A closer look at the second quarter GDP data

While the headlines were preoccupied with the recession label, there were finer points that got glossed over

Fire fighters battling a wildfire in a forest

Can any one stop the blaze spreading? Commentators note that stronger June oil figures were playing catch-up after May’s wildfires. (Anya Ogorodnik/AP)

A number of commentators have weighed in on yesterday’s GDP releases, from Jason Kirby’s piece on the divide between household and business spending and  Kevin Carmichael’s thoughts on economic stagnation, both of which you should read immediately. When you’re finished doing that, here are a few points that I believe are getting lost in the shuffle.

Revisions were surprisingly small

As I explained last week, one way to avoid a statutory recession is for past data to be revised to show growth in the first quarter of 2015 (and this could still happen in future GDP releases, so the issue of a statutory recession has not been fully settled). Yesterday’s quarterly and monthly real GDP (RGDP) releases saw some of the smallest revisions I can remember, with the quarterly release making only a minor revision to the 1st quarter of 2015 and left 2014 untouched entirely. Without the revision, annualized RGDP growth would have been -0.59% in the first quarter and -0.73% in the second. After the revision, those figures are -0.78% and -0.54% respectively.

There was more action on the monthly figures, as RGDP was revised for every single month going back to January 2014. These revisions were mostly downward and minor in nature. Months that saw RGDP increases under the old data still saw increases under the new data, and the same holds true for decreases, with April 2014, May 2014 and March 2015 all downgraded significantly.

According to Philip Cross, major RGDP revisions will be coming in November, so until then we can conclude that we had a statutory recession in the first half of 2015, which very well could continue into the third quarter of the year. It will take some time before we know if Canada met the other definition of a recession used by the U.S. National Bureau of Economic Research and Canada’s C.D. Howe Institute. My guess is that C.D. Howe will eventually determine that Canada had either a category 1 recession (similar to 1980) or category 2 recession (similar to 1974-75).

A caveat on the June GDP surge

The June RGDP figures showed a substantial 6.23% annualized growth in RGDP, leading some commentators to project “strong growth” for the rest of the year. In my view, that is a misread of the data. In a must-read piece on yesterday’s RGDP releases, Luke Kawa puts the June numbers into context:

But June’s GDP, which showed a really robust MoM increase of 0.5 percent, is not what inspires my optimism in the forward outlook. Half of it came from a rebound in oil and gas extraction.


So the jump in June was catch-up from the May pause. This means that:

a) Q2 GDP weakness is overstated
b) The strength of the hand-off to Q3 is also overstated

At least half of the June rebound is explained by the oil rebound, though the Pan Am Games in Toronto played a positive role as well. Manufacturing, which has taken a recent hit through a combination of a reduction in sales to commodity sectors, declining exports due to a bad winter in parts of the U.S. and a re-tooling of the Chrysler plant in Windsor, Ontario saw only modest gains in the month.

No guarantee of a positive third quarter

Speaking of the oil industry, we have seen a nearly 25% drop in oil prices (US Dollar, West Texas Intermediate) since June, according to the U.S. Energy Information Administration

Month WTI (USD)
Jun-15 $59.82
Jul-15 $50.90
Aug-15 $42.85

(August average prices only through August 24th due to data availability)

Since it is commonly recognized that a decline in oil prices has a negative effect on Canadian RGDP, we should further temper our expectations for third quarter RGDP growth. Oil prices have been unusually volatile over the last week, so predicting third quarter economic growth is a bit of a fool’s errand when we don’t have a good feel on what the rest of the third quarter will bring for oil prices (and what we do know is not good).

There are other reasons to be pessimistic, most notably the ongoing economic weakness in China and lagging business investment in Canada. Optimists will point to the strengthening U.S. economy as a reason why Canadian RGDP growth is likely to be positive.

The definition question

Philip Cross followed up his statement that 2nd quarter “GDP will almost certainly be positive” (based on an argument I personally found persuasive) by attacking the 2-quarter definition of a recession. Expect these arguments tend to go on for some time. Personally, I find both definitions of a recession quite useful and find it odd that there was absolutely no dissent whatsoever when the federal government was defining a recession as “two consecutive quarters of negative growth” in the Balanced Budget Act. In Mr. Cross’ defense, he does not appear to be a fan of balanced budget legislation in the first place. Last year, when asked about balanced budget legislation he told the House of Commons Standing Committee on Finance  “I don’t think writing something into law, and then expecting that future governments will be held by that, is realistic.” If the two-quarter definition is so problematic, the time to be dealing with it is before it is entrenched in law, not months afterwards.

What’s next

My calendar of economic indicators shows that Canadian trade data will be released tomorrow, job numbers on Friday and we will have a Bank of Canada rate decision on September 9th. Kevin Carmichael would remind us to keep an eye on U.S. economic data, which is always sound advice.

Mike Moffatt is an assistant professor in the Business, Economics and Public Policy group at the Ivey Business School. He has worked with Canadian politicians and policymakers of all political stripes to craft more effective public policy, including his most recent role as an outside economic adviser to Liberal Leader Justin Trudeau. Follow @MikePMoffatt on Twitter.