Canada may avoid official ‘recession’ but comparative living standards continue to fall

The late U.S. president Ronald Reagan famously said in the 1980 election that “Recession is when your neighbour loses his job. Depression is when you lose yours. And recovery is when Jimmy Carter loses his.” He went on to win the presidency in large measure because Americans wanted a return to economic prosperity. This raises an interesting question about what the word “recession” means.

The dictionary defines recession as “a period of temporary decline during which trade and industrial activity are reduced, generally identified by a fall in GDP in two successive quarters.” The Canadian Encyclopedia defines recession as a “temporary period of time when the overall economy declines.” The U.S. National Bureau of Economic Research (NBER), which is the organization responsible for officially dating recessions, defines it as “a significant decline in economic activity that is spread across the economy and lasts more than a few months.”

In 2022, after the United States experienced two quarters of economic decline—the traditional definition of recession—many U.S. economists argued recessions were more complicated. But nearly everyone agrees that a recession relates to the aggregate economy rather than the economic conditions experienced by individuals. In other words, it’s a measure of how the overall economy is performing rather than a more granular measure of how individual citizens are faring.

This is an important insight and explains the occasional detachment between what certain aggregate economic data may indicate versus the individual experiences of people. Consider a simple hypothetical example of two jurisdictions, both with the same level of total economic activity (i.e. GDP), the same starting population and the same rate of economic growth. But assume one jurisdiction records growth in its population that’s lower than growth in the economy, while the other experiences population growth in excess of that in the economy.

Both jurisdictions are enjoying positive economic growth in an overall economic sense, but the former is also recording growth in per-person GDP, the principal measure of living standards, because GDP is expanding faster than the population. The latter jurisdiction, despite the same level of economic growth as the former, is suffering a decline in per-person GDP because its population is growing faster than the overall economy. In other words, the latter jurisdiction is producing less goods and services on a per-person basis, indicating a decline in living standards.

Unfortunately for Canadians, this is not a hypothetical discussion. Canadian per-person GDP (adjusted for inflation) reached $56,369 in the second quarter of 2019 but by the end of 2021, despite economic recovery from the COVID shock, stood at $55,730, roughly 1.1 per cent lower than in 2019. According to data up to the third quarter of 2022, per-person GDP remains below 2019 levels, even though the overall economy has been growing since late-2020.

This decline—or perhaps more accurately, stagnation—in per-person living standards occurred amid an economic rebound in 2021-22 from the COVID-induced recession. So, while the Canadian economy recorded positive overall growth, per-person GDP (i.e. average individual living standards) actually declined. Moreover, this negative trend is set to continue, according to the economic forecast in Budget 2023, with annual GDP growth (inflation-adjusted) averaging less than 1 per cent over the next two years while Canada’s population rises by at least 1.4 per cent—a combination that guarantees a further decline in living standards.

Put simply, if recessions were measured by per-person statistics rather than in aggregate, Canada would be in its third year of recession compared to 2019—with at least two more years of declining living standards ahead of us, mainly because overall growth in the economy has not been sufficient to offset the country’s rapidly expanding population.

And it’s actually worse than this; Ottawa’s explicit economic policies seek to grow the country’s overall economy by boosting the population, largely through high rates of immigration, rather than by addressing shortfalls in business investment, productivity, entrepreneurship and innovation. So, while Canada’s aggregate economy may avoid an “official” recession this year, individual Canadians will continue to suffer from a recession in the form of lower average per-person GDP (i.e. living standards).

Reversing this pattern of stagnating or declining living standards should be the primary goal of Canadian governments. But judging from the federal budget, most policymakers are content to ignore the issue.