The beer and pizza theory of the Canadian recession revisited

Philip Cross at StatsCan summarises the recent recession:

[T]he 2008-2009 recession in GDP was driven more by prices than volume in Canada, while in the US it was driven more by volume than by prices.

This is the story I told way back in March of 2009, in a post that more pundits would have done well to read:

Over the past weeks and months, there have been any number of articles about how and why Canada fell into recession. But the real story has little to do with declines in housing prices or consumer debt loads. It's all about the terms of trade.

But here's the thing: that decline looks very much like a one-time episode. The [Bank of Canada's] weekly commodity price index has been holding more or less steady so far this quarter. The terms of trade may not be contributing to GDI growth for awhile, but at least it's stopped contributing to its decline.

Here is the updated graph of commodity prices and the terms of trade, using the Bank's new chain-weighted commodity price index:

As long as commodity prices continue to recover, so will the Canadian economy.

Comments

[asp]

And? Will they?

[Kosta]

Thanks for the update Stephen, it's a great point about an important driver in the Canadian economy.

[Just visiting from Macleans]

I found the chart on your second link Fisher BCPI - Nominal Commodity Shares by Major Group quite interesting and telling. Even though the most recent weightings were not updated since 2006, with energy accounting for roughly 60%, one has to think its weighting has even increased further since then (both in terms of price and volume).

Q: Do you have any similar graph/blog showing how the economy has changed over the same period in terms of GDP weighting by sectors - ie commodities, manufactured goods, services etc?
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O/T - FYI. Interesting debate on TVO's The Agenda Mon. Night. Ideology Part II: Time to Pay More Taxes?. A. Coyne was putting forward basically the same arguments shared on this blog - arguing for continuing lowering of corporate taxes as a means to increasing productivity. He connects his dots around 27:20 on this video.

As I have mentioned before here, the problem I have with this argument is: when do you decide that your taxes are already low enough, and how do you know it's not already time to focus on other means of increasing productivity? A q that has largely gone unanswered.

Coincidently, Wed's Lang and O'Leary Exchange had as a guest Greg Wiebe, Tax Division, KPMG (starts 36:20), who compared compared tax rates across countries. Canada ranked 2nd worldwide (behind Mexico). And with HST being implemented now in BC and Ont, and with further planned cuts (assuming the Conservatives remain in power - target 25%), a lot of the heavy lifting has already been done. In other words, to get further gains in productivity (42:30)- the biggest leverage remaining is elsewhere (ie improving management I would argue - he notes no productivity improvements yet have been seen despite very favourable tax regime).

[Rick]

When you talk about commodity prices and the relation to GDP you are referring to Canada as a whole.... but not really representative of the aggregate average household income.

As long as commodities are recovering there is going to be more revenue collected by governments and less pressure to cut public sector spending.... which probably (directly or indirectly through some sort of subsidies) account for more than 65% of the employment in this country.

The problem though, is that if we are going to increase the value of the dollar in step with this rebound in commodoities, especially if the US continues its effort to reduce its trade deficit, we are going to need to develop a private sector in place of manufacturing that does more than just extract raw materials... otherwise a very pronounced wage gap is going to creep in just as it did in the US where you are either a government employee, a beneficiery of some sort of subsidy or service contract with a company that has a subsidy, or working minimum wage.

Without a shift into research, technology and development of new business all this easy capital is going to be inefficiently distributed and we are going to end up with our own bubble/debt crisis.

[J. Powers]

Stephen,

Thanks for this new peek at the recovery. Maybe I'm misreading the conversation, but it seems to me that the central question is about how to measure the recovery. If we use housing prices, a pretty compelling story emerges. I've seen commentary suggesting that outside housing, the Canadian economy has seen basically no growth. And intelligent commentary like the following does little to quell worries that free money has inflated housing prices:

http://www.creditwritedowns.com/2010/04/bubblicious-mortgage-deals-canadian-version.html

Your suggestion that we can define the recovery as a function of commodities prices is also pretty compelling. But that makes me worry, too, because of this:

http://www.creditwritedowns.com/2010/05/the-commodities-con.html

Basically, it seems that any attempt to define either a recession or a recovery in terms of asset prices of ANY kind is doomed to suffer from the same uncertainty. In a world where (1) money can be borrowed for free and (2) asset prices are substantially (if not entirely) driven by derivative financial instruments that have no direct connection to the underlying assets themselves, it seems foolish to put any trust in asset prices. Too much noise, not enough signal.

What's the picture if we look at employment and income?