Report A: ECONOMIC REVIEW AND OUTLOOK

TOPIC BOX
A BRITISH COLUMBIA RECESSION?

A BRITISH COLUMBIA RECESSION?

A decline in real GDP, even a small one such as the estimated 0.5 per cent drop in 1998, raises the question of whether a recession occurred. A frequently cited "rule of thumb" is that two consecutive quarterly declines in real GDP constitute a recession.

In fact, the two-quarter rule of thumb provides only a partial and sometimes incorrect answer. In British Columbia's case, even the use of the rule of thumb is complicated by the absence of timely quarterly provincial GDP data.

Determining whether a recession has occurred or is underway is a fairly complex matter. The National Bureau of Economic Research, the organization responsible for business cycle dating in the United States, states that it:


" . . . does not define a recession in terms of two consecutive quarters of decline in real GNP. Rather a recession is a recurring period of decline in total output, income, employment and trade, usually lasting from six months to a year, and marked by widespread contractions in many sectors of the economy".


This definition implies that determining whether a recession has occurred requires examination of three aspects of economic decline:

  • Depth: How deep is the decline in economic activity?
  • Duration: Is the decline in economic activity sustained for more than a couple of months?
  • Diffusion: How widespread across sectors and industries is the economic decline?

It is evident that some areas of the British Columbia economy were in recession in 1998, judging by the performance of various indicators and analysis of the quarterly patterns of activity. The resource and construction sectors stand out as areas in recession, with sharp declines in forestry and mining shipments, exports, housing starts and sales, and related employment in the resource and construction sectors.

However, the economy performed better in some other sectors. Overall employment was up, despite the declines in construction and resource-related jobs. Within construction, non-residential activity appeared to increase slightly, although residential starts were down sharply. Overall tourism expenditures were aided by the low Canada-U.S. exchange rate, and continued to grow despite a downturn in the number of Asian visitors. The drop in retail sales was concentrated in the automotive sector and housing-related spending. Non-resource manufacturing activity and employment expanded, also benefiting from the low Canada-U.S. exchange rate and minimal cost increases relative to U.S. competitors. Even within the resource sector the picture was not uniform; output of natural gas and copper rose 3.6 per cent and 22 per cent respectively, and the volume of pulp and paper production was little changed from 1997. Lumber production fell 4.4 per cent.

Employment growth differed widely across the province with most of the Interior experiencing increases despite the downturn in the region's forest sector and high unemployment rates in some areas. As well, employment in managerial, sales and clerical positions grew at a good pace, with the resource/export sector slowdown affecting the transportation and materials handling occupations.

The combined evidence is unclear on whether a recession occurred. As noted, the decline in activity was not widespread but was concentrated in a few areas. Employment, exports and a number of other economic indicators rose in the fourth quarter. This suggests that, if there was a recession at some point in 1998, it was brief. Finally, the strength of employment growth in many sectors and the drop in the overall unemployment rate indicates that the decline was shallow relative to past recessions.

 

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