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That the C$ depreciated proves the poinit that net exports had something to do with the whole mess. That the cure worked does not negate the malady.
INvestment drops for a reason.

I was surprised that net exports played no role. But they might have played an indirect role. When the *demand* for our net exports fell, that caused a fall in the real exchange rate/terms of trade, rather than a reduction in the amount of net exports. (I'm thinking especially oil prices, for example). That fall in the real exchange rate reduced Canadian real incomes so consumption demand fell, and also made investment less profitable, so investment demand fell. Might that make sense? Sort of like Stephen's old beer and pizza post.

When we talk about "typical" perhaps it's worth looking at savings rates as well. The last recession, on that front, was not typical at all.

Great work. Sure helps to get a few facts to base my airy-fairy theories on.

I have a few questions, since you seem to be blowing my idea that our recession was caused by a decline in exports to the U.S. out of the water. An increase in net exports could be a reduction in exports, accompanied by an even greater reduction in imports. Does that work? Do you have data on what sort of exports increased?

I might have to fall back on the idea that firms reduced investment in anticipation of a decline in sales. Does that make sense?

Paul: oil and gas prices tanked and the sector freaked out and started cancelling projects in a big way. Off the top of my head I can think of four or five bitumen upgraders, a refinery, and oil sands expansions that were cancelled. So that kinda fits your fall back position...

i too would like to commend you for a great job.
@ paul. i tend to hugely buy your idea that firm resulted to lesser investment. i tend to agree because businesses are guided by the optimistic or pessimistic tendencies when making decisions on investment. the aggregate of these microeconomics decisions are the ones that impact on the macro economic variables

Paul: Yes, both import and export volumes fell, with imports falling faster than exports. And that fits in with falling investment as the driving force, because much of our machinery and equipment spending is on imports.

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Great post. Very interesting and informative. I really enjoy seeing the numbers broken down in this way, though it does make me wonder - are the numbers for these graphs available online and if so where can they be accessed?

So, what are the lessons here? Since a lot of machinery is imported, could we say:

1. Perhaps the government should change the rules on mortgages at the first hint of a recession - increase amortisation terms and reduce down payments, then reverse these policies once recovery firmly takes hold?

2. The B of C should be more aggressive in printing money when a recession starts, to lower the C$ even more than it has, and to ignore the inflation target?

Nick H: Sadly, no, the data are not freely available the way they are in the US; that's a big reason behind why I take the time to do posts like these. Unless you have an affiliation with a university or some other institution that had paid to subscribe to StatsCan's database, you can't get these numbers without paying for them.

It sounds from the comments like reduced invesment spending would largely reduce imports, which, as far as I can tell, shouldn't have much negative impact on Canadian GDP, since a lot of investment spending flows out of the country. So then wouldn't the drag on GDP from reduced exports outweigh the drag from reduced investment (because a lot of investment spending occurs outside the country anyway?) I may be a bit confused on this issue. I may also be overexaggerating the extent to which investment spending occurs outside the country. It would be nice to see net exports broken down as exports and imports.

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