C.D. Howe report shows no recession in 2015

While an anemic economy was believed to be central to the Liberals winning the Federal election last year, Jeremy Kronick of the C.D. Howe Institute says talk of a recession was premature

A newly released report from the C.D. Howe Institute says that despite consensus at the time, Canada was not actually in recession at the beginning of 2015. The poor performance of the economy last year was a key issue during the Federal election – a campaign that resulted in Justin Trudeau’s Liberals replacing Stephen Harper’s incumbent Conservatives.

Now Jeremy Kronick, senior policy analyst at the C.D. Howe Institute and author of the new study, has posited that the economic conditions that largely contributed to the change in government were not quite as desperate as often portrayed during that period.

The report: “Taking the Economic Pulse: An Improved Tool to Help Track Economic Cycles in Canada,” introduces an improved diffusion index that measures exactly how economic shocks spread throughout the economy. Considering the recent wildfires in Alberta, the report is certainly timely.

“The idea is to strip out one-off events,” says Kronick. “Alberta is a big part of the economy, so the wildfires are a good example of an event that can cause GDP to be negative in the quarter, but that’s not necessarily recessionary as it is not spreading to the rest of the economy.”

Events in Alberta in May and June this year are part of a much wider and long-lasting oil shock that has hindered the province. Dating back to 2014, the energy downturn has clearly had a malign effect on the overall domestic economy too. Despite that, the word recession should not be thrown around too easily, according to Kronick.

“This index identifies that most industries were not contracting in 2015,” he says. “From a diffusion standpoint, it supported the idea that we weren’t in a recession.”

He continues: “The shock that occurred in the oil industry didn’t spread to lot of industries. Employment didn’t fall in the first two quarters of 2015 – that’s odd if it was a recession. That’s not to take away from what happened in Alberta, but nationally it supports that idea.”

The difference between the economy in 2015 and comparable periods such as 2008–2009 is one of geography, according to Kronick. In his view, the contraction in Alberta and the knock-on effect for overall GDP was not dire enough to categorize the first and second quarters of 2015 as a recession.

 “If it is targeted in one area of the economy, it’s hard to say it’s a recession,” he says.  “It requires more analysis and I think the index will help policy makers analyze the economy more deeply from now on.”

Such advice certainly is relevant today, especially when most economists are pointing to a dip in Q2 this year, caused in large part by the wildfires.

 “I think we’ll see GDP falling in Q2 but rebounding in Q3 as Fort McMurray gets aback to business,” says Kronick.  “With negative events like wildfires you get big rebounds because people have to rebuild. That’s the problem with just looking at GDP, because it then makes it look like growth is strong.”

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