Canada and the recession

Posted in Economics by Alex L. on December 4, 2011

Economics Sandbox header

My lovely girlfriend, a Canadian citizen, challenged me to write something about the more northerly part of North America. Since I’ve also wanted to write a post dealing with economics, badabing badaboom: here’s an article about the Canadian economy. I’m not a professional economist but this entry (and future ones like it) are my way of engaging with economic facts and data on my own so I don’t have to rely solely on the opinions of commentators. That’s why I’m counting these entries as part of my “Economics Sandbox”. Please feel free to correct, comment, question, and enlighten.

I was recently surprised to read that Canada was weathering the economic downturn much better than the United States. What does that mean exactly? I looked at some data to get a better idea.

Just looking at GDP growth, it looks like Canada’s economic output was affected in almost exactly the same way as the U.S. economy.

Chart of GDP growth in Canada and U.S., 1990-2010

Source: World Bank

But GDP growth is not the only (or even the best) measure of a country’s economic health.When I looked at unemployment rates, it’s clear that America’s labor market has been in worse straits than Canada’s since the recession started in 2008.

Chart of unemployment rates in Canada and U.S., 1990-2010

Source: BLS via FRED

Employers hire less when they don’t see a positive outlook for the short-term future of the economy. Another indicator of business confidence is gross capital formation, which is a partial measure of how much money businesses and governments are willing to invest  on machinery, buildings, services, and other capital. If they are hopeful about the future, these organization are more likely to invest in these new projects.

The chart below shows that gross capital formation has declined less in Canada than in the U.S. during the recession, which suggests that Canadian organizations are investing more in the future relative to the U.S.

Chart showing gross capital formation to GDP ratio of Canada and U.S., 1990-2009

Source: World Bank

So why has GDP growth in the two North American countries remained the same while employment and business confidence have been higher in Canada than in the United States? The standard answer seems to be because the Canadian banking system acted much more sensibly during the past decade than its counterpart in the U.S. Canada’s system of lending is more tightly regulated and more insulated against risky investment practices, according to the New York Times.

In other words, Canada’s government didn’t have to bail its banks out of their own mess to the same extent that the U.S. did (although Canada did allow banks to trade mortgages for cash through the Insured Mortgage Purchase Program). The government deficits incurred by the U.S. as a result of the emergency measures to restore the economy have increased the U.S. debt by a staggering amount (my data set for the chart below did not include the most recent statistics: the U.S. debt-to-GDP ratio is actually much higher as of Q2 2011—about 100% of GDP).

Chart showing debt-to-GDP ratio for Canada and U.S., 2005-2011

Source: WEF Global Competitiveness Report

There are some recent indications that the Canadian labor market may be slowing down, but Canada’s economy is not nearly as precarious as that of the EU, Japan, and the U.S. President Bill Clinton, in his new book, Back to Work: Why We Need Smart Government for a Strong Economy, makes an example of countries like Canada because they are less hamstrung by ideological hangups when dealing with the economy (unlike most conservative politicians in America).

Although we Americans are often dismissive of our northern neighbor and other “socialistic” economies—some of which, like Germany, have been more resilient than ours in the recession—it would be the greater part of wisdom to learn what has worked well for others and try it ourselves.

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