Philip CrossThe rhetoric on the campaign trail has amplified the noise about whether or not Canada is in a recession. But, as Philip Cross writes in the Financial Post, even looking at numbers beyond gross domestic product still paints a fuzzy picture.

By Philip Cross, Sept. 2, 2015

We still don’t know whether Canada is in a recession. After a steady drumbeat of claims that Canada had fallen into a “technical” recession in the first half of 2015, second-quarter GDP dipped 0.1 per cent, although it grew 0.5 per cent in June. Given the country’s steady job growth, there isn’t much more clarity about a possible recession today than there was before the six-month economic data were released on Tuesday.

A sure tip-off to the general lack of understanding of what a recession involves is all the emphasis on the idea that Canada was in a “technical” recession — as opposed to some other, non-technical type. The term is meaningless; all recessions are technical (so let’s lose the quotation marks). The economy is either in recession or it isn’t. And determining whether it is has to do with whether the economy’s performance meets certain technical criteria about the slump’s depth, duration and diffusion.

When people call it a technical recession, it’s a signal that they have either a political agenda or they lack expertise — implying that the modifier alleviates the speaker from any obligation to be objective or even knowledgeable about the technical criteria that warrant throwing around the R word.

And those criteria involve much more than the popular rule-of-thumb that counts it as two consecutive quarterly declines in GDP. Back-to-back declines are not necessary for a recession, nor are they sufficient to justify the label. An economy that contracts severely in one quarter, but rebounds slightly in the next, due to some unrelated factor — for instance, a good harvest — before plunging again, is clearly in recession. And not all consecutive contractions in GDP are proof of a recession: Prolonged electricity blackouts are especially damaging to economic growth, as Central Canada discovered in 1998 and 2003.

An economy that shrinks over the course of a year is a strong sign of a recession, no matter what the quarterly vagaries and causes. But recognizing a recession also means looking at how widespread the downturn was: Did it affect a range of sectors in the economy, or was it confined to a few? Did the drop in output spread into other macroeconomic indicators, such as employment?

There were two main factors dampening Canadian growth this year: One was the cyclical downturn in the oilpatch; the other was a collection of one-time events, ranging from Chrysler retooling its minivan plant, to a cold spring delaying agricultural and fishing activity. These one-time factors were ignored by the prophets of the recession narrative. The abrupt upturn in production measured in June confirms that much of the earlier weakness was the result of those irregular factors — not a slide into recession.

Another complication with calling a recession after a release of quarterly data like Tuesday’s, is whether the data will hold up after they are inevitably revised. The U.S. Commerce Department this year revised its first-quarter GDP data from negative to positive growth, and its second-quarter data from 0.6 per cent growth, at annual rates, to 0.9 per cent — a rather different economic picture. It’s a fact that Statistics Canada will issue a major revision to its GDP estimates in November, which will include conceptual changes to what is counted as output. It would be irresponsible and corrosive to any organization’s credibility to say today that the economy is in recession and then come back in a couple of months to say “Sorry. We changed our mind about that recession.”

And there are plenty of signs — beyond the expenditure-based GDP everyone chooses to focus on — that the underlying trend of the economy was improving during the second quarter. Jobs grew steadily. The federal government ran a budgetary surplus in the quarter (even discounting its sale of General Motors shares, rising tax revenue is not typical of a receding economy).

And the most telling indicator is the robust growth in our largest trading partner, reflected in our exports in June, with the U.S. rebounding from a shaky start to the year that reflected its own one-time factors of severe winter weather and a dock strike (the hysterical reaction to the slight dip in Canada’s first-quarter GDP was quite a contrast from the smarter U.S. commentary, where no one seriously suggested the first-quarter drop signalled a recession).

Factoring in all these variables, the forces dampening GDP so far this year were already dissipating as summer began.

The declines in GDP so far this year were microscopic; they could well be revised away (Statistics Canada just released a remarkable new database on revisions, which should encourage economists to better understand their importance). Given the certainty that revisions will always be made, it might even be worth questioning the wisdom in Statistics Canada publishing marginal declines in GDP unless it is absolutely certain the data is flawless: a 0.1 per cent drop in GDP receives a 100 times the attention that zero growth does (and 1,000 times more during election campaign), so the agency needs to be several times more certain that the economy really did shrink.

And for now, the data do not clearly show whether or not the economy is in recession. That may be frustrating to pundits who want a quick and easy answer, but that’s the price of being data-dependent: Often, data have a tendency to be ambiguous.

Philip Cross is the former chief economic analyst at Statistics Canada

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