Canada’s First-quarter GDP Decline was a Rare Event
Alex Carrick
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Seed Newsvine |
First-quarter 2008 real (inflation-adjusted) Gross Domestic Product (GDP) in Canada was -0.3% (on an annualized basis) versus fourth-quarter 2007. The negative figure was quite a rare event. It was only the third time in the past sixteen years that GDP has declined, on a quarter-to-quarter annualized basis.
The other two occasions of negative performance happened in second-quarter 2003 (-0.5%) and third-quarter 2001 (-0.6%). The third-quarter 2001 drop was in the midst of the dot.com collapse and was just after the 9/11 World Trade Center terrorist attacks.
1995 also a Weak Period
There were also two consecutive quarters of virtually no growth in mid 1995, with the second quarter of that year at 0.0% and the third at +0.1%. Housing starts in Canada in 1995 were seriously depressed, much like they are now in the United States. The annual level of housing starts in 1995 reached only 111,000 units. Compare that with an annual average figure of almost exactly double that amount (223,000 units) over the past six years and annual levels that were more than 200,000 units in each year during the same time period.
The most serious periods of economic decline in Canada in the last thirty years occurred in 1990-91, when there were four straight quarters of decline (Q2-90 through Q1-91), and in 1981-82, which saw six straight quarters of decline (Q3-81 through Q4-82).
Astonishing Levels of Inflation in Two Earlier Periods
Those two periods were what taught central bankers just about everything they know, and now put into practice, about managing economies. The year-over-year level of inflation in 1991 versus 1990 was +5.6%. In 1981 versus 1980, it was a hard-to-believe +12.4%. Interest rates had to be correspondingly high to rein in the excess. The approach ever since has been to increase the supply of money in small incremental steps and to pre-emptively raise interest rates to shoot down inflation when it starts to soar.
Is “Stagflation” a Concern?
Central bankers go grey the quickest when growth has stalled but inflation is high – i.e., “stagflation”. The chief weapon in their arsenal is interest rates, but under such circumstances, rates have to be kept high to combat inflation, rather than lowered to stimulate growth. Some analysts are concerned that the U.S. economy may soon find itself in this situation again.
Inflation in Canada is quite restrained at only +1.7%. In the U.S., the latest Consumer Price Index (CPI) increase was +3.9% year over year, but the “core” rate was only +2.3%. Interest rates in both countries have been lowered about as far as they can go.
Inflation is Coming into North America from Outside
The danger is that inflation is coming into North America from outside sources that cannot be controlled. High world demand for food products and raw materials, combined with speculative buying to ride the wave of commodity price increases, is creating some havoc. This is especially true with respect to oil and gasoline prices.
Both Canadians and Americans are waiting for the U.S. to ride out its problems in financial and housing markets and to get back on a solid growth path. Low current interest rates and fiscal stimulus in the form of tax rebate checks will make this the most likely scenario. However, deviations from this desired outcome are not impossible to imagine and few of the consequences are particularly appealing.
