Financial security Governance Housing Monetary policy

Was ‘Great Recession’ deeper in Canada than US, and is that even a valid comparison?

Chart 1 Canadian and US real GDP, 2007-2011
Chart 1 US and Canadian GDP 2007-2011
Source(s): Statistics Canada and U.S. Bureau of Economic Analysis

Editor’s Note: This post was inspired by a note from a friend of and frequent contributor to this site, which has since been posted as a letter to the editor of the Globe and Mail’s Report on Business.

With the Canadian general election campaign in full-swing amid incessant ‘technical recession’ chatter, it should come as no surprise to once again see finger-pointing at the (current/outgoing?) government’s performance during the Great Recession.

A recent Globe and Mail op-ed attempted to do just that. Unfortunately, it was riddled with factual errors and otherwise muddled whatever criticism it intended to parry.

The piece starts out by noting: “Contrary to the popular myth, that recession [2008-9] was a little deeper here than in the United States, as measured by the decline in GDP.”

That was never a myth, either during nor following the Great Recession. Statscan initially reported a 3.3 percent decline in real GDP between the Canadian 2008Q3 peak and 2009Q2 trough; the BEA initially reported a 3.7 percent decline in real GDP between the U.S. 2007Q4 peak and 2009Q2 trough. That gap narrowed as estimated output declines were subsequently revised down in both countries, then back up in the U.S., as shown in the attached chart. The latest estimates peg the peak-to-trough declines in both countries during the recession at practically the same rate, 4.2 percent.

But that’s not all there is to defining the ‘depth’ of a recession. According to even the latest estimates, the Canadian decline in output was relatively short-lived, spanning just three quarters; by contrast, the U.S. decline persisted over six quarters. Likewise, the Canadian recovery was much shorter, spanning just five quarters; the U.S. recovery took eight quarters. A practical way to show how the Canadian recession was nowhere near as deep as the U.S. is to focus on the area between their respective  recessionary peak-recovery (straight) lines and real GDP trend lines, as illustrated in the chart. It’s not even close – the U.S. experienced a far broader economic shock during the Great Recession.

Even if the 2008-2009 Canadian recession wasn’t anywhere near as broad as it was in the U.S., that the depth of the Canadian decline was anywhere close to the U’S. should be the real concern. The U.S. recession included – actually was precipitated by – a collapse in the U.S. housing and financial sectors. By contrast, the Canadian housing bubble continued – and continues – to inflate largely unabated.

While the rest of the world was becoming acquainted with the U.S. sub-prime loan scandal, rule changes by Canada’s Finance Minister at the time had the Canadian Mortgage and Housing Corporation (CMHC) underwriting $0-down, 40-year mortgages – a practice that was scaled back slightly during the recession. Whereas massive U.S. government bailouts of private housing and financial institutions involved in the financial scandal eventually put U.S. taxpayers on the hook, from the get-go Canadian taxpayers were – and still are – on the hook in the eventuality of a Canadian housing collapse. (While the same Finance Minister took steps to tighten the rules in 2012, this was after nearly six years of folly during which time Canadian housing prices sky-rocketed, resulting in CMHC rapidly reaching its legal $600 billion mortgage insurance cap.)

It’s been poor public policy, not zeal for a balanced budget, that’s put Canadian households at risk. In particular, it was unsound fiscal policy, not the government’s failure to use fiscal policy, as the muddled argument goes, that contributed to ballooning household debt.

The muddled argument also goes on a bit about redirecting household savings to better uses, an opportunity that the (current/outgoing?) government presumably squandered in it’s so-called ‘zeal’.

In fact, the household savings rate today (4.0 percent) is less than half of what it was in the early 1990’s (1993Q2 peak of 13.9 percent). Surely that can’t all be laid at the foot of a governing party that didn’t even exist at the time. There was another government in power back then that had an even greater ‘zeal’ for balanced budgets, which it achieved through harsh austerity measures; the plummet in Canadian household savings rates directly coincided with that government’s mid-1990’s austerity budgets.

And once those austerity budgets yielded their desired budgetary balances, that same government pivoted to slashing corporate income tax rates instead of assessing the deleterious effects its policies had on Canadian households. As remarkably low household savings rates persisted, corporate profits and savings soared.

At most what can reasonably be argued is that the (current/outgoing?) government’s fiscal policies did little to improve Canadian household financial security.

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