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CURRENT ANALYSIS
July 2013
Is the Current Canadian Economic Recovery Really
Substandard?
A complaint about the current recovery/expansion period is the sluggish pace
of growth compared to earlier post-recession periods. A common graph used
to illustrate the point is to plot real GDP indexed to its pre-recession peak and
compare it to the average path of the economy for all other recessions back to
the 1950s. This is illustrated in Chart 1. This graph implies that the current
recovery is not only well below the average path followed by the Canadian
economy coming out of recessions since the 1950s but it hugs close to the
lower bound of the dispersion of growth through all of these historical periods.
Chart 1
Canadian GDP Cycle Comparisons
Index = 100 at recession GDP peak
150
Range of previous cycles since 1951
140
Average of 'recessions' since 1951
Current cycle
130
120
110
100
90
-4 -3 -2 -1 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28
Quarters from peak
Source: Statistics Canada, RBC Economics Research
Chart 2
Canadian Potential GDP Growth by Decade
Average annual growth (%)
6.0
Canada potential GDP growth
(RBC estimate)
5.0
BoC implied estimate*
4.0
3.0
2.0
1.0
0.0
1949-1959
1959-1969
1969-1979
1979-1989
*Growth in potential GDP implied by Bank of Canada output gap estimates
Source: Statistics Canada, RBC Economics Research
Paul Ferley
Assistant Chief Economist
(416) 974-7231
[email protected]
Nathan Janzen
Economist
(416) 974-0579
[email protected]
1989-1999
1999-2009
2009-2012
An objection to this comparison is that these earlier recovery/expansion periods reflect much higher trend or “potential” growth rates of the Canadian
economy. Potential growth is essentially an economy’s speed limit though it is
generally exceeded during recovery periods because of slack built up during
recessions. It can be approximated by summing trend growth in labour input
(e.g. hours worked) and trend labour productivity. In the current environment
of weak productivity and sluggish labour force growth, potential growth is
estimated at a historically low rate of around 2%.
As shown in Chart 2, there has been a steady downward trend in potential
growth from the 4½% to 5% realized in the 1950s and 1960s. Much of the
slowing reflects a sharp and persistent long-term decline in productivity
growth. Partial offset was provided, particularly in the 1960s and 1970s, by
stronger growth in the labour input reflecting a combination of the entrance of
the baby boom generation into the work force and sharply rising female participation rates. The baby boom generation is now beginning to reach retirement age, however, and female participation rates have flattened out after closing much of the gap with the male population by the turn of the century. This
has resulted in further slowing in potential GDP growth relative to past recessionary periods in Canada.
To try and control for this factor, we have lowered the average growth rate
derived from all past recovery/expansion periods used in Chart 1 by the difference between potential growth currently (about 2%) and actual potential GDP
growth during the historical periods (average of about 3.7% across all recession recoveries since 1951.) As shown in Chart 3, this modification suggests
that the current recovery, though still very sluggish, is actually not markedly
different from past recovery/expansion periods once the underlying lower potential growth numbers are taken into account. A lion’s share of the underperformance implied in Graph 1 can be explained by the lowering of potential
CURRENT ANALYSIS | JULY 2013
Chart 3
Canadian GDP Cycle Comparisons
Index = 100 at recession GDP peak
150
140
130
Range of previous cycles since 1951
Average of recessions since 1951
Average of previous recessions adjusted for slowing in potential GDP growth
Current cycle
120
110
100
90
-4 -3 -2 -1 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28
Quarters from peak
Source: Statistics Canada, RBC Economics Research
Chart 4
US GDP Cycle Comparisons
Index = 100 at recession GDP peak
150
Range of previous cycles since 1951
140
130
growth. In other words the sluggish growth in the current recovery/
expansion phase of the business cycle is more due to weak trend or potential
growth, which in turn is related to historically low gains in productivity and
the impact of pre-existing demographic trends on labour force growth, rather
than cyclical weakness associated with the 2008/09 recession.
Historical periods adjusted to current trend growth
Average of 'recessions' since 1951
Current cycle
120
110
100
90
-4 -3 -2 -1 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28
Quarters from peak
Importantly, the slowing in potential GDP growth, resulting from longerterm demographic trends and slowing productivity growth, is not just a Canadian phenomenon. The economic recovery has lagged past performance in
the US even more than in Canada. In part, this has reflected fiscal restraint as
well as the fact that disruptions to US housing and credit markets were much
more severe in the recession than in Canada; however, slower potential
growth has also been a factor in the underperformance of the US recovery.
Accounting for stronger potential GDP growth in prior cycles, in the same
way as described above for Canada, suggests that about 70% of the underperformance of the US economy during the economic recovery can be accounted for by slower potential GDP growth (Chart 4). This is similar to the
conclusion reached by the Congressional Budget Office (CBO) in a November 20121 study that “about two-thirds” of the underperformance of the US
economy in the current recovery/expansion period reflects lower U.S. potential GDP growth rather than cyclical weakness. Similarly, Stock and Watson
(2012)2 found that, while cyclical factors have played a role, “most of the
slow recovery in employment, and nearly all of the slow recovery in output,
is due to a secular slowdown in trend labor force growth.”
Source: Bureau of Economics Analysis, Congressional Budget Office, RBC Economics Research
Canada’s current recovery/expansion does look substandard relative to
growth in earlier periods of post-recession growth; however, this is more the
result of the overall potential growth in the economy ratcheting lower steadily from the 1950s. This in turn reflects the more fundamental problem of
slowing productivity growth and more recently slowing in labour inputs
rather than transitory fallout from the 2008/09 recession.
1. CBO (2012). What Accounts for the Slow Growth of the Economy After
the Recession? http://www.cbo.gov/sites/default/files/cbofiles/
attachments/43707-SlowRecovery.pdf
2. Stock and Watson (2012). Disentangling the Channels of the 2007-2009
Recession. NBER Working Paper No. 18094.
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CURRENT ANALYSIS | JULY 2013
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