Exposed: Revealing Truths About Canada’s Recession

April 29, 2009
1.3 MB43 pages

Canada may have come late to the global recession, but the economic downturn is hitting the country with a force that is unparalleled in post-war economic history.

This report looks at the signs of the current recession and compares it to Canada’s 13 other recessions, going all the way back to 1926. It discovers that, including the Great Depression, Canada’s economy has only had six experiences of economic decline lasting two quarters or more. It reveals how this recession has several things in common with the two biggest downturns in post-war history, but there are also important, and troubling, differences.

Canadians entered this recession more exposed to an economic downturn than
they have been since the 1930s. They have the weakest system of protection against unemployment since the 1940s. Their personal savings rates are comparable to those of the 1930s. They also have record-high levels of household debt. Many are unprepared for massive job loss and have nowhere to turn.

In previous recessions, Canadian households offset the impact of job loss by hav-
ing women take up more paid employment. In this recession, most women are al-
ready working — there is much less backup, or reserve army of labour, for families
suffering from recession this time around.

This leaves many Canadians with little to help them weather the force of this down-
turn, poised to possibly be the worst in decades. The study finds that, compared to
previous recessions, this recession is packing a bigger punch in its early days than
any recession since the Great Depression.

The drop in GDP was more rapid in the opening months of this recession than the opening months of the 1981–82 and 1990–91 recessions. The expected scale of decline keeps escalating. The Bank of Canada revised its forecast from a 1.2% decline over the course of 2009 to a 3% decline in the space of weeks.

Job losses in these opening months of recession have eclipsed the rate of job loss in the early months of the 1980s and 1990s recessions, and are relatively bigger than job losses in the U.S. when scaled up for purposes of comparison. The study predicts the loss of 387,000 full-time jobs to date is just the tip of the iceberg: more job losses are on the way and the pain won’t be brief.

In the recession of the 1980s, the economy regained lost ground in a year-and-a- half, but it took almost four years for the number of full-time jobs to be fully restored. It took seven full years to get back to the pre-recessionary number of full-time jobs in the wake of the 1990–91 recession, though GDP returned to pre-recessionary levels in just four quarters.

If past experience is any guide, it could take years to recoup the loss of full-time employment that is underway in record numbers this time around. Though Canada entered the recession with unemployment rates at 35-year lows, doubling its unemployment rate to 12% is not out of the question, given early indicators and parallels with previous recessions. The fact that a majority of households in Canada today rely on two income earners may help soften the blow of job loss. But many households may not be able to get by without two incomes and could soon be in trouble.

The first round of pink slips has hit men’s jobs hardest, with big losses in full-time, better-paid and unionized jobs in manufacturing and commodities industries. The next round of job losses will hit the service sector. Families with over-leveraged budgets may hit their personal debt wall in a hurry as women start to lose their jobs in growing numbers.

About 60% of Canadian households were already in a net debt position before this recession began. With so many families already reliant on credit to make ends meet, the competition for remaining jobs will be fierce. Both the 1980s and 1990s recessions led to a major restructuring of Canada’s labour force and began a long-term trend toward lower paying, insecure work. Similar patterns are at play today.

The vulnerability of unemployed Canadians coupled with high household debt levels weighs heavily on Canada’s ability to emerge quickly from the downturn. At a third of the economy, exports are important, but recovery depends critically on Canada’s own consumer spending, which accounts for 57% of the economy. Some observers say Canada can do little about this recession, since it didn’t cause it.

Findings from this study suggest that is a short-sighted view, for several key reasons:

  • No coat tails to ride: Riding on the coat-tails of a quick American-led or export-ledrecovery is not likely in the cards. Everyone is in the process of re-balancing their books. Deleveraging is both healthy and necessary for the long-term economic viability of individual households and businesses, here and elsewhere. But that means exports are not likely to rebound anytime soon, and spending will be cut by both businesses and consumers in Canada too. This leaves governments as the only remaining actors that can stimulate the economy and shore up tepid consumer confidence while we await global recovery. Governments also need to prepare for the next, inevitable phase of economic expansion.
  • Domestic action is crucial: Domestic policies have determined how we weathered previous recessions and how we set the stage for the next trajectory of growth. Exports may have propelled Canada out of a few recessions, but the recoveries of the 1940s, 1950s, 1980s and 1990s were driven more by domestic developments. Expanding investments in infrastructure from the 1940s to 1960s helped offset recessions and set in place a foundation for future growth. The Canadian economy has not seen such a wave of public investment in half a century. It shows. This recession provides a unique opportunity to rebuild capacity and energy efficiency in physical infrastructure (such as repairing and extending transportation, energy, and water systems) and human infrastructure (such as improving our systems of care and learning). Without such investments, Canadians will face critical shortages in the coming years, crippling future potential.
  • Jobless need better supports: Improving benefits for the unemployed is a crucialand immediate next step. Unlike the U.S., Canada scraped its way out of the 1970s downturn in part because the majority of Canadians were well protected by the former Unemployment Insurance system. This is an important lesson. Changes in the 1990s gutted Canada’s Employment Insurance (EI) system. In the last recession, 85% of unemployed men and 81% of unemployed women could rely on benefits if they lost their job; today only 45% of men and 39% of women can. The last time the unemployed were this exposed to economic risk was in the 1940s. This policy oversight is a disaster in the making, but an utterly avoidable disaster. There is broad-based consensus on how to fix the EI system.

The report’s conclusion should be a wake-up call for Canada’s federal govern-
ment: Not since the Great Depression have Canadians been so exposed in the face
of recession.