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It's interesting to see more people playing with what-ifs that don't involve a US recovery. The Americans have very serious structural problems to deal with, seem determined to repeat every mistake the Japanese made and have a major problem with corruption/elite self dealing that will need to be dealt with before they'll be able to make meaningful progress on bank insolvency. Fixing everything could take decades and nobody--not us, not the Chinese, not the Europeans--should count on the US leading the way towards recovery anytime soon.

Under the current conditions, I cannot imagine a particular scenario in which Canada recovers while the US does not-... and neither does Europe and other countries like India.... I do not see how can China have a relevant recovery under those circunstances .... in any case, unfortunately for Mexico, the US recovery is a necessary condition...


For the non-experts in the room. How can exports be producing negative growth? Don't exporters start exporting when that's the case?

I see this as an extremely remote possibility, but if the world were to go into an extreme depression I think Canada could recover on its own with a series of very radical measures.

If there is a serious and long lasting depression throughout the rest of the world, and maybe even a trade-disrupting military conflict, I think Canada could always revert to some sort of autarky. Obviously this would be a last resort, and likely to be a far worse outcome than any shared recovery, but I do see it as an important put on Canada's economic situation during a prolonged global crisis.

We have all of the natural resources necessary to run a functioning economy, functional banks, well-educated populace and well-developed industry. The problem is that Canada is small, and gets tossed around on the global markets, so we just end up riding commodity booms and US consumer demand. Now suppose that Canada's exposure to world markets becomes a net negative: constantly falling import prices and shrinking export markets are hammering our industries, commodity prices are low for the foreseeable future. At a certain point, it might be preferable to slap huge tariffs on imports and shift towards a closed economy. To be clear, this would be an extreme "survivalist" type measure, but would enable Canada to disengage from a global deflationary spiral. Fiscal and monetary stimulus would be very simple to carry out in a closed economy.

In general though I agree with Stephen's idea: recovery is most likely to come in the form of commodity demand (and hopefully demand for consumer goods) from China if they are successful in raising domestic demand, rather than consumer demand in America for cars etc. which seems far less likely to bounce back. Also, I don't see how the American economy can recover in the long term without balanced trade vis-a-vis China, so I see the rebalancing of the Chinese economy as the primary factor in establishing a sustainable recovery. Hopefully this would lead to increasing demand for Canadian goods besides commodities, and minimizes the effects of the commodity curse, but either way, we seem well-positioned for recovery.

Since others have commented on content: my preferred name for the '00 decade is The Noughties.

I think that recovery of US financial markets is a necessary condition for a Canadian economic recovery. Normalization of credit markets + increase in terms of trade sounds like a good recipe for a decent uptick in growth in 2010.

Greg - I'll second you on The Noughties.

That sounds right. It's hard to see how trade flows are going to recover if credit markets remain frozen.

I think I prefer Aughties to Noughties, since it isn't a homonym.

Very interesting article. As a Japanese, now I can understand what happened in Japan more clearly than before, as it is almost asymmetrical to what happened in Canada.

However, when I checked data, recent net export(NX) contribution to Canadian GDP growth on nominal basis was also negative -- -3.4% of 2002-2008 growth 44.6%. As real GDI can be roughly approximated by (real GDP) - (real NX) + (nominal NX), this means trade was dragging factor not only for real GDP, but also for real GDI. That is, although trade factor did improve GDI compared to GDP, it abated pure-domestic economy growth after all. Canadians seems to have bought pizzas a bit too much.

Sidenote: As for Japan, NX contribution to nominal GDP growth during 2003-2007 is mere 0.1%. I pointed out this fact to Krugman in his blog comment repeatedly, but apparently it didn't get through.

I should have written symmetrical, not asymmetrical.

To JC: Net export is export minus import. As you noted, export itself cannot be negative. But if you import more than you export, net export becomes negative.

Thanks himaginary (and since your helpfulness is contagious, Krugman is too large a figure to run a blog, which needs tending and immediacy --features that are in abundant supply here at WCI, where you can read the interaction of the comments...not like the isolated offerings at K's waiting to be reviewed for publication...it is a dead catalog)
Is there a reason why we have to stare down this particular interval (2002-2008)? My unorthodox approach is to view the GDP runnups in most countries as the bloatation of the housing markets germinated in the US, so "eatin pizza" (as cute as Noughties...don't ignore the multiple entendre missing in Aughties) strikes the wrong chord for me...but I can be revised...not like some other blogs.
It is early for the Canadian economy and what seems to me a significant penetration of a now faltering US economy at the center of a global downturn.

I wonder to what extent the relative health of our financial system compared to the disaster that is much of the rest of the world will help us? Does it make us less likely to fall into a 'deep' liquidity trap? Based on the astounding level of excess reserves at the Fed and it's close correlation with the increase in the monetary base, the US liquidity trap seems to be caused by insolvent banks hoarding cash against expected loses rather than individuals and firms hoarding cash out of conviction that there are no profitable endeavors in which to invest. Which makes me wonder: are zombie financial intermediaries eating Uncle Ben's brains? And if that is the case, the sooner Timmy grows a pair and channels Ash, the sooner monetary policy can start working again.

Ash for Treasury Secretary; he's one crazy zombie killing mofo.

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