Quebec economy: modest growth in the coming months

Desjardins Leading Index (DLI) showed little progress during last year fourth quarter. It points, at best, to a modest growth for Quebec's economy in the first half of this year.

Link to DLI analysis published February 12:

http://www.desjardins.com/ressources/pdf/ipd0215e.pdf?resVer=1423749038000

World economy: is growth too comfortable at just over 3%?

The world economy seems comfortable at just over 3% of real growth. It is not a robust growth, but it is what we get in these years even if the monetary policies are still very accommodatives around the world. It grew by 3.3% in 2013 and 2014. In their respective economic outlook, published last January, the IMF and the World Bank forecast a world GDP (at PPP) growth of around 3.5% this year. It would be just slightly better than in previous years, although leading indicators of the evolution of the economy let believe, for the moment, that growth in the coming months could be less than that.

The OECD monthly leading indicators, published February 9, let anticipate a stable but modest pace of growth in the coming months. The Purchasing Manager Indexes, published by Markit Economics earlier this month, point towards a world growth that goes from modest to moderate early in this year.

The G-20 Finance Ministers and Central Bank Governors, at their meeting in Istanbul on February 9 and 10, insist on their preference for a much stronger growth, but they have few concrete solutions, except their usual reform agenda, to offer in a context where risks and uncertainties are still quite high.

To be optimistic: nothing lets believe that the world economy could contract or show a sharp decline of its growth rate in the near future. Even the euro area could avoid such a scenario, although deflation is still at its door with its potential for economic turbulence.


Link to the OECD February 9 press release:

http://www.oecd.org/fr/std/indicateurs-avances/indicateurscompositesavancesdelocde-miseajourfevrier2015.htm

Link to Markit Economics February 4 press release:

http://www.markiteconomics.com/Survey/PressRelease.mvc/aa9e75bbcfac4fea8622b22632b5d42c

OECD leading indicators : no major change

The monthly leading indicators from the OECD, published January 12, do not show any major change of trend in the short term economic outlook for most of the countries.


Link to the OECD press release:
http://www.oecd.org/std/leading-indicators/CLI-Jan15.pdf

World Economy: Growth Slowdown

The J.P. Morgan Global Manufacturing & Services PMI, published January 6, shows that the expansion of the world economy, was slowing down at the end of 2014. The recent evolution of the new orders subindex lets believe that this trend continues at the beginning of this year.


Link to Markit Economics press release:
http://www.markiteconomics.com/Survey/PressRelease.mvc/a0012184072a45c19d6ba4077f7c173d

World Economy: moderate pace of growth in the coming months

Monthly leading indicators from the OECD, published December 8, let believe that economic growth will stabilise in the coming months, especially in the OECD area. The euro zone and Japan remain the exceptions with, at best, slow growth. Emerging economies will keep growing, but at a slower pace than what we were accustomed to.

Link to the OECD press release:

http://www.oecd.org/std/leading-indicators/composite-leading-indicators-cli-oecd-december-2014.htm

Recession Indicators

Analysts and journalists that comment or report economic news, be they or not economists, conclude, often and automatically, that there is a recession when an economy real GDP contracts two consecutive quarters. Also, when politicians are asked: what is the definition of a recession? Frequently, their staff recommends them to answer: it is at least two consecutive quarters of real GDP contraction.

So, why a recession in Canada lasted only one quarter (first quarter of 1975), and why the most recent recession in the United States (December 2007 to June 2009) started without having two consecutive quarters of real GDP decline during the first half of 2008?

The answer: organizations that have the responsibility of dating business cycles use not only real GDP but also other macroeconomic indicators to make their decisions.

The National Bureau of Economic Research (NBER) Business Cycle Dating Committee looks at real GDP, real income, employment, industrial production, wholesale trade, retail sales and any other indicator that, depending on the circumstances, could guide its judgment of the occurrence of a recession in the United States.[1] 

The Centre for Economic Policy Research (CEPR) Business Cycle Dating Committee, which has responsibility for dating recessions in the euro area, uses also a set of indicators related to production and labor market, such as real GDP, employment, investment, industrial production and consumption.[2]

The C. D. Howe Institute Business Cycle Council retains real GDP and employment to identify recessions in Canada. The Institute took this responsibility in 2012 after Statistics Canada decided to cease the dating of the country’s business cycles.[3] 

In Japan, the Economic and Social Research Institute (ESRI) Business Cycle Indicators Committee analyses many coincident indicators, such as industrial production, retail sales and wholesale trade. After that, ESRI’s President renders a decision as to the occurrence of a recession.

