Understanding the Debate Over Canada’s Economic Health
Following the release of Statistics Canada's first-quarter GDP estimates, there has been a lot of discussion about whether Canada is in a "technical recession." While the short-term performance of the economy is important, focusing too much on this can distract from the real issue: the lack of growth over the past decade. The term "technical" is often used to imply a level of expertise, but it can be misleading when applied to economic definitions.
What Is a Recession?
The idea of a "technical" recession typically refers to two consecutive quarters of declining real GDP. This definition originated from the National Bureau of Economic Research (NBER) in the United States, which observed that recessions usually last around six months. However, neither the NBER, Statistics Canada, nor the C.D. Howe Institute has ever relied solely on this rule to determine if a recession has occurred. Instead, they consider a range of economic indicators, including labor market data and other signals.
Using an arbitrary rule like consecutive quarterly declines can sideline the judgment needed to interpret various economic signals. It also overlooks the quality of preliminary data, which can be subject to revision.
Discrepancies in GDP Measures
Statistics Canada provides three different measures of GDP: one based on income (such as wages and corporate profits), another based on expenditures (like personal consumption and business investment), and a third based on industry production. In theory, these should align, but in practice, they often don’t.
In the first quarter of this year, the income measure of GDP decreased by 0.1%, while the expenditure measure remained unchanged. The industry measure even increased by 0.1%. When averaged, the income and expenditure measures showed a slight dip of 0.036%, which is nearly negligible. Including the industry measure in the average actually results in a small increase, meaning the economy avoided consecutive quarterly declines.
The Impact of Data Uncertainty
StatCan could have done better by not publishing a minor decline in its income measure of GDP. Instead, releasing an unambiguously flat reading might have prevented the focus on consecutive quarterly declines. A small change in income levels—such as $118 million higher at quarterly rates—would have rounded the annualized change to a neutral 0.0%.
Unlike data on the consumer price index or unemployment rate, GDP data can be influenced by human intervention due to the uncertainty involved in preliminary estimates. This was evident in 2015 when marginal declines in GDP led to the image of a recession during an election year.
Revisions and Uncertainty in GDP Estimates
GDP estimates are subject to frequent revisions, often upwards, as more comprehensive data becomes available. For example, tax data has been used to supplement earlier estimates based on smaller surveys. Energy exports are particularly prone to significant revisions, with StatCan routinely adjusting preliminary monthly estimates by $1 billion or more.
This year’s first-quarter GDP estimate included a preliminary figure for March exports, which was challenging due to the surge in oil prices caused by the war in Iran. Estimating oil exports during such a volatile period is inherently difficult.
The Bigger Picture: Long-Term Growth Stagnation
The debate over whether Canada is in a recession misses the bigger picture. Whether the economy grew or shrank slightly over the past six months is of little importance compared to the fact that per capita growth has stalled since 2015. The economy has not just had a few bad quarters—it has been underperforming for a decade, largely due to weak business investment.
Addressing this issue requires long-term strategies rather than short-term monetary or fiscal stimulus. Relying on temporary fixes may not resolve the underlying problems and could even exacerbate them.
Conclusion
While the technicalities of GDP measurements and the debate over a potential recession are important, they should not overshadow the more pressing issue of long-term economic stagnation. Focusing on sustained growth and addressing the root causes of slow progress will be essential for Canada's future economic health.
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