Great Recession? This time it's different
As the 80th anniversary of Black Monday approaches, comparisons have been made between the Great Depression that struck the world in the 1930s and the economic slowdown underway today.
A look at the facts, however, shows some subtle yet important differences between the two scenarios.
One key difference is the geographic range affected. While the Great Depression was certainly global in scope, North America was disproportionately hard-hit.
"I don't think it could have been any worse among industrial nations," Canadian economic history professor Joe Martin tells CBC News of the 1930s. "Canada suffered far worse than anyone, including the U.S.A."
Canadian GDP per capita went down by 25 per cent, on average, during the Great Depression, he notes, and by 1933 more than a quarter of Canadian workers were officially unemployed. Between the stock market crash of October 1929 and the spring of 1933, Canada's national income fell by almost half. Even then, the recovery was uneven, and the slump began anew in 1937. It wasn't until 1940 that the economy began a sustained rally.
In Europe, the Great Depression wasn't nearly as bleak. German GDP per capita declined by 17 per cent at its lowest point, and in the United Kingdom, GDP fell by only five per cent. It was during the Great Depression that the British economy surpassed the U.S. as the world's largest, Martin notes.
Contrast that with the current situation 80 years on. The global economy is a lot more interconnected, and the pain is a lot more evenly distributed. A mortgage on a home in Scottsdale, Ariz., gets securitized and sold to investment banks across the world, spreading the pain of that real estate collapse across numerous countries.
The dust has yet to settle, but it's already clear that the economic slowdown of 2008 and 2009 is certainly geographically widespread. With the notable exception of China (where GDP growth slowed to six per cent) and Australia, virtually every developed economy in the world experienced some sort of recession over the past year.
Compared with double-digit declines throughout the 1930s, Canada posted three quarters of negative GDP growth, and the Bank of Canada expects the Canadian economy to emerge from recession during the current quarter.
"I've said from the beginning it will not be as bad," Martin says. "I don't think, when the final numbers are in, it will even be as bad as the early 1990s [recession.]"
The sectors most affected were also quite different, then and now. In Canada, much of the pain in the current recession has occurred in the battered manufacturing sector. The woes befalling auto manufacturers and other heavy industries have hit hard in Ontario, where the provincial deficit is forecast to soar to $22 billion this year.
In the 1930s, it was the resource-dependent West that bore the brunt of the pain. Saskatchewan's gross domestic product shed some 75 per cent in 1930, Martin notes. Canada's main export at the time was wheat, and as demand dried up, grain prices hit their lowest prices in more than 300 years. And the export prices of farm products, fish, lumber and base metals fell far more steeply than those of manufactured goods.
As a result, municipalities in the four westernmost provinces were unable to pay the interest on their debts, and Ottawa had to step in. No matter how the current economic slowdown shakes out, Canadian governments are a long way from defaulting on their debts.
The differences don't end there. Current economic problems have been pinned, in broad terms, on financiers creating obscure financial instruments that allowed them to take unnecessary risks. Terms such as collateralized debt obligations, asset-backed commercial paper, subprime mortgages and mortgage-backed securities have all been blamed for exacerbating, if not causing outright, the financial collapse.
In the Great Depression, Martin notes, the financial system was much more closely regulated. "Banks weren't allowed in the mortgage market, for example," Rotman School of Management professor Lawrence Booth tells CBC News. "And [they weren't] allowed into the insurance market either."
Many financial firms collapsed, to be sure, and the survivors were much less nimble, but the economy eventually recovered. Governments and regulators today appear to be adopting that model, having already moved to put tighter controls on the industry to mitigate speculative activity.
"We can criticize Canadian bankers for being too cautious and conservative, but in the long run, I think you want your banks to be cautious and conservative," Martin says.
In fairness, none of the actions governments and regulators took in the 1930s was enough to truly shake the economy out of its doldrums. It took the Second World War to do that.
Indeed, Canada emerged from the Great Depression quicker than the United States did in part because it joined the war effort sooner, Martin says — one week after the United Kingdom did in 1939. The United States did not formally join the war until December 1941, after the attack on Pearl Harbor.
This current economic slowdown is still waiting for a catalyst to signal its end. Governments have pumped billions worth of stimulus spending from public coffers to try to pump up demand. Nobody knows, however, what the impact will be when those taps are ultimately turned off — nor what ballooning federal deficits might do to the global economy down the line.