MRO Magazine

Good news beyond the first quarter?

Ottawa, ON -- Decoupling was a popular term a year ago, used to describe how the rest of the world had unhitched fr...


April 17, 2009
By MRO Magazine

Ottawa, ON — Decoupling was a popular term a year ago, used to describe how the rest of the world had unhitched from the US economic problem. It is now rich fodder for late-show humour. The acutely synchronized recoil that output saw in late 2008 has erased decoupling from the vernacular, and sent global forecasts tumbling. To make matters worse, this is no one-quarter wonder.


Even more dramatic was the size of the hit to output. The mighty US economy fell by an annualized 6.3%. Pan-European output fell by 6.6%. The loss in Japan was a staggering 12.7%. For single-quarter performance, these numbers have few precedents in recent history.



First quarter, 2009 expectations are almost as gloomy. A further 5.7% contraction is forecast for the US. Japanese forecasters think their economy took an additional 11.7% pasting. Europe gets off a bit more easily, with a ‘mere’ 3.2% drop.


Few if any of the remaining industrialized economies will escape unscathed, and Canada is in an unfortunate subset of economies where the decline will actually deepen. Moreover, emerging markets are showing signs of continued duress. Back-to-back declines of this magnitude are extremely rare in the past 50 years, occurring just once in Canada, the UK and the US, but unheard of in France, Japan and others.


From this point, the path of GDP growth is less certain. Recent monthly indicators are very modestly upbeat, leading to talk of bottoming-out. Equity markets have rallied, further boosting sentiment. Some analysts maintain that the sharpness of fourth- and first-quarter contractions will itself provoke a positive, albeit tepid, response. Others look at the downward recent momentum and believe it will be sustained in the coming months. Which argument is most compelling?


Economic contractions always have both domestic and external ripple effects. One of those is the impact on employment, which always lags GDP movements. Compared with previous recessions, job losses, although sizable to date, still have a way to go. Using past movements in job markets as a guide, recent declines in economic output suggest that in general, in the industrialized world a further 1-1.5% reduction in employment is likely to occur.


Job losses produce further ripple effects. Consumer spending, the largest single share of the economy, weakens, especially for bigger-ticket and luxury items. Confidence is also affected, leading consumers to protect their cash and salt away as much more as they can. Default rates also rise, wreaking further havoc with already-stressed global financial institutions.


While this paints a bleak near-term picture, there is hope that the past will not exactly repeat itself. Firms are painfully aware of the ageing of the Western population, and some are hanging on to their more skilled employees. Others are instituting job-sharing plans or across-the-board pay cuts. All of these measures will stem job cuts and mitigate economic dislocation.


The bottom line? The current tumble in GDP is unusually broad and deep. We can all hope that the worst is now behind us, but history suggests that we may still feel significant effects. History also suggests that GDP recovers before those effects are complete. The sooner, the better.


Peter G. Hall is the Vice-President and Chief Economist for Export Development Canada. He can be reached at The views expressed here are those of the author, and not necessarily of Export Development Canada.