Economic analysis


A weekly scorecard on the state of the economy in North America and beyond

EconowatchLadies and gentlemen, the recession is over. Or at least it seems to be winding down. Unless it isn’t. The past few weeks have been a little dizzying for those not accustomed to the wildly contradictory messages common in the world of economics.

What is a poor citizen supposed to think when Bank of Canada governor Mark Carney comes out one day and says the recession is all but over, and then Finance Minister Jim Flaherty (backed by a passel of big bank analysts) emerges a day later to throw cold water on the idea.

Is the recession over or what? As is so often the case in the world of economics, the answer is “yes and no.”

Carney and Flaherty were speaking honestly and accurately about two separate but related realities. Carney was referring to the technical definition of a recession, and the news there is encouraging. All signs suggest that Canada’s economy is growing again, and will likely grow more toward the end of the year. Commodity prices have rebounded, housing has stabilized and job losses are slowing. That means that the pressure will soon be on for Carney to squeeze off the easy money tap, to keep inflationary pressures at bay.

Flaherty, on the other hand, is a politician, and he knows that his primary audience is not made up of Bay Street bankers, but ordinary folks. Last fall, he made some big mistakes: at first rejecting the notion that Canada had anything to fear from the deepening economic crisis around the world, then insisting that the slowing economy would not drive the federal budget into deficit. Wrong on both counts. He’s now learned that the worst mistake he can make is seeming out of touch, and telling Canadians that everything is fine when they are still scared and suffering.

In the wake of Carney’s upbeat assessment, many commentators chuckled that the Great Recession was a dud that left Canada with little more than scrapes and bruises. Yes, it could have been worse, and it was worse elsewhere. But before we get all smug, let’s take a page from Flaherty’s book and keep a couple of things in mind. The 5.4 per cent economic contraction in the first three months of this year was the second-worst such downturn in the past 50 years. For the thousands of Canadians who lost jobs, saw retirement and college dreams crumble, it was nothing to scoff at. Carney is right—brighter days are in sight. And Flaherty is too: while the disease may be receding, for many the pain will linger.

GRAPH OF THE WEEK: The largest earnings decline, ever

How badly has the recession hit corporate profits? The latest numbers show a stunning 98 per cent drop in expected earnings since the 2007 peak. If current estimates hold, in a few months the U.S. could mark the first 12-month period ever in which S&P 500 earnings per share were negative.

The largest earnings decline, ever


One really hot July
Market-wise, July was on fire. The Dow Jones Industrial Average shot up by 8.6 per cent in a month, its best monthly percentage gain since 1989. Here in Canada, the TSX surged four per cent, and the rally continued into August, with the TSX hitting 11,000 earlier this week. Economists say the push was mainly based on positive indicators from the U.S.

Falling slower
Below the border, the big news was that while the GDP is still falling, it’s starting to fall slower. It declined by just one per cent in the second quarter, better than the 1.5 per cent decline expected. Here in Canada, the story wasn’t as good, as the GDP decline in May was larger than expected, at 0.5 per cent. The Conference Board of Canada predicts that Canadian GDP will tumble by a total of 2.7 per cent in 2009 (after inflation), but will expand by 2.8 per cent in 2010.

Raise the house
U.S. house prices just registered their first real gain in three years. According to the latest data from the S&P Case-Shiller index, prices were up 0.5 per cent in the three-month period ending in May, compared to the period ending in April. That’s still down 17 per cent from last year, but a good sign nonetheless.


Still a clunker
The cash-for-clunkers program helped boost U.S. auto sales in July by 16 per cent, but its budget is exhausted, its fate uncertain and it hasn’t come close to ending the industry’s pain. General Motors announced it will have to lay off more workers and its sales are still off nearly 20 per cent compared to last year. Sales were also down at Chrysler, Toyota and Honda. Luxury automaker BMW, meanwhile, said its quarterly net profit fell 76 per cent on weak sales.

Spending freeze
Personal income levels fell more than expected in the U.S. in June, with the biggest drop in four years—a bucket of cold water on hopes that an economic recovery will be quick and easy. Consumer spending was up, but economists said it was purely the result of rising fuel and food prices. And with the cost of living continuing to rise, Americans still can’t afford to spend freely.

What stimulus?
Capital spending among Canadian businesses is down by 10 per cent compared to last year’s levels. Cutbacks were seen in 15 of the 20 industries surveyed by Statistics Canada, with the biggest declines in the mining, oil and gas sector and the finance and insurance sector. Economists say this is particularly troubling news, given the amount of government spending that’s been aimed at boosting confidence and getting business investing again.



  • Brothels in Germany, where prostitution is legal, have started to offer a variety of incentives to lure back business, which is off by as much as 30 per cent in the downturn. Some have advertised discounts to those who arrive by bicycle, while others have offered flat rates for services. The promotions haven’t gone over well with some politicians, who call them a “violation of human dignity.”
  • Perhaps it’s only fitting that a truly out-of-this-world company would still be attracting big money in the midst of a global recession. Virgin Galactic, a space tourism company, has just landed a $280-million investment from Abu Dhabi firm Aabar Investments, in return for a 32 per cent stake. The cash is a huge boost for Virgin’s plans to send paying customers into space by 2011.
  • A steep recession is no match for a sweet tooth. The once struggling candy and gum maker Cadbury PLC recently reported that sales were up by 13 per cent in its latest quarter, and its profit nearly tripled. The sale of its beverage businesses boosted results, but chocolate bar sales were a big driver—one of those small indulgences that people can still afford no matter how bad the economy gets.
  • The U.S. Department of Justice says it can save over half a million dollars next year by making double-sided photocopies—and it can save an additional $300,000 by emailing documents instead of printing them out. It’s all part of a government-wide effort to hunt down even the tiniest cost-cutting opportunities, part of what the White House is calling the “$100-million savings challenge.”


The Canadian economy shrank more than expected in May, but the Bank of Canada still recently issued the best news we’ve heard in a while: the recession is almost over. Many economists were quick to agree—but politicians were wary, as they know high unemployment will persist for a while.

“We are on track for the recovery both in Canada and globally.” —Bank of Canada governor Mark Carney

Jim Flaherty“There are good signs that the economy has stabilized and that there are the beginnings of a recovery. I wouldn’t put it any stronger than that.” —Finance Minister Jim Flaherty

“By many indicators, the current quarter will likely mark the end of the Canadian recession.”—Alex Koustas, Scotia Economics

“Don’t break out the champagne yet.” —Patricia Croft, chief economist, RBC Global Asset Management

“All provinces will recover slowly over the next year. Saskatchewan, British Columbia, Alberta and Ontario are expected to post the strongest growth in 2010.”—Marie-Christine Bernard, associate director, Conference Board of Canada

Stephen Harper“The so-called recovery at this point is extremely fragile. We’re still in the middle of a major global economic crisis, the biggest economic crisis since the Second World War.”—Prime Minister Stephen Harper

“Even though the Canadian economic recession is nearing an end, the monthly job losses are likely to continue, as businesses consolidate their workforce further in the face of depressed demand for their products.”—Millan Mulraine, TD Securities economics strategist


Thursday, August 6: Statistics Canada will report the number of building permits for June. As in May, a modest uptick is expected.

Friday, August 7: The labour force survey for July will be released by Statistics Canada. Despite signs of economic recovery, analysts expect to see the unemployment rate rise again, to 8.8 per cent.

Tuesday, August 11: The number of job openings in the U.S. in June will be reported. Little if any boost is expected.