Jean Boivin: The "Great" Recession in Canada - perception vs reality
Remarks by Mr Jean Boivin, Deputy Governor of the Bank of Canada, at the Montreal
Chartered Financial Analyst (CFA) Society, Montreal, 28 March 2011.
* * *
Introduction
I am very pleased to be able to deliver this speech today to the Montréal CFA Society - my
first speech in Quebec as a Deputy Governor of the Bank of Canada. As active stakeholders
in the Quebec and Canadian economies, you are at the centre of the economic life of the
country. Thus, I don't have to tell you that the past few years have been challenging.
Barely three years ago, the financial crisis was a source of major concern worldwide. This
unprecedented event had serious and costly repercussions, which we continue to feel today.
In the aftermath of the crisis, the global economy entered a recession that we can rightly
characterize as "great." Economic activity in the G-7 countries dropped by more than 5 per
cent. According to the International Monetary Fund (IMF), the number of unemployed
persons around the world jumped by more than 30 million, most of them from advanced
economies.1 This is a striking figure, especially when we think of it as almost equal to the
entire population of Canada.
The Canadian economy was not spared: It still faces major difficulties, and significant risks
remain on the road ahead. Yet, it is also true that the country's economic prospects have
improved since the crisis, as we see in Montréal, which has enjoyed the strongest growth
among Canadian urban centres. In fact, coming out of the recession, Canada is a leader
among the G-7 countries. Employment and economic activity have surpassed their
prerecession levels. In light of the progress we have made, we can now ask: What was the real
extent of this recession? What are the lessons to be learned, and what are the implications
for the future?
The purpose of my speech today is to reflect on events that are still fresh in our minds. Let us
remember, however, that the answers to these questions will become clearer over time, as
new data and analysis become available.2
The recession: first impressions
At first glance, the answers seem simple. After all, a recession is defined as a generalized
and sustained decrease of economic activity, of which the broadest measure available is
GDP. It would then appear that our task is simply to measure the extent of the decrease in
GDP during the most recent recession and then to compare this decrease with other, similar
episodes in Canada, or elsewhere. Child's play, you might think.
This could be the first approach that our descendants - future economists, yet to be born,
with no inkling of what we just lived through - would take: to study and compare economic
cycles in Canada. Examining the economy from this angle, they would observe that the
recession of 2007-09 did not seem to be any more serious than previous recessions in
Canada and that, in fact, it was much shorter The behaviour of employment would
(Chart 1).
seem to confirm such a diagnosis: employment losses were much less serious and,
compared with other recessions of the past 30 years, jobs were regained much sooner
(Chart 2)
But any diagnosis based on a narrow, mechanistic reading of statistical measures of
economic activity could prove to be false, or at the very least, incomplete. If our descendants
were open-minded enough, they might be led to examine some of the headlines from this
time:
« L'Économie canadienne paralysée », La Presse, le 31 mai 2008
New York
"A Financial Drama with No Final Act in Sight," Times, 14 September 2008
« Nous sommes au milieu d'une crise grave », Le Droit, le 25 septembre 2008
"It Couldn't Get Worse, But It Did," New York Times, 12 October 2008
La Presse
« L'économie canadienne s'atrophie encore », Affaires, le 2 mars 2009
« Nous étions au bord de la catastrophe,» Le Devoir, le 18 juillet 2009
On the basis of their preliminary diagnosis, our descendants might wonder what all the fuss
was about.
Let us hope, however, that curiosity spurs these future economists on to further inquiry.
Behind this first impression hides a much more complex reality. Canada's economy
weathered a very violent storm, but thanks to wise precautions and appropriate navigation, it
arrived safely in port, damaged perhaps, but still afloat.
The global economy on the edge of the precipice
But we cannot judge the severity of the storm on the basis of a safe arrival. Let's go back to
the autumn of 2008. Ministers of finance and central bank governors from around the world
meet in Washington. The tension and anger in the air are palpable. After the credit bubble
burst in August 2007, the financial crisis spread like wildfire. The liquidity crisis turned into a
solvency crisis. In September 2008, the crisis worsened, and its effects were felt throughout
the entire American financial system, triggering a series of events at breathtaking speed. In
very short order, we witnessed the bankruptcy of Lehman Brothers and the nationalization of
Fannie Mae and Freddie Mac.3 The contagion then spread to Europe, where key British,
German and Belgian banks were either nationalized or needed major bailouts. Stock markets
registered their greatest drops in more than 75 years.
