Canada's recent recession was less severe and shorter than in the other industrialized nations, and it was nowhere near as "severe" or as long as the downturns this country faced in the early 1980s and 1990s, Statistics Canada said yesterday in a special report.
The key reason, the agency argues, was that Canadian companies and governments had better balance sheets compared with their industrialized peers going into the start of the recession.
Compared with their U.S. peers, Canadian chief executives took a gentler, kinder approach to the recession, slashing investments in machines rather than people, the analysis also pointed out.
The cuts to investments in machinery and equipment hit a record last year and were four times the reduction in payrolls. A lack of investment in equipment is often cited as a principle cause for Canada's lacklustre economic productivity. Still, the decision to hold off on job cuts probably prevented the unemployment rate from surging and, as a result, provided confidence when it was needed most.
During Canada's technical recession, from the fourth quarter of 2008 to the second quarter of 2009, real GDP in Canada fell by 3.3% from peak to trough, compared with a total decline of 3.7% in the United States and even larger declines in Europe and Japan during that time.
The key reason, the agency said, was that Canadian companies and governments were in better financial shape compared with their industrialized peers, the result of advantageous terms of trade from surging commodity prices in recent years.
Nevertheless, Canada felt the bite, especially on the trade and manufacturing front. Earnings from exports fell 22% last year, while the manufacturing industry accounted for half the drop in GDP during the three-quarter recession.
Firms in Canada responded by paring back spending on machinery and equipment and inventories by a record 14 per cent last year, Statistics Canada said.
Overall, firms cut $41 billion from capital purchases, or four times the amount companies cut from their payrolls, about $9.5 billion. Prior to the recession, companies spent $184 billion a year on capital, compared with $618 billion on wages and salaries.
"It is just easier to cut back on capital spending, and in some instances it just makes sense. You just need less inventories," said Statistics Canada's chief economic analyst, Philip Cross.
Offsetting that record cut in capital spending was solid domestic demand. Cross said there was merely a "two-month recession" in household spending as consumers were "traumatized" by events on Wall St.
Corporate Canada's decision to hold off on payroll reductions meant that the number of jobs dropped just 1.8% during this recession, or less than GDP did peak to trough. In comparison, U.S. firms cut payrolls by 6% in the recession.
But U.S. productivity has surged, growing by 6.2% in 2009's fourth quarter. It continues to outpace Canada, which posted a productivity gain of 1.4% in the comparable time frame.
Craig Alexander, deputy chief economist at Toronto-Dominion Bank, said companies were reluctant to pare payrolls because many parts of the country were facing outright labour shortages prior to the recession.
He also said that employment levels in manufacturing, the Canadian sector hardest hit in this downturn, "plunged" during the downturn. In contrast, domestic-oriented sectors, less reliant on global trade flows, were not as deeply affected.
"You certainly wouldn't say manufacturing weathered the storm in terms of employment," Alexander said.
Last year, the sector shed 179,000 jobs, or two-thirds of all job losses in the country.
