Study: The accelerated pace of the 2008-2009 downturn
Statscan - The most remarkable features of the contraction that began in 2008 were its speed and its severity, starting in the financial and commodity markets in August 2008. The steep declines in stock, commodity and exchange markets late in 2008 exceeded those of the previous three cycles in all three markets during 1981-1982, the early 1990s, and 2001. In addition, most of these declines occurred in two or three months at the end of 2008, a much more rapid pace than in previous downturns.
With its duration of eight months, the slump in commodity prices between June 2008 and February 2009 was markedly shorter than those in previous cycles. Despite the shorter duration of the retrenchment, the 50% drop of commodity prices in the current cycle was by far the largest.
The Canadian dollar retreated from parity with the US dollar to a monthly low of 79 cents in the 10 months between May 2008 and March 2009, compared with decreases that took place over a year or more in each of the previous three cycles. The 21% drop in the Canadian dollar late in 2008 and early 2009 exceeded declines of less than 10% in the earlier cycles.
The Toronto Stock Exchange peaked in June 2008, and then fell rapidly until early March 2009, a slump covering nine months. This compares with peak-to-trough declines of 12 months in 1981-1982, 14 months in 1989-1990 and 13 months in 2000-2001. The 45% drop in 2008-2009 exceeded the losses of 37% in 1981-1982, 23% in 1989-1990, and 39% in 2000-2001.
While the initial speed of the contraction in output and jobs was unusually swift during the latest downturn, the overall losses did not exceed those of the previous two recessions. Quarterly real gross domestic product (GDP) fell 3.6% in 2008-2009, compared with declines of 3.4% in 1990-1991 and 4.9% in 1981-1982. Nearly two-thirds of the decline occurred between November 2008 and January 2009, a three-month period during which GDP fell 2.5% as Canada's exports decreased 26%.
Similarly, jobs declined by 2.3% in this recession, while they fell by 3.4% in 1990-1992 and 5.4% in 1981-1982. Nearly all of the decrease took place in the four months from November 2008 to February 2009.
According to these measures, the recession in 2008-2009, though quicker to reach bottom, was similar to, or less pronounced than, those in earlier cycles. Moreover, the more severe contractions in financial markets in 2008 were not reflected in the real economy.
While the accelerated pace of cycles was evident in both financial markets and the real economy during the downturn in 2008-2009, the amplitude of the declines was markedly different, having been sharper in financial markets and more muted in the real economy. The role of prices helped reconcile the two.
Stocks and the exchange rate in Canada were driven lower primarily by the sharp drop in commodity prices. The decline in commodity prices was reflected in a record drop of 7.6% in nominal GDP, due mostly to a 4.2% decline in prices, while the decrease in the volume of output was relatively small. It is this sharp retreat in nominal incomes and prices that financial markets anticipated.
Price changes were a key difference between the recessions in the United States and Canada. In the United States, the 3.8% contraction in real GDP through the second quarter of 2009 was slightly larger than that in the previous two recessions. US nominal GDP fell by only 2.4% in the latest recession, implying that prices rose 1.5%, a marked contrast to the record drop in Canada's prices.
Therefore, the 2008-2009 recession in GDP was driven more by prices than by volume in Canada, while in the United States, it was driven more by volume than by prices. The distinction between prices and volume is important for a number of reasons. The volume of output is more closely linked to employment; this helps explain why job losses were more severe in the United States than in Canada. As well, price changes are more easily reversed than changes in output.