Is the Dreaded Double Dip Near?

Statistics Canada has released the Canadian economic accounts with GDP estimates for the second quarter of 2011.   Overall, real gross domestic product or GDP declined by 0.1 percent in the second quarter following a 0.9 percent increase in the previous quarter. 

The big driver of the drop was the decline in exports as domestic demand was up.  While business investment in plant and equipment was up and consumer spending on goods and services was also up, exports declined 2.1 percent and oil and gas extraction decreased 3.6 percent (due mainly to maintenance shutdowns and Alberta wildfires).  Businesses are piling up inventories, which means that demand is slowing (or if you are an optimist they are piling things up to meet the anticipated coming boom in demand but not likely given the tight inventory management most companies follow today).  When converted to an annual rate, real GDP in the second quarter declined 0.4 percent while it was up 3.6 percent in the first quarter. 

 Figure 1

Source: Statistics Canada

 

 

 

 

This decline in the second quarter of 2011 comes before the economic turmoil, uncertainty and trauma of the summer in terms of sovereign debt issues and the stock market drop.  The burning question is whether this finally signals the start of another recession - the so-called double dip recession given it follows the previous one so closely.  If the third quarter of 2011 shows another decline then we will technically be in another recession as recessions are traditionally defined as two consecutive quarters of negative growth.  What are the odds of this happening?  Pretty good I think actually given that the big driver of the second quarter real GDP decline was the drop in exports.  After a period of robust recovery from the third quarter of 2009 to the second quarter of 2010, they appear to be weakening. 

 

 

Figure 2

Source: StatistIcs Canada

 

 

Exports make up a third of our GDP and the weak performance of the American and European economies over the course of the summer does not bode well for a pick-up in exports in the third quarter.  The third quarter will also be marked by a slowdown in U.S. output due to the impact of Hurricane Irene on the U.S. eastern seaboard though that might be balanced by reconstruction activity in the fourth quarter. Repent, the dreaded double dip may finally be at hand.

Comments

[Simon van Norden]

I may be slightly obsessed, but posts like this always make me worry about data revision. Livio is taking the latest StatCan release as "hard data"; in fact it is an initial estimate that is subject to revision. I can't help wondering whether this makes a difference.

This gives me an excuse to play with the new Statistics Canada RTDAT tool (for a link, see http://expertise.hec.ca/simon_van_norden/original-vintage-data-sources/). It can give me all initial estimates of real GDP growth as well as the revised estimates four years later. So I'm wondering, conditional on seeing a first estimate of GDP (v1992067) growth (Q/Q) at least as weak as the current figure, how often (as of today) did we conclude that we were in a "recession" (two consecutive quarters without growth in real GDP)?

RTDAT will give me initial estimates back to 1993Q1. During that time we've seen two recessions according to the above definition (1995q2-q3 and 2008q4-2009q2) but we've also seen three quarters (2001q3, 2003q2 and 2008q1) where initial growth estimates were <0 but these were followed by quarters of positive growth. Put another way, in the past 17 years, of the 5 times we initially thought growth had gone from positive to negative, we've seen two recessions.

(Actually, I'd get very similar conclusions if I ignore data revision; it doesn't seem to be a big issue in this case. More important are the odds of getting a second bad quarter conditional on getting a first one.)

[Nick Rowe]

Hmm. Stephen came very close to forecasting/backcasting this one. Stephen's forecast was +0.1%.

Most people seem to think that the Bank of Canada will be on hold for quite a bit, after this. I'm wondering if it ought to cut, given the troubles in Europe.

[Paul Friesen]

I think a double dip recession is very likely. U.S. government cutbacks in the face of a liquidity trap are almost the worst possible policy, and this absurdity is sure to affect us. The bank of Canada also has very little it can do to counteract the hit we can expect to exports because interest rates here are already so low.

The only brightish spot I can see is that Harper and co. do not seem to have completely ruled out more stimulus. I think we may well need it.

