The reported decline in GDP in the second quarter of 2011 was an unwelcome development, but I don’t see how it can be interpreted as a sign that the Canadian economy is about to fall into recession.
A closer look at the numbers suggests that the most recent report is far more typical of an expansion than of a recession.
I have made the point before that net exports are generally counter-cyclical: they are a drag on growth during expansions, and they make a positive contribution during recessions. (This pattern is largely due to pro-cyclical swings in the exchange rate.) In a typical quarter during a recession, you’d expect to see a fall in consumer spending, a much sharper fall in investment spending, and an increase in net exports. Conversely, you’d expect to see an increase in consumer spending, strong growth in investment, and falling net exports in an expansion.
So what did we see in the second quarter of 2011? Increasing consumption expenditures, strong investment growth (expenditures on machinery and equipment have recovered their pre-recession peak) and a very large drop in net exports. In other words, the 2011Q2 numbers match the profile of a typical Canadian expansion much more closely than they do a recession.
And then of course there’s employment. Employment increased in each of the three months of the second quarter of 2011 -- behaviour that is decidedly atypical of a recession.
I don’t want to oversell this point: a decline in GDP is not good news. The Bank of Canada will doubtlessly -- and rightly -- decide to not increase interest rates next week, and any initiative on the part of the federal government to make an early start in its austerity program would clearly be ill-advised.
But the inference to be drawn from the 2011Q2 national accounts release is that the recovery is not proceeding as rapidly as we had hoped. It doesn’t mean that we’ve fallen back into recession.
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