Canada has officially entered in the first phase of recession caused by COVID-19 pandemic. The declaration was done by the C.D. Howe Institute’s Business Cycle Council on Friday.
The council said the economy peaked in February, just before drastic measures to slow the spread of the coronavirus that causes COVID-19 were implemented across the country.
There are no hard and fast rules for declaring a recession, although one rule of thumb used by economists is that an economy is probably in one if it has shrunk for two three-month periods in a row.
The council defines a recession as a “pronounced, persistent and pervasive decline in aggregate economic activity” based largely on GDP and the job market.
The COVID-19 pandemic is still less than two months old in Canada, but the council said Friday that the slowdown is already so swift and deep that it’s safe to declare a recession already.
In the council’s view, this is the first recession Canada has seen since the financial crisis that began in 2008. And the data suggests this one is on track to be quite a bit worse than that one.
The March jobs report showed more than a million jobs were lost in the month, while a preliminary estimate by Statistics Canada suggested the economy contracted by nine per cent in the same month. Those are the biggest one-month plunges in jobs and GDP on record in Canada.
More pain expected in April data
While the decline in March was record-setting, economists expect the data for April will show an even bigger drop, with the measures taken to slow the spread of the coronavirus in place for the entire month.
The eight-person council, which normally meets once a year in December, decided to meet twice last month, once it became clear that something dramatic was happening to Canada’s economy.
Stephen Gordon, an economics professor and member of the council, says the current economic slowdown is a great example of how the “two quarters of contraction” definition of a recession is too dogmatic.
In a series of tweets on Friday, he noted that if the slowdown had started in April as opposed to March, the entire first quarter would have been excluded. And since a rebound in the summer is quite plausible, that would make the current recession only one-quarter long — deep though it may be.
“This episode would fail the two-quarter test, even though it’s obviously a recession,” he said.
The current episode is a good illustration why the the "2 quarters of declining GDP" definition of a recession is not a hard-and-fast rule. 1/
— Stephen Gordon (@stephenfgordon) May 1, 2020
Statistics Canada reported Thursday that economic growth had stalled going into the crisis, with real gross domestic product essentially unchanged in February due to teacher strikes in Ontario and rail blockades across many parts of the country.
The official estimates of GDP for March and the first quarter of 2020 will be released on May 29.