For world GDP, the fourth quarter of 2008 was ugly. Canada was no exception, as our economy fell into recession, shrinking by an annualized 3.4% in the quarter. But Canada suffered a lot less than most other large economies – strange, given our greater dependence on international trade. Has our resilient domestic economy helped us to sidestep the worst of the global gloom?
Far from it. Domestic demand shrunk by an annualized 5.1% in the quarter, while net trade flows actually boosted growth – substantially. How? Exports fell, but at the same time, imports were down by even more. Absent the effect of lower imports, Canada’s GDP would have contracted by about 5.8% in the final three months of 2008, much closer to the US and pan-European declines.
Many may be assuaged by the arithmetic magic, but the overall story is not good. While shrinking imports might shore up the bottom line temporarily, they speak volumes about the economy’s ills. Consumers import heavily, and their spending was down sharply in the quarter. At the same time, business spending on equipment – most of which is imported – plunged. And globalisation of our production has in 20 years ramped up the import content of exports, so lower imports are actually highlighting the pain that exporters are currently feeling. And don’t forget, imports create jobs too.
How bad is it? Imports fell by an annualized 23% in the October-December period last year – the second-sharpest quarterly drop in recent memory. Moreover, recent monthly figures suggest that little improvement can be expected in the near term. And of the factors that drive imports, exports are the weakest. Exports have been in recession since mid-2007, contracting in six consecutive quarters. Over that time, exports are down 9.4%, unmatched by any other category of demand.
For exporters, things went from bad to worse last fall. Activity fell by almost as much in the fourth quarter as in the previous five quarters together. The 17.5% annualized drop was surpassed only three times in the past half-century. The contraction leaves end-year exports 4.2% below the average level for 2008, a shabby hand-off into the New Year. Furthermore, downward export momentum continued through year-end. Merchandise trade figures show that December exports, adjusted for price variations, were over 9% below the average 2008 level. This, together with soft global prospects, strongly hints that merchandise exports could see a double-digit drop this year.
Unfortunately, no industry is exempt from the malaise. Late-year declines hit all broad industry categories, flattening annual export activity among the top performers, and deepening declines for those already in trouble. Dim export activity is the conduit of the global recession to the broader Canadian economy, and it is having a wide impact. Total economic output on a quarterly basis is heading into 2009 0.5% below the 2008 level. On a monthly basis, GDP is starting off 1.6% below the 2008 average. Given that first-quarter GDP is now expected to shrink by a further 4%-5% at annual rates, the economy is poised to recede by about 1.5% this year.
The bottom line? Sharply lower world trade brought the global recession to Canada in the fourth quarter of 2008. And export prospects for 2009 are not promising. But if the world can resist its protectionist urge through the downturn, global trade is our best hope for a return to solid growth.
The views expressed here are those of the author, and not necessarily of Export Development Canada.