The spectre of the Great Depression of the 1930s hovered on the horizon, reminding us that
recessions following financial crises are usually longer and more difficult than others and
leave behind indelible scars.4
Implications for Canada
Although Canada was not at the epicentre of the crisis, the contagion can spread through a
number of transmission channels. The financial crisis was clearly leading to a massive
slowdown of global economic activity, with a direct impact on foreign trade. Since
threequarters of our exports are destined for markets in the United States, experience taught us
that when the United States sneezes, Canada catches a cold (Chart 3).
Further, with the increasing integration of the global economy, the fates of national
economies are much more closely interrelated, even more than might be expected based on
the scale of our international trade.5 A global financial crisis, therefore, can affect Canada not
only through international trade, but also by weakening financial markets, shaking consumer
and business confidence, and postponing capital investments, in light of the high level of
uncertainty.6
Phase one: sudden slowdown
For all these reasons, the financial crisis was expected to have a significant impact in
Canada, and for the first phase of the cycle, this was certainly the case.
During the last recession, GDP declined by 3.3 per cent over three quarters. In contrast, over
the same period of time in the 1980s and the 1990s, it fell by 2.2 per cent and 1.9 per cent,
respectively
A prominent feature of the recent recession was the spectacular drop in exports. Exports
were harder hit than in any previous recession, decreasing by 16 per cent over three
quarters, while the most significant drop during the recessions of the 1980s and 1990s was
only 8 per cent (Chart 4).
Investments were equally hard hit by the recession. There was a 22 per cent downturn in
investments over just three quarters (Chart 5). Nothing like this has ever been seen. It took
two years during the 1980s recession, and three years during the 1990s recession, before a
downturn of comparable magnitude was recorded. This recent decline in investment is partly
due to the exceptionally high levels of uncertainty haunting the global economy.
In sum, the recent recession was different from previous ones, owing to a more pronounced
slowdown triggered by unusually steep drops in exports and investment. During its initial
phase, the effects of the crisis in Canada - albeit to a somewhat lesser degree - were
comparable to those in the United States and showed real signs of becoming a "Great
Recession" (Chart 6).
Phase two: rapid recovery
Despite the rapid slowdown, the recovery was faster than those that followed previous
recessions. Why?
Neither exports nor investments can provide the answer. While GDP has recovered to
prerecession levels, business investment and exports have only recovered 45 per cent and
67 per cent, respectively, of the losses incurred during the recession.
If the recovery was speedier, despite weaker contributions from investment and exports,
support for the recovery must have come from household and government spending. This
was indeed the case. Household spending declined by only 2 per cent between 2009 and
2010, compared with 6 per cent during the previous two recessions. The contribution of
government spending to growth was more than one percentage point in each year.
The greater strength of household and government spending reflects Canada's favourable
position at the outset of the recession. Major adjustments had been made to the structure of
the Canadian economy. Business and household balance sheets were relatively sound, and
the banking system was robust, managed prudently, and sufficiently capitalized. Canada's
monetary policy framework had been effective and was credible. The fiscal situation was
favourable, and the social safety net and regulatory framework were effective. As well,
household spending was boosted by the prosperity arising from strong demand for our
natural resources and by improved terms of trade.
This favourable position gave Canada the flexibility it needed to respond strongly to the crisis
without compromising the credibility of our public policy frameworks. Thanks to the
expansionary monetary and fiscal measures adopted in concert with other G-20 countries,
Canada was able to support domestic demand which contributed significantly to the
economic recovery.
Important lingering issues
In Canada, then, we had room to manoeuvre to help us effectively absorb the aftershocks of
the global economic crisis. It is essential to maintain this buffer in light of the elevated risks
that still exist worldwide and the structural issues that persist in the Canadian economy, even
after the recession. The standard of living that we will be able to sustain in the medium term
will depend, in fact, on our ability to address these issues.
Allow me to address three of these issues: household indebtedness, international
competitiveness and, more importantly, our productivity.