 

Those four organizations insist on the importance of looking not only at the duration, but also at the amplitude and the scope (degree of propagation to the whole economy) of the downturn in economic activity to determine the occurrence of a recession.

The Conference Board does not play an official role in dating recessions. But, it employs real GDP and its index of coincident indicators to identify recessions for many countries. The coincident variables are, most often, employment, industrial production and retail sales. The Economic Cycle Research Institute examines also business cycles for different countries, and it uses the NBER method to determine recessions.

For Quebec’s economy, Desjardins’ economists identified recessions by uniquely using real GDP. But in a note to their analysis, they mentioned:

“…two or more consecutive quarters of declines by the real GDP do not necessarily signify a recession. A major pullback in economic activity for the period also has to be recorded. If the drop is weak in scope, it could denote a slowdown phase.”[4]

 

For the world economy global business cycles, International Monetary Fund (IMF) economists use, as key indicator of a recession, world real GDP per capita based on purchasing power parity (PPP) weights. They also look at industrial production, total trade, capital flows, oil consumption, unemployment, per capita consumption and per capita investment.[5]

 

Also, a weakness of the two consecutive quarter approach is that when there are revisions of data, a small quarterly decrease can become a small increase. What happens, after the revision, of the recession call made on the basis of preliminary data? It is forgotten or ignored.

Even if the two quarter approach would have advantages, such as being simple, easy to explain, automatic and popular, the business cycle experts refute it. They prefer to exercise their judgment after having used a certain number of  indicators and criteria (duration, amplitude and scope).

 
 

Finally, where does come from this idea or belief that two consecutive quarters of real GDP contraction equals a recession?

It seems that it originates from an erroneous interpretation of a NBER statistical observation, during the 1960s, to the effect that recessions in the Unites States lasted at least six months.[6]

To conclude, taking inspiration from the NBER, CEPR and C.D. Howe Institute experts, wouldn’t it be more appropriate to suggest to politicians, and their staff, the following answer to a question on the definition of a recession:

-      It is a significant decline of the activity, propagated to the whole economy, lasting at least a few months.
 

N.B.: The French version of this article is available at: http://leblogdejpfsurlesindicateursavances.blogspot.ca/2014/09/pib-et-recession.html

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[1] For more information, consult the most recent decision of the NBER Business Cycle Dating Committee and its Q&A section at:

http://www.nber.org/cycles.html

[2] The CEPR committee presents its decisions and methodology at: http://www.cepr.org/content/euro-area-business-cycle-dating-committee

[3] Cross, Philip and Philippe Bergevin. “Turning Points: Business Cycles in Canada since 1926”. C.D. Howe Institute. October 2012. Available at: https://www.cdhowe.org/sites/default/files/attachments/research_papers/mixed/Commentary_366_0.pdf

[4]  Bégin, Hélène and Jonathan Créchet. “New Features for the Desjardins Leading Index”. Desjardins Economic Studies. January 2013. Available at: http://www.desjardins.com/en/a_propos/etudes_economiques/actualites/point_vue_economique/pv011613a.pdf

[5] IMF, “World Economic Outlook”,  April 2009, Box 1.1 « Global Business Cycles », pages 11 to 14. Available at: http://www.imf.org/external/pubs/ft/weo/2009/01/#ch1box

[6]  Cross and Bergevin, page 4 :

“The notion that a recession is defined by two or more consecutive quarterly declines in GDP has become well entrenched in popular discussions. The origins of the consecutive-declines guideline go back to a mistaken interpretation of a simple statistical observation by the NBER that, in practice, recessions in the United States lasted at least six months (Moore 1967). Lay people, anxious to penetrate the byzantine process used at the time to assess cycles, quickly jumped on this as a rule even though it was just a statistical artifact. Indeed, the NBER itself has never used consecutive quarterly declines in GDP as a definition of a recession.”

 

 

Quebec economy: better outlook

Desjardins Leading Index (DLI) increased significantly for a fifth month in a row in September, according to the information published by that financial institution on November 21. This index points to a better outlook for the Quebec economy in the coming months.

Desjardins' economists forecast a GDP growth of 1.8% in Quebec in 2015, an improvement from this year (1.5% projected) and last year (1,0%). Will that be enough to see positive changes in the labor market?

Link to DLI analysis:   

http://www.desjardins.com/ressources/pdf/ipd1114e.pdf?resVer=1416577260000