Recession 101

Nationwide, we’ve seen headlines flashing on the television and the newspapers. From reports about financial turmoil in the United States to the deep dive of the Canadian loonie, we’ve seen the current state of the global economy and the financial markets. We’ve also seen warnings that the United States could see its worst recession as the real economy begins to show signs of strain in consumption and manufacturing.

For Canadians, the mere mention of the word recession can cause serious worries especially for those who have a job, those who have investments or those who are thinking about making a big purchase in the near future.

What is a recession? Recession takes place during a period when real GDP (Gross Domestic Product) decreases; the growth rate of real GDP (i.e. the value of total production or the output of Canada’s farms, factories, shops and offices) is negative for at least two consecutive quarters.

What causes it? A recession can be triggered by a variety of factors, some on the aggregate demand side (i.e. the total demand for goods and services produced in the economy over a period of time) and some on the aggregate supply side (i.e. measure of the volume of goods and services produced within the economy at a given overall price level).

According to Statistics Canada, the period from 1984 to 1999 witnessed dramatic economic ups and downs. It began with recovery from a recession in 1981-82 and a push back into another in 1990-91. However, the 1981-82 recession was the more severe. Real GDP (Gross Domestic Product) fell by 2.6%, unemployment went up to 11.0%, and the bank rate hit 17.93%. The 1990-91 recession, on the other hand, saw a GDP drop of 1.4%, unemployment of 10.3%, and a bank rate of 13.04%.

How does a recession affect our income and our jobs? Based on historical data, during recessionary periods, family incomes usually drop. There are several impacts, but the real financial hit varies from household to household. Generally, consumers and investors are worried in a time of recession while employees have more concerns about their job security. As the economy slows down and move to a grinding halt, companies reduce production, which in turn forces them to lay off workers. The response of companies to the fluctuating economic state is reflected by changes in their total labour costs, which can be approximated by total payrolls. Therefore, as a result, jobs are cut during a recession.

So, that’s essentially the basics of what takes place during a recession, but how can we be sure that we’re safe from a recession in Canada? According to a recent report by the Conference Board of Canada, although the U.S. Economy will impact Canadian economic growth this year, Canada will manage to avoid a recession. Their forecast indicates that the economy’s weak growth will last through 2009. This is also consistent with a report released by the Bank of Canada that predicts that our economy will have a sluggish growth continuing until 2010. Furthermore, the Conference Board stated that global growth is expected to decrease to 2.8 percent this year and 2.4 percent in 2009. Despite the fact that the U.S. avoided a recession in the first two quarters of 200 because of strong exports, they dove into recession due to deterioration in consumer spending.

The economic downturn is a mix of economic factors, but to summarize, the current state of the economy is part of the normal business cycle. In other words, like an operating business, it also has its own share of ups and downs.

Source: www.cbc.ca

Macroeconomics, Canada in the Global Environment, 3rd ed. 1997

www.statcan.gc.ca

Michele Majul is an HR Professional with Canada Post Corporation in Prairie Region. She graduated from the University of Manitoba with a Bachelor of Arts Degree in Psychology and a Certificate in Human Resource Management.

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