There have been three key dates for Canada over the past 15 months. The first was in July 2008, when world commodity prices peaked. The second was Sept. 30 when stock markets collapsed. That was when the recession really began for Canada. The third was in February of this year when international raw material prices bottomed out.

The impacts of those three dates appear most clearly in two areas: real gross domestic product (GDP) and the value of the Canadian dollar. While Canada experienced weak GDP in the first three quarters of 2008, it was really only in Q4 of last year (-3.7% annualized), Q1 (-6.1%) and Q2 (-3.4%) of this year that the recession truly sank in.

This recession versus the early 80s and 90s

An interesting feature of the recession in Canada is that it may prove to be not as severe as some other major downturns over the last several decades. For example, there were six straight quarters of decline from mid-1981 through the end of 1982. And there were four straight quarters of decline in the early 1990s. The graph below shows those recessions.

Canada entered the recession in better shape on a number of counts than most countries: a stronger financial sector, a good level of housing starts, high office occupancy rates, solid government balance sheets and buoyant labour markets. These served the country well in the recent hard times. Many of these indicators have been put to the stress and are now less healthy than they were, but that was to be expected. (story continued below)

Currency implications

During the period of most difficulty, from early October to when world commodity prices started to pick up again this spring, the value of the Canadian dollar dropped dramatically from the low 90-cent U.S. level to the high 70-cent range. Global worries about the financial system meant that investors everywhere were taking refuge in the U.S. dollar.

Since February, however, the aversion to risk has eased somewhat and commodity prices have been strengthening, lifting many currencies versus the greenback. In the currency charts below, the resource-based economies have seen particular rises in their exchange rates. Included in this listing, besides Canada, would be Australia and Brazil.

Longer-term, there is likely to be some avoidance of U.S. greenback holdings due to an American trade deficit that is bound to worsen again as recovery proceeds and also as a result of the massive amount of deficit spending that Washington has been taking on.

The consequences

The consequences are many. For starters, a higher-valued Canadian dollar keeps the price of imports down. This holds the inflation rate under wraps. Furthermore, it is the low inflation rate that is allowing interest rates to be held at minimal levels, providing stimulus for overall economic activity. In the latest quarter, consumer spending increased (+1.8% quarter to quarter annualized) after falls in each of the two preceding quarters.

While the Canadian dollar has moved into the low 90-cent range over the last three months, it still remains down slightly versus what it was at this time last year. From October 2008 through early 2009, the Canadian dollar plummeted to the high 70-cent U.S. range. Since then, it has re-appreciated by 15%. No doubt about it, this plays havoc with strategic planning by manufacturing firms and others engaged in export sales.  

Currency movements have implications for tourism, trade, the strength of foreign competition and relative investment opportunities with respect to other countries. In turn, this has implications for hotel/motel construction, plant construction and office/retail building markets.