Monday, February 6, 2012

Has Canada's Economic Recovery Been Overstated?

Over the past three or four years, Canadians have been exposed to a steady diet of mainstream media coverage telling us how well we weathered the Great Recession and how quickly the country’s economy returned to its pre-Recession state.  In this posting, I’ll take a look at a recent report entitled “Canada’s Incomplete, Mediocre Recovery” by Jim Stanford.  This report, issued by the Canadian Centre for Policy Alternatives (CCPA), gives us some sense of the “truthiness” of that statement.

Let’s open by looking at the results of a recent poll taken by Pollara for the Economic Club of Canada.  The online poll, conducted in mid-December 2011, shows that optimism about Canada’s economy has dropped to levels not seen since 1996, other than for a brief period during 2008.  The poll shows that only 25 percent of Canadians believe that the economy is growing, down from 29 percent a year earlier and that 70 percent of Canadians believe that Canada’s economy is in recession as shown here:

Poll results also showed that many Canadians still believe that the country is in a recession, despite the fact that, according to economists, the recession ended in early 2010.  Surprisingly, 63 percent of Canadian’s believe that Canada’s economy is in a mild recession, up from 56 percent a year earlier and only 25 percent of Canadians believing that Canada’s economy is experiencing moderate growth.

Canadian’s beliefs about our country’s economic well-being is in sharp contrast to the claims of our political leadership, particularly Mr. Harper and Mr. Flaherty who never miss an opportunity to tell us how well we are doing, thanks in large part to their steady hand on the wheel and their fiscal prudence.  Unemployment has dropped steadily (until recently), particularly when compared to the depths of the Great Recession as shown on this graph:

In January of 2012, 17.357 million Canadians were employed and 1.421 million Canadians found themselves unemployed.  This compares to 16.838 million employed and 1.465 million unemployed in April of 2009.

As well, economic data tells us that real GDP has regained and surpassed all that was lost, reaching a level that was 2.6 percent higher in the third quarter of 2011 than three years earlier as shown here:

When all of this is taken into consideration, Canadians are left with the unbending sense that we should be paying homage to those in Ottawa that were such great stewards of Canada’s well-being over the past 4 years because, after all, Canada did fare much better than most nations around the world.

Not so according to the CCPA.  One issue that the government seems to neglect is the growth in Canada’s population over the same period.  On average, over the last five years, Canada’s population has grown by 1.2 percent per year with the working age population growing at 1.3 percent per year.  As shown on this chart, the rate of Canada’s population growth is nearly double the OECD average and is in the top 8 among all 34 nations:

This growth means that Canada’s economy has to be continuously generating new employment and economic growth just to stay even.  Certainly, sustained population growth results in sustained growth in consumption and results in higher overall consumer spending but, in order to maintain a steady state, the economy must generate hundreds of thousands of new jobs every year and billions of dollars in GDP growth just to stand still, a fact that seems to go unnoticed or unmentioned by our political masters.

First, lets look at how Canada’s growth in real GDP looks in per capita terms, the best way to accommodate population growth.  Here is a graph showing the changes in Canada’s per capita GDP since the beginning of 2005:

Canada’s real economic output began to shrink in the third quarter of 2008 and had fallen by nearly 4 percent in the summer of 2009.  However, if we look at the per capita GDP growth, the downturn actually began at the beginning of 2008 when slowing economic expansion was outstripped by growth in population.  This resulted in real per capita GDP contraction of 5 percent (or $2100), 1 percentage point worse than the fall in total GDP.  As you can see from the graph, since the recovery began, real per capita GDP has grown by roughly $1500, recovering only 75 percent of what was lost during the Great Recession.  In fact, following the CCPA’s trend of economic growth from prior to the Great Recession, real per capita GDP growth is an additional $3000 below trend meaning that the current recovery has only replaced $1500 out of the $5100 in lost economic growth on a per capita basis because the population continued to grow during the entire period.  All in all, one can quite quickly see that the rebound in economic growth since 2008 when measured in per capita terms is rather modest at best, particularly considering that economic growth is usually most robust in the years immediately following a recession.

With this in mind, let’s look at a chart that shows changes in Canada’s real per capita GDP to that of other OECD nations for the period between 2007 and 2011:

Notice how Canada comes right in the middle of the pack.  So much for stellar economic growth!  You will notice that there are 12 nations that have more or less equaled or surpassed their pre-recession per capita GDP growth.  Not so for Canada.

Now let’s take a look at Canada’s employment picture.  As I noted above, Canada’s labour force grows by about 1.3 percent per year (or 350,000 new potential workers).  This means that the economy must create 350,000 new jobs per year just to keep unemployment levels from rising, that is, on top of the new jobs the economy must create to repair the damage done to Canada’s employment picture during the recession.

The CCPA feels that the employment rate which measures the ratio of total employment to the total working age population is a better reflector when examining job creation, particularly since it is not influenced by factors including discouraged workers leaving the work force which can make it appear that the labour market is strengthening when, in fact it is worsening.

Here is a graph showing changes to Canada’s employment rate since 2007:

The employment rate peaked at 63.8 percent in February of 2008 and, at that point, the decelerating pace of job creation no longer kept up with growth in the working age population, resulting in an employment rate decline of 2.5 percent.  This was the fastest decline in the employment rate in any recession since the Great Depression.  Despite the modest increase in Canada’s output as measured by GDP since the end of the Great Recession, the employment rate has barely increased, rising by only 0.4 percentage points to 61.7 percent in December 2011.  This is less than 20 percent of the damage done during the most recent recession.  You will also note on the graph that the employment rate has actually declined over the last half of 2011, a period where Canada’s working age population grew by over 150,000 people.

Here is a chart showing the change in the employment rate for OECD nations including Canada for 2011 when compared to 2008:

Canada’s employment rate sits at 1.2 percentage points below its average level in 2008, again, in the middle of the pack.  This proves that Canada’s employment situation has not really improved as much as unemployment statistics would tell us, again, because of the increasing size of the working age population.

From this report, we can see that Canada’s so-called recovery has been much overstated.  While some ultra-low population growth nations like Japan and Germany can experience modest growth in their economies and employment and still experience an unemployment and per capita GDP growth rate steady state, the same cannot be said for Canada.  While our illustrious Prime Minister claims to be an economist, perhaps he and his minions should take some time away from congratulating themselves over Canada’s economic performance and look at the issues that will make it increasingly difficult to keep Canada’s economy “growing” over the long term.  Relatively high growth in both population and labour force growth makes Canada's recent recovery look rather mediocre and may explain why many Canadians do not feel that the Great Recession ever ended.


  1. It seems as if the only growing industry is the sign makers who make the signs that say "Canada's Economic Action Plan"!

    Joking aside, I fear that if a 20% downward housing value correction were to hit our country; we would be at the same place on the list as the US. Lower GDP growth, and lower employment rate!

    Thanks for writing about this report APJ.

  2. I agree - the sign makers and the producers of the EAP television commercials!

    1. Would you like wine with your cheese...move out west an get a real job

    2. Not interested thanx. In Ontario we prefer to work hard for our money. We don't loaf around in the bars at the curling clubs complaining about the East, Ontario, socialists and French people like you in the West do. Not BC. Apologies to all those socialists in BC.