December 26, 2008

BC's Economic Downturn

On November 23, 2008 Finance Minister Jim Flaherty said and Prime Minister Stephen Harper repeated that Canada might be in a "technical recession". That means two consecutive quarters of no economic growth, measured as the change in inflation adjusted GDP.

In the United States, the National Bureau of Economic Research (NBER) rejects the technical definition and says that: "…a recession is a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales." Harper is an economist, but also a politician. His use of the word technical may have had more to do with minimizing the seriousness of the situation than it did with reliance on the narrow non-NBER definition.

Statistics Canada usually revises its estimates of GDP, and on a provincial level it only publishes annual data for GDP. Several of the advantages of using the NBER definition of a recession include being less exposed to measurement errors in GDP, being able to use monthly data and being able to say something about provincial economies.

NBER's Business Cycle Dating Committee has dated US business cycles from 1854 through the start of the current downturn. The Economic Cycle Research Institute (ECRI), an independent institute dedicated to economic cycle research, uses the NBER methodology to date business cycles in 20 economies. ECRI shows a period of continued expansion (no recession) in Canada from February 1958 until April 1981. It dates the 1980's recession in Canada as starting from a peak in April 1981 and bottoming-out in November 1982, a downturn of 19 months. It dates Canada 1990's recession as starting from a peak in March 1990 and bottoming-out in March 1992, a downturn of 24 months. If the current downturn is going to be as long, or longer, than the last two, a lot depends on when it began. If it is going to bottom-out in the third quarter of 2009, then it is either surprisingly short or it actually began in December 2007, at the same time as the US cycle. Most analysts would argue that the Canadian economy remained strong until at least the third quarter of 2008, so that puts a recovery in the summer of 2009 as being either optimistic or wrong.

Misdating the beginning and expected length of the current downturn in the Canadian economy can have serious consequences for Mr. Flaherty's budget, scheduled for presentation on January 27, 2009. It may be hard to convince taxpayers that governments of all stripes are not experts at shoveling money off the back of a truck, but in reality it is hard to push big sums out the door quickly, particularly if the money is going to be spent on useful projects. The time required for planning and engineering work on major public projects can be measured in years. If government believes that the economy is going to recover on its own by the third quarter of 2009, then it might back away from any fiscal stimulus and merely announce projects that it would have done anyway, while claiming that the announcements are the stimulus. Playing that game could delay economy recovery in Canada.

In British Columbia the Campbell government is in denial over the extent of the province's exposure to the world economic crisis. Its line is that Canada is in better shape than most of the world and BC is in better shape than most of Canada. On October 22, one week before two by-elections, Campbell conducted an unorthodox 6:15 PM news conference in which he announced ten items he claimed were: "…immediate steps to improve the province's economic competitiveness and reduce costs for families and business in the wake of the global economic slowdown". One of those steps was to call the legislature into session, six and a half weeks later than the beginning of its scheduled fall sitting. Another of his emergency economic measures was to: "accelerate public investment in capital infrastructure projects to keep people employed in our construction sector and keep goods and people moving". The 6:15 PM news conference was over two months ago, yet not a single announcement has been made regarding accelerated public sector capital spending. Of course the next provincial election is on May 12th so it might be tempting to schedule announcements as part of the run-up to the vote. Manipulating the provincial side of a stimulus program so as to maximize the advantage for the Campbell government's re-election bid could put recovery of the provincial economy at risk.

Those who deny that the BC economy is feeling effects of the worldwide crisis should read the business section of any newspaper. It is also possible to look at the hard data on the increase in the number of people on welfare or the drop in construction employment, which peaked at 235,300 in September and by November dropped by 15,000.

Except for those in the severely depressed forest industry, BC is probably at the very early stages of a downturn. The Campbell government may try to make it through the May election without admitting how serious the crisis is for British Columbians, a trick similar to what Stephen Harper did during the last federal election campaign. Campbell needs to be held accountable for using the economic crisis to play politics during the October by-elections and then dropping the ball until his February budget.