Canada is not in a recession, influential group of economists says

Despite an economy that has shrunk for the first four months of the year, Canada is not in a recession, the unofficial arbiter of business cycles says.

What recession?

7 years ago
Duration 6:02
Finn Poschmann of the C.D. Howe Institute's Business Cycle Council explains why a strong job market is helping Canada skirt recession

Despite an economy that has shrunk for the first four months of the year, Canada is not in a recession, the unofficial arbiter of business cycles says.

The Business Cycle Council, an arm of think-tank the C.D. Howe Institute, said Tuesday that there's no evidence that Canada's economy has slipped into recession in any of the ways that people typically associate with the term.

Although it falls under the umbrella of C.D. Howe, the council's "views collectively expressed do not represent those of any institution or client," the group said in a release Tuesday.

The council is made up of seven private sector economists tasked with understanding how the economy evolves and providing guidance to policymakers. The group calls itself "the arbiter of business cycle dates in Canada" and in that role, is similar to the U.S. National Bureau of Economic Research, which looks retroactively at economic data to help guide policy moving forward.

Two quarters? Not so fast

It's a common belief that a recession is defined as two quarters in a row of declining GDP. On that front, Canada is two-thirds of the way towards what's being called a "technical recession" because official Statistics Canada shows the economy contracted in every month between January and April. Data for May is due out on Friday and it too, is expected to show another decline.

But that's an overly narrow view and not a real gauge of how the economy is doing, the group of economists said Tuesday. "The council defines a recession as a pronounced, pervasive and persistent decline in aggregate economic activity," not simply an economy that shrinks for six months in a row.

They aren't alone in that view. The standard of two quarters of shrinking GDP seems to have been created by an observation by the U.S. NBER that recessions in America tend to last for at least six months. "Lay people, anxious to penetrate the byzantine process used at the time to assess cycles, quickly jumped on this as a rule even though it was just a statistical artifact," C.D. Howe said in a 2012 report on the subject.

Indeed, according to the NBER, the last major recession in the U.S. started in early 2008, but according to official data the economy hadn't technically had two consecutive quarters of negative GDP by that point. 

That's not the only time there's been a lag. For as far back as we have reliable data, the U.S. economy contracted in 11 different quarters that the NBER defines as expansions. And the inverse is also true: the U.S. economy has seen quarterly expansions in GDP at least five times during a period when the NBER says the economy was technically in recession.

There are recent Canadian examples of that disconnect too. The council says the last big Canadian recession was between November 2008 to May 2009. Yet companies in some sectors were cutting jobs  for several months before that, and many sectors started recovering well before that time period ended. "Monthly output began its recovery in June 2009, while employment lagged slightly, partly because of a new seasonal pattern in education employment," the council noted.

That's because when it comes to tracking recessions, size matters. "In deciding on the occurrence and timing of a turning point in the business cycle, the council looks at three dimensions: duration, amplitude, and scope — or how widespread a downturn or upturn might be," the council said Tuesday.

In other words, its not enough to just decide when GDP started expanding and contracting. A more nuanced view is needed to decide what's happening in the real economy and when a recession started.

On that front, there are at least a few positive economic indicators for Canada's economy amid the negative ones. It's undeniably true that cheap oil has led to reduced investment in the energy sector and some others, but the job market is still holding up well, the council noted. According to Statistics Canada data, the economy added more than 100,000 jobs in the first four months of the year, despite a GDP showing that was technically shrinking.

Add it all up and when all factors are considered, the council isn't ready to declare a recession just yet. "The Business Cycle Council therefore determined that as of July 22, data did not provide evidence that Canada had entered an economic downturn," they said, adding that they will meet again in the fall to look at new data.


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