Great Recession Versus Great Depression for Canada

With all the doom and gloom with respect to slowing Canadian economic growth and talk of secular stagnation, it is useful to look at a comparison between the last few years in Canada with what transpired during the Great Depression.  References are often made that the 2008-09 Recession and its aftermath is a period comparable to the Great Depression.

An interesting comparison to this effect for the United States, the UK and Europe was made in a Forbes article by Neil Howe some time ago.  This comparison concluded that the Great Depression was more severe early on than for the current downturn but the present downturn has been longer lasting suggesting we perhaps should call the current period among other things the “Long Depression” or perhaps “The Second Great Depression.”

I’ve provided a slightly different comparison for Canada using real GDP growth rates and unemployment rates for the 1928 to 1935 period.  The real GDP numbers for the Great Depression are those constructed by Urquhart and Green while the unemployment rates were constructed from labour force data from Historical Statistics of Canada.  The 2008 to 2015 numbers are of course from Statistics Canada (with unemployment rates for 2015 being a 5 month average and the real GDP growth rates being the first quarter).  Naturally, any comparisons made need to be qualified by potential differences in the manner in which data was collected and compiled during these two time periods. Pre World War Two macro data for Canada (and other countries) definitely exhibits more volatility than afterwards.  This could be to differences in data quality or perhaps it is the stabilizing effects of more activist government fiscal and monetary policy since but that is a debate for another time.

Nevertheless, as the two figures show, when compared to the United States and Europe, Canada has had a relatively benign Great Recession experience in aggregate (though some central Canadian residents may beg to differ).  When compared to the Great Depression, at no time have Canadian unemployment rates since 2008 soared anywhere near to the peaks of the Great Depression though interestingly enough, our unemployment rates going into the Great Recession were higher than those going into the Great Depression.  By Year VIII (1935 versus 2015) the unemployment rate was still more than twice as high during the Great Depression Era.  During the Great Recession era, the unemployment rate peaked at 8.3 percent in 2009 but has since declined very slowly and currently stands at 6.8. During the Great Depression, the unemployment rate peaks at 19.3 percent in 1933 and then reaches 14.2 percent by 1935.

With respect to real GDP growth rates, during the Great Depression Era the economy shrank for four consecutive years and between 1929 and 1933 the Canadian economy shrank 30 percent.  During the Great Recession, real GDP shrank about two and one half percent but then grew in every year since (with the first quarter of 2015 posting a decline but the year is young).

Regional variations aside (slow growth in Ontario, a resource boom in Alberta), the overall performance of Canada’s economy during the period since 2009 in comparison to the Great Depression could be termed the “Long Slowdown” or perhaps “The Long Winter's Nap” given the slow rate of decline in the unemployment rate and the lower rates of real GDP growth especially relative to the 1997-2007 period.  It is not comparable in terms of relative impact to what occurred during the Great Depression (imagine a 30 percent drop in real output after four years and an unemployment rate of nearly 20 percent). The current slowdown is real and protracted and a concern but in Canada it cannot be considered on par with the "Great Depression."

 

Comments

[Nick Rowe]

Thanks for this post Livio. This is stuff I need to know.

It mostly confirms what I suspected. The one (two?) big surprise is the very low unemployment and very high growth in 1928. Was there a massive boom, compared to previous years? Was the high GDP growth mostly due to immigration? Is that extremely low unemployment rate credible, or was it maybe measurement differences?

[Livio Di Matteo]

Nick:
Actually the 1920s opened up with a large recession but then there was a period of very high growth - the so called roaring twenties. However, i think measurement differences may play a role - the "official" GNP/GDP numbers go back to 1926.

[Nick Rowe]

Thanks Livio.

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[Erik Lund]

Some preliminary points
i) Doom and gloom talk about the Canadian economy is perfectly appropriate. We're a country of the old, and this just can't keep on going. I repeat: this cannot keep going. We're running out of freaking beef and eggs, people. There's a reason we used to have famines. It's not just some quaint thing that Medieval people did for fun.
ii) "Secular stagnation" is an idea from 1938. (1939, if you're like me and picked up the idea from The Economist's "A Correspondent in New York.") The story that we are experiencing now is what the North American economies experienced in 1938--9 is completely and utterly the opposite of a "doom and gloom" story. Because the 1938/9 story ends in September of 1939 with the beginning of thirty-five years of robust economic growth. It's like turning a key or pressing a button. If we could just figure out what button was pressed, we could do it again!

Dumb comment of the kind usually reserved for Nick Rowe's posts

Does anyone else find it odd that the eight year comparison begins in 1928? Or even 1929? The canonical beginning of the Great Depression is 29 October 1929, and while there were already signs of economic softening in 1929, the event most directly comparable to the failure of Lehmans is that of Creditanstalt on 11 May 1931. An eight year period comparison 1931--9/2009--2015 would take in the recession of 1938, which is the event that comes to my mind in connection with the late downside GDP numbers.

This is obviously slightly different from the claim that the "Long Recession" has so far lasted longer than the "Great Depression" and shows signs of being more damaging because of its longer run; but since the "Long Recession" isn't over, it's a bit premature to be proclaiming victory!

As for the data, I eventually rustled up this (not from StatsCan, because they're just intimidating): Year/change GDP; 1936/+5.39; 1937/+9.41; 1938/+2.61; 1939/+5.96. Unemployment rate: 1936/16.7%; 1937/12.5; 1938/15.1; 1939/14.1.

It is the surprising depth of the 1938 dropoff --a global, and not just American phenomena-- followed by the weakness in 1939, made less distinct in the annualised data by the pushing of that mysterious button, whatever it could have been, on 9 September 1939, that drew attention to Hansen's thesis. If the "recovery" of 1935--8 was just a "dead cat bounce," something was deeply, deeply wrong with the Canadian (as the world) economy.

But then some crazy, mysterious thing happened at 4:40 in the morning, central European time, on 1 September 1939, and everything changed, and it turned out that Hansen, with his crazy theory that secular stagnation could only be ended by only "permanent government deficits" to maintain demand, was wrong! Hurrah!

[Bert Schlitz]

America's dropoff was already ending by the spring of 1939 and 2nd/3rd quarter growth accelerated rapidly. There wasn't much deficit spending either. During the war investment spending was nationalized and everybody capitalized for the war effort.

[Erik Lund]

Bert:
The American economy did, indeed, recover in late 1938 --but only to a point. I took a quick stroll through my press coverage notes, but mainly came away with the realisation that The Economist was basically always pessimistic in those days. So I will direct you instead to Wikipedia. You'll find there the claim that a substantial spending public spending package played a significant role in the recovery.

In this vein, I direct you to the 1939 Federal budget. (Receipts, 78.2 billion; outlays, 114, equal to 3.1% of GDP). You will note that Allied armaments purchases began in the spring of 1939, and really ramped up after September. Nevertheless, employment did not reach 1937 peaks until the outbreak of war.