[Andrew F]

The austerity in the US seems more and more like a re-run of the Great Depression. All we need now is a currency war and protectionism. I don't think the latter is likely, but the former is mostly already in place. Maybe a currency cold war, esp. between China and the USA.

[Determinant]

The thing I wish the government would acknowledge is that much of the Canadian economy is shackled to the US economy. Manufacturing and services in particular, call centres being a poster-child for the latter.

I can easily take you on a random walk through the industrial or export-service section of any city and show you how many companies are dependent on US exports for their business. It would be 90%. This isn't esoteric theory, it's just knowing where the sales orders come from.

If the US is weak then we will be weak, our economy will have one hand tied behind its back. To expect it to perform miracles of growth in this state is silly.

[Paul Friesen]

Determinant: I certainly agree that the U.S. market is very important, but I do not think that U.S. weakness means that we necessarily need to have a recession too. We could avoid it with good policy. I am not very sure that we will get good policy though.

The thing to understand is that if something (e.g. U.S. exports) demands less stuff, something else needs to demand more stuff if we are to avoid unemployment. That seems blindingly obvious, but many commentators these days don't seem to get it. In a normal recession, the central bank gets the housing sector to demand more stuff by reducing interest rates. We have very little room to do that now, though.

But we could still end any recession in a few months using a real fiscal stimulus. That is what China did in late 2008. They didn't meet the huge drop in exports to the U.S. with despair. They met it with decisive, effective policy in the shape of a stimulus of almost 15% of GDP. They provided subsidies for their own people to buy their own goods. They invested massively in infrastructure. And their recession was history 6 months later. Much U.S. demand was replaced by domestic demand, and that is now self-sustaining.

Yes, the U.S. is a major, important market for us, but we could replace losses there with domestic demand in the same way.

[Andrew F]

During the last recession, I advocated government getting into the habit of having a pipeline of infrastructure projects on hand, with all the planning, design, consultation, EAs, done ahead of time, then put on ice for 18 - 24 months before being put out to tender. When the economy falls into recession, the government can then pull the trigger on the whole pipeline at once and put it to tender right away. Hopefully you can get work started within 4 - 6 months.

Canada has a huge infrastructure backlog. I think there are plenty of opportunities for infrastructure investment with high rates of return. Given that our government has access to 10 year money at less than 3%, we're crazy not to take advantage of it.

[Paul Friesen]

Andrew: I think that is a good suggestion. Here's another I've made before.

We have already taken control over monetary policy out of the hands of elected officials and given it to an independent central bank. Decisions over monetary stimulus are made by appointed officials, who are free to base decisions a long-term, objective look at what the economy needs, as opposed to what could give a short-term blast of growth before the next election.

I think it's time to do the same with fiscal policy. Give an appointed body control over a key tax rate - in Canada, the GST seems the obvious choice. Give them a mandate to bring down the debt-to-GDP ratio over the long term, but to assist the central bank in keeping the economy at capacity over the short term. The GST rate would fluctuate the way interest rates do now. In a situation like this, the rate would drop to stimulate the economy, although in normal times, it would be held at the rate necessary to balance the budget or run a slight surplus.

This would remove the temptation elected officials always face to keep spending up and taxes down by running a deficit. If they increase spending in normal times, the independent authority would raise the GST to compensate. Yet the system would allow a rapid dose of stimulus if needed.

[Determinant]

@Paul:

OK, but it is highly unconstitutional. Taxation by appointed officials? That is a non-starter. The Government has the authority to spend money because it is elected, you cannot disentangle the two.

Second, in most Canadian order books US orders are easily larger than Canadian orders. Firms susceptible to a US downturn will have to replace 50 - 90% of their orders through your system just to keep the economy where it is. So how much is that sort of stimulus going to cost and will we run into the long-run budget constraint if we try it?

Third, I wouldn't worry so much at a Double-Dip. Mostly because it doesn't matter. The period since 2008 can only be described as Stagnation. A double-dip is just more of the same.