Industrial Average shot up by 8.6 per cent in a month, its best monthly percentage gain since 1989. Here in Canada, the TSX surged four per cent, and the rally continued into August, with the TSX hitting 11,000 earlier this week. Economists say the push was mainly based on positive indicators from the U.S.
Falling slower
Below the border, the big news was that while the GDP is still falling, it’s starting to fall slower. It declined by just one per cent in the second quarter, better than the 1.5 per cent decline expected. Here in Canada, the story wasn’t as good, as the GDP decline in May was larger than expected, at 0.5 per cent. The Conference Board of Canada predicts that Canadian GDP will tumble by a total of 2.7 per cent in 2009 (after inflation), but will expand by 2.8 per cent in 2010.
Raise the house
U.S. house prices just registered their first real gain in three years. According to the latest data from the S&P Case-Shiller index, prices were up 0.5 per cent in the three-month period ending in May, compared to the period ending in April. That’s still down 17 per cent from last year, but a good sign nonetheless.
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