Cheer up, sort of. The Great Slump is almost half over.
Let's get the terminology straight. There was the Great Depression of the 1930s. Then there was the Great Recession of December, 2007, to June, 2009. From the start of that recession until the economy resumes its normal long-term growth rate usually takes nine years. Those nine years can be called the Second Great Contraction or, more simply, the Great Slump.
Such are the descriptions offered by economists David Papell and Ruxandra Prodan for the U.S. Federal Reserve. The two looked at economic cycles during and after recessions caused by financial collapses. They wanted to know whether collapses permanently pulled down a country's GDP, and how long it took for normal economic growth to return.
Their answers: GDP does recover, but it takes nine years for the long-term growth rate to be reset. Which means the United States is approaching the halfway point of recovering from the Great Slump. Which means, by definition, a long period of economic difficulty ahead.
A long period of difficulty for the U.S. will spill over into Canada. This country's finances are in better shape, our housing market didn't collapse and our banking system remains sound. There's no Goldman Sachs that just announced a quarterly loss. But the U.S. remains by far Canada's biggest trading partner. What happens there crosses the border.
The Papell/Prodan paper is just one study. The authors could be too pessimistic. Maybe things will improve more quickly. But it's sobering to note that their conclusion about the stubborn difficulties of recovering from financial recession echoes the same findings of Kenneth Rogoff and Carmen Reinhart, whose book This Time Is Different underlined how hard recessions hit economies, and how long it takes to recover from them.
Today, not quite halfway through the Great Slump, the U.S. housing market remains in terrible shape in many parts of the country. For a lot of middle-class Americans, their house is their biggest asset. If their home's value drops, or if they worry about meeting mortgage payments, let alone lose their house through foreclosure, the result sends a shiver through their spending intentions.
There can't be a consumer-led recovery when the housing market remains so badly wounded. And it was a consumer-led spending spree in the first decade of this century in the U.S., coupled with loose financial regulations, political imperatives to cut taxes and Wall Street greed, that provoked the financial collapse.
As long as housing is down, consumer spending and confidence will be down. It's a terrible vicious cycle of deflated reality and expectations. The effects of the cycle ripple across the country, and cross borders.
So Canada is likely to experience at least somewhat lower growth than governments had been hoping for, even counting on, a year or so ago. They seemed to think that the recession, being officially over, would evolve into a sustained period of growth that would restore their finances and allow them the luxury of avoiding much fiscal pain.
Forget it. To the Great Slump in the U.S. is added the ongoing financial agony of Europe, where whatever the Europeans cook up seems never to be enough to underpin their banking systems, weak sister economies and the euro. Spain's debt got downgraded this week; the ratings agency put France on notice. Greece is already considered a lost cause waiting for a default. Portugal? Italy?
And China, the supposed saviour of the world economy, has just recorded much slower growth than before, and much slower than the world had counted on. Inflation there is a growing concern for policy-makers.
The idea that little Canada can sail through these storms unmolested is fanciful. We're going to take on water, the only question being how much and for how long.
Provinces that thought their deficits would disappear along a trend line projected in their last budgets will be disappointed. So will Ottawa. The hope that unemployment would steadily decline is likely to be dashed. The Great Slump, alas, is still with us, and will remain so for a while.