Comparing recessions and recession projections

According to this story, there seems to be some disagreement about how the current recession will play out:

The issue is Mr. Carney's prediction last month that the recession will begin to recede by the end of the year, followed by a sharp rebound of growth averaging 3.8 per cent in 2010. While Bay Street accepts the premise of a recovery next year, the bank analysts expect growth at only about half that pace.

"There is a divide," said Avery Shenfeld, senior economist with CIBC World Markets, who will be attending today's gathering. "The financial community is closer to a rate of growth of 2 per cent [in 2010] than 4 per cent."

It's not clear to me that the divide is really all that important. The Parliamentary Budget Office has constructed 'low' and 'average' scenarios from the private sector forecasts, and I've graphed them along with the Bank's projection and with the paths of GDP in the two previous recessions:

The Bank's projection really isn't all that rosy over the next few quarters: it follows the path of the PBO's low scenario as well of that of the previous recessions up until 2009Q2.

When placed in historical context, it's hard to tell a story in which the Bank is diverging greatly from the private sector forecasts. Everyone sees a trough in the latter half of 2009, and all the paths are consistent with a recession that is shorter and shallower than the previous two episodes. At this stage, a 2 ppt disagreement about 2010 growth rates doesn't seem all that important.

Comments

[Marc]

The Bank and private sector forecasters have been roughly on the same page for the past couple years. That is, totally delusional about the future prospects of the Canadian economy given some pretty obvious signs.

To me, this graph shows that we are in for a rougher ride that will probably last through 2010, and some stagnation or jobless growth following that for a couple years. There is a big difference in the fiscal/monetary policy mix compared to those previous recessions, however, though I think the fiscal taps are just starting as provincial budgets get tabled, and another round of federal stimulus will come next year.

[Stephen Gordon]

I dunno. This time around, the Bank of Canada isn't raising interest rates and the various levels of government aren't under pressure to cut back spending as they go into deficit, so those are two reasons to believe that it won't be as severe this time around.

The Bank's scenario seems to be based on a terms of trade scenario: an initial big hit as they move against us, but they're expected to continue their upward path later on. That seems plausible - at least, to the extent that futures markets can be used as a guide.

To tell a story of a deeper and longer Canadian recession, it seems to me that you need more than a US slowdown to make it work; you need a home-grown factor that would have put Canada in danger of recession on its own without the external shock. In the past, the Bank of Canada was that source, but I'm pretty sure that they won't be in 2009.

One thing that could still do it is if the US kept contracting faster and longer than what people think. But that would then beg the question of how and why.

[brendon]

The small-scale model that I play around with agrees much more with the BoC - and you're right, sans an external shock, I don't see how the Canadian economy isn't going to rebound strongly in 2010 given stimulus spending + heaps of monetary stimulus and a lower dollar.

[Stephen Gordon]

Oh yes, the lower dollar: I had forgotten about that. It's sort of a sign of the times that a 20% depreciation can be overlooked...