Vancouver – Preliminary data suggest Canada entered a recession in the first quarter of 2020 with a February peak, says the C.D. Howe Institute’s Business Cycle Council.
The Council, comprised of Canada’s preeminent economists in the field and co-chaired by Steve Ambler and Jeremy Kronick, is an arbiter of business cycle dates in Canada. The Council typically meets annually, but also when economic conditions indicate the possibility of entry to, or exit from, a recession.
Due to the COVID-19 pandemic and the ensuring government shutdown that put a stop to much economic activity, the Council met on April 16 to review the case for calling the beginning of a recession in the first quarter of 2020 and the dating of the business cycle peak. They briefly convened again on April 30 following the release of Statistics Canada’s February GDP data.
The Council defines a recession as a pronounced, persistent, and pervasive decline in aggregate economic activity. This means that the Council looks at three dimensions: by how much did economic activity decline, how long did the decline last, and how broad was this decline across economic sectors. It looks at both GDP and employment as its main measures of economic activity. To measure the breadth of an economic contraction it uses two different diffusion indices.
At their meetings, the Council looked at Statistics Canada’s release of estimate GDP data on April 15 that showed a 9 percent drop in March GDP resulting in a quarterly drop of 2.6 percent–the largest one quarter drop in GDP on record. The Council agreed the magnitude of the contraction makes it extremely unlikely that any future adjustments will overturn the conclusion of a major drop in economic activity in the first quarter. They also reviewed employment data for the first three months of the year. Labour force survey data indicate a 1.5 percent drop in total employment in the first quarter, with a 5.3 percent drop in March alone.
Using the industry breakdown for January and February GDP data allowed the Council to determine what the index would have to be in March for entry into a recession. With government-enforced shutdowns of non-essential industries, and with employment falling in every industry except natural resources, members agreed it is highly unlikely the diffusion index will be above 50 for Q1 of 2020, thereby indicating more contracting than expanding industries.
Members agreed that by applying the Council’s methodology to the preliminary data available, Canada entered a recession in the first quarter of 2020.
Since GDP and employment growth were either positive or flat in January and February, and both indicators turned negative in March, the Council declared February as the cycle peak. The decision to declare a recession with a February peak is based on preliminary data available as of April 30, 2020. Members of the Council noted that further GDP revisions will occur which may impact the peak month, but are extremely unlikely to be significant enough to alter the recession call for the first quarter of 2020.
