Canada’s vigorous GDP growth
Statistics Canada reported Wednesday that GDP rose 0.3 per cent in July on the heels of a 0.4-per-cent rebound in June. CBC Radio quickly dismissed the gains as “tepid” and signalling “a slight upward trend,” the polar opposite of the drama it attached to the recession supposedly signalled by a 0.1-per-cent dip in second-quarter GDP.
A cumulative gain of 0.7 per cent over two months represents significant growth of over four per cent at annual rates, so it deserves closer study than the CBC gave it. The sudden turnaround in GDP sheds significant light on the underlying sources of weak GDP earlier in 2015, which some rashly called a recession.
Growth was led by the oilsands, where output surged 17 per cent in the latest two months to a record $39.2 billion, smashing the previous high set in February by over $1 billion. The rapid advance in oilsands output puts a different slant on their retreat in the spring, which it has become clear was entirely related to unscheduled maintenance and encroaching forest fires that forced two plants to evacuate employees and stop operations.
Too many analysts looked at weak oil prices and falling oil output and simple-mindedly made the connection that the two were related. In reality, lower output reflected one-off factors interrupting a strong upward trend as new oilsands plants come online this year and next. Because of the high fixed costs required to build oilsands plants, their output only drops due to supply disruptions. Even during the worst of the severe 2008-09 recession, output from the oilsands never declined for even one quarter. Once you switch on these plants, you never willingly turn them off for an extended period. Analysts and pundits failed to incorporate this important fact into their analysis of lower GDP in April and May, so anxious were many to push the narrative of an economy in recession.
Manufacturing was the second major source of growth in July. Almost all of its increase originated in the auto industry. Autos had been the leading causes of the puzzling weakness in manufacturing earlier this year, reflecting Chrysler’s suspension of production at its minivan plant for extensive retooling. This plant is gradually returning to normal production over the summer. This is significant because the July growth in autos is guaranteed to be repeated in August, giving manufactur- ing another healthy boost from its largest industry.
The rapid recovery of GDP from its small decline early this year suggests that these losses were driven by onetime factors and not the cyclical weakness from a classic recession. A drop in output due to supply disruptions such as wildfires near the oilsands and retooling auto plants is akin to the drops in GDP that occurred during Ontario’s electrical blackout in 2003 or the ice storm in 1998. The required policy response to supply disruptions is totally different than during a true recession; patience is the only quality needed, not a futile rush to fiscal pump-priming.
People with a political motivation leapt at the opportunity to cry recession because of the perceived impact it would have on the federal election, as if the average person’s views on the economy are influenced by what statisticians in Ottawa say. Statistics Canada was in the reverse position in 1993, saying a recession was over (which proved to be the right call). At the time, this pronouncement unleashed a torrent of vitriol, as what the Spicer Commission called a “fury in the land” aimed at Prime Minister Mulroney was directed at StatsCan for one memorable day because it was perceived as following a narrative the government wanted. The point is that what statisticians said about the economy being in recession or not had no influence on what people thought then, any more than it does now. People form their own opinions of the economy based on their personal experiences, not by following the bewildering array of data that mesmerizes economists, the media and financial markets.
Commentators who rashly declared that a recession occurred this year revealed their political bias, not their economic acumen. The prudent and responsible course was to wait for StatsCan to confirm that the economy actually shrank — the very concept of GDP is due for a major revision later this year — while reflecting on what was really driving the decline.
The underlying course of the economy was not as weak as the headline GDP data suggested early this year any more than it is as strong as the fourper-cent annual rate posted over the last two months. Once the surge in auto and oil output passes, growth is likely to settle down to a slow but steady pace. This is the real message about how the economy is faring. Canadians can be excused for being confused how an economy said to be moribund one month ago can display such vigour the next. But as the adage says about economics, if you’re not confused you’re not paying attention.
Output from the oilsands never declined for even one quarter