Canada’s 2015 Recession Was No Such Thing, C.D. Howe Study Findsby
Nation’s economy shrank in first and second quarters last year
Contraction wasn’t diffuse enough to warrant recession label
It looks like Canada’s 2015 recession never actually happened.
The Toronto-based C.D. Howe Institute, which tracks and labels Canadian business cycles, published research Tuesday showing last year’s economic contraction -- driven by falling oil prices -- wasn’t widespread enough to be considered a recession. The conclusion came in a study by analyst Jeremy Kronick, who developed diffusion indices aimed at capturing true cyclical changes in the economy as opposed to transitory ones.
Although it’s not C.D. Howe’s final word on the matter, the report suggests the non-partisan institute is leaning away from using the recession label, capping a debate that spilled over into the political arena in last year’s election. The R-word was widely bandied about by the opposition during the campaign to attack the economic record of then Prime Minister Stephen Harper, who went on to lose the vote.
The discussion at the time was centered around GDP data that showed the economy contracted in the first two quarters of last year. Back-to-back quarterly declines, a situation some analysts refer to as “technical recession,” is usually a good indicator of a true recession. But it turns out not this time, the C.D. Howe report finds.
Continued to Expand
The study calculated diffusion indexes using various methodologies to convey “in a single number the extent to which the downs or ups of an economy are widespread in any given period.” It found that in the first two quarters of last year, a majority of industries continued to expand even as aggregate output fell, which isn’t consistent with an economy in a recession. That conclusion is also in line with data showing employment was growing at the time, another sign the economy wasn’t in recession.
“All the methodologies suggest the negative oil price shock that led to a contractionary economy in the first half of 2015 was not diffuse enough to warrant a recession call,” Kronick wrote in the report. Interestingly, the data also finds evidence to suggest the 2008-2009 recession may have been longer than initially thought.
The C.D. Howe Institute Business Cycle Council will use the report as a tool when they make their official call in the next few months, said Kyle Murphy, a spokesman. If the institute chooses not to label the contraction a recession, it would mark only the second time a back-to-back quarterly contraction wasn’t identified as one, the last occurrence being in 1970.
While the report comes too late for Harper’s electoral prospects, C.D. Howe hopes the additional research will become “important for the proper understanding of business cycles, including the identification of recessions.”
Politics aside, the whole debate may also be a cautionary tale of using the R-word too casually. Claims that Canada was in a recession may have exacerbated the downturn by hampering confidence, which was at depressed levels last summer, and why Bank of Canada Governor Stephen Poloz at the time declined to be drawn into the debate.
“I just find the discussion quite unhelpful,” Poloz said at a July 2015 press conference, when asked whether Canada was in recession.