Household indebtedness
Let us start with household debt. Since the beginning of the recovery, household credit has
increased at twice the rate of personal disposable income. In the autumn of 2010, Canadian
household debt climbed to an unprecedented level of 147 per cent of disposable income
(Chart 7).
The relatively healthy financial condition of Canadian households at the beginning of the
"Great" Recession helped the Canadian economy to better withstand the initial shocks of the
crisis. However, going forward, it is essential to maintain the necessary room to manoeuvre
to keep household spending on a viable path. This leads us to believe that the rate of
household spending will more closely correspond to future earnings, and certain signs to that
effect have already been observed.
Canada's international competitiveness
The second issue is our ability to compete internationally. The slow recovery of exports is
due in part to the sluggishness of global economic activity. It is also due to the continued
erosion of Canadian business competitiveness over the past ten years. This erosion can be
attributed to the appreciation of the Canadian dollar and Canada's poor productivity
performance. Thus, Canadian exporters are seeing their market shares for a wide range of
goods drop in the U.S. market - by far the most important market for Canada - while
exporters in other countries, such as China and Mexico, are gaining ground (Chart 8).
As global economic growth continues to take root, we are seeing early evidence of a
recovery in net exports. But, at this point, exports are still weak when compared with
previous recessions. And in a world of growing international competition, we should not
assume that the forces causing the erosion of competitiveness through the previous decade
will simply fade away because of a global recovery.
This situation highlights the need to diversify our export markets and increase our ability to
compete, not only with American producers, but also with other foreign exporters.
Productivity and investment
This brings us to the third issue. As I just discussed, international competitiveness is based
on our ingenuity, the efficiency with which we produce, or, for short, productivity. But beyond
its influence on international competitiveness, productivity is a fundamental determinant of
our economic well-being. To improve productivity, we need investment.
The slow recovery of investment in this cycle is particularly surprising in light of relatively
favourable financial conditions: interest rates remain low, and the exchange rate facilitates
imports of machinery and equipment.
The elevated level of uncertainty experienced during the recession, especially from a global
perspective, was a major hindrance to business investment. This uncertainty was not
confined to our borders: the link between uncertainty and business investment was clearly
evident in the economies of the United States, Germany and the United Kingdom.7
Yet heightened uncertainty is only part of the explanation. Although the recession in the
United States was more serious and Americans faced at least the same degree of global
uncertainty as we experienced in Canada, Canadian business investment in machinery and
equipment lags behind that of the United States (Chart 9). In 2009, Canadian workers had
access, on average, to approximately half the capital expenditures in machinery and
equipment and information and communication technologies (ICT) of those available to their
American counterparts. This is not a new phenomenon. In fact, between 1987 and 2009,
Canadian investment in machinery and equipment and ICT per worker represented, on
average, 77 per cent and 59 per cent, respectively, of similar American investments.
It is true that business investment started to recover at the end of 2009. Yet much progress
remains to be made: less than half of the extraordinary drop in investments of the last
recession have been recovered. With the increasing globalization of markets and the
demographic challenges we face, maintaining our standard of living will require improved
productivity. We must continue to innovate and to invest in promising projects.
Conclusion: perception vs. reality
We are fond of repeating the old adage: "An ounce of prevention is worth a pound of cure."
Recent experience expands the notion and shows that good prevention measures can also
make the cure more effective. Before the Great Recession, Canada was able to protect itself
by ensuring that it had room to manoeuvre to absorb the shocks of the crisis. The lessons we
learned from the past were reflected in the adoption of sound public policy frameworks. A
solid position, combined with the relatively healthy state of Canadian households, gave us
the flexibility to withstand the worst effects of the global shock.
Future economists studying the 2007-09 recession in Canada may find it difficult to go
beyond their first impressions and assess its true impact. Some will undoubtedly surmise that
the economic activity of this time did indeed reflect, not only the extent of the shock, but also
our ability to absorb it. The storm we weathered was a major one. We should not forget that it
could have struck at a time when we were more vulnerable and less flexible. Things could
have unfolded very differently, with disastrous results.
It is some comfort to know that, collectively, we were able to limit the damage. We must
proceed with the strategy that has served us so well: continue to learn from our experiences
to ensure better prevention and, when necessary, a better cure. For this, we must strive to
deal with the issues that confront us with strength and determination.
Thank you.




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