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The recession and recovery: Australia did it better

Stephen Gordon takes a broader measure of Canada’s economic performance


 

(Seth Perlman/AP Photo)

It is frequently remarked that Canada fared “relatively” well during the economic and financial crisis. And it is also frequently remarked that current and projected short-term Canadian economic growth rates are relatively weak. Both statements are true. But it’s important to make the distinction between the level of economic activity and its growth rate. An economy that is still climbing out of recession has a lot more room to grow than an economy that has already fully recovered.

We’re used to measuring ourselves up against the U.S. economy, and sometimes the other G7 countries, but what about a broader comparison?

The chart below plots OECD countries plus Brazil and Russia along two dimensions:

  • Depth of recession: The percentage loss in GDP from its pre-recession peak to its trough.
  • Strength of recovery: The percentage change in GDP from the pre-recession peak to the last quarter of 2012. (Negative values indicate an economy that has yet to recover output lost during the recession.)

(Click on the graph to see a larger version.)

 (N.B.: Greece is not plotted because the OECD doesn’t have Greek GDP data through 2012.)

As you can see, the Canadian recession was indeed less severe than that of the other G7 countries, and it has had the strongest recovery. There are six countries where the fall in GDP was less than in Canada: Poland, Australia, Israel, Chile, New Zealand and Switzerland. And there are eight countries with stronger recoveries than Canada’s: Chile, Israel, Turkey, Poland, Korea, Australia, Brazil and New Zealand. Putting the two together, five countries — Chile, Israel, Poland, Australia and New Zealand — had both weaker recessions and stronger recoveries than Canada.

The most surprising (to me) country in that graph is Poland, which never had a recession to speak of, and has been growing remarkably quickly. Part of the explanation must be that although it has joined the EU, Poland has yet to adopt the euro. As a new member, it is obliged to abandon the zloty at some point, although a date does not yet seem to have been set. I suspect that the Poles aren’t in any hurry to join the eurozone, and will drag out the transition just as long as it can.

I’ve already made the point that, in many ways, Australia is a more natural point of reference than the U.S. for the Canadian economy: it’s another significant resource exporter with flexible exchange rates. New Zealand and Chile also fall in that category, and they’ve also done well. I would have thought that Norway would have also done better than Canada, but its recovery has been sluggish. It would appear that just as the slow U.S. recovery has held Canada back, the even slower European recovery is making it harder for Norway to come back.


 

The recession and recovery: Australia did it better

  1. Australia enacted a national carbon tax AND had a better recovery than Canada? Colour me shocked. Better not let Flaherty know.

  2. My question is: Is Australia as heavily dependent on the USA for trade as Canada is? Did they recover better or was the fact their main trading partners’ economies didn’t take a beating (as bad as the states), sheltering Australia them from the worst of the recession?

    • Australia is a resource-based economy. We are in a resource boom. That pretty much explains everything.

      According to The Economist, the “resilience” of the Canadian economy was due to “policies—such as bank regulation and sound public finances—which predate
      Mr Harper” plus a “commodity boom.”

      We are heavily dependent on the US for value-added exports. We could export bitumen to China. But that won’t do much for provinces that don’t mine bitumen…

      http://www.economist.com/node/16060113

      • No, it doesn’t explain everything. There were four broad factors that explain the limited impact on Australia of the global financial crisis.

        The first is that the floating dollar largely immunises the domestic economy from international shocks, and exports of minerals can be readily switched between export markets and sold at lower prices without affecting real production levels. In principle, the same should hold for Canada.

        Second, the Reserve Bank spotted the problems early and moved to rapidly drop interest rates to provide a monetary stimulus.

        Third, the Government implemented a very large fiscal stimulus with three phases to provide a steady flow of extra demand over time, with the mantra of timely, targeted and temporary. The first phase was direct cash grants. The second phase was a program of fast disbursing projects, including home insulation and school buildings. The third phase was targeted at slower-disbursing projects such as larger infrastructure projects. The Government was aided in this by prudent macro-policies before the GFC, that had reduced government debt, and since the danger has passed the Government has rapidly unwound the temporary stimulus spending.

        Finally, yes, Australia benefits from the growth of Chinese demand for its exports.

  3. In some ways Australia is a good point of reference, as you said it’s another resource exporter with flexible exchange rates. On the other hand though, how much of Australia’s relative success is due to their proximity and trade relatationship with rapidly growing economies like China?

    In 2012, 24.6% of Australian exports went to China. In addition, Australia’s export destinations are also much more well balanced than Canada’s.

    By comparison, in 2011 (I couldn’t find information for 2012) 73.71% of Canadian exports went to the USA while only 3.75% went to China.

    For me, this really reinforces the need for us to diversify our trade partners and aggressively persue free trade with fast growing economies.

    • Agreed, however a heavy reliance on China could become a bigger anchor than US for us. We’re in no danger of that but it could easily become a problem for Australia. I don’t expect China to grow perfectly forever and we can hope when things get tough there at some point it will be a bad slowdown rather than a meltdown.

  4. I am an Austrialian who resides in the western suburbs of Melbourne(Victoria)

    AAA credit rating, 5.6% unemplyment, strong economic growth, low inflation…..Government with an approval rating of 42% compared…oppostion which constatnly talks down the economy: 58%.

    Australia: The stupid country……

    • Australia’s Labour Party is described as “centre-left” and Liberal Party as “centre-right.” How different are their policies, really? How do they compare to Canada’s Liberal and Conservative parties?

      • Don;t have enough time to explain in full:

        The ALP, which i obviously support, is a Social democratic party with close ties to the trade union movement. The current government adopted a Keynesian approach to the GFC and it managed to keeps literally 100s of thousands in work. Traditionally, Labor was a supporter of Socialism but have now moved to supporting Keynesian economics.

        The “Liberal party” isnt too liberal…in fact it is just the fourth name used by the conservative side of politics. (National Labor, Nationalists, UAP, Liberal). Sometimes they support Keynesian, neo- liberalism etc. indeed, they are populist more than anything.

        I don;t really know about the parties in Canada.

        Can you believe that the opposition compares the Australian economy to the economies of Greece and Cyrpus…..i am NOT joking.

        • Yeah, recently there was quite a big drop for a month in Canadian employment and you could say the ALP types in opposition were eager to hear the news. It does happen in every country among the opposition I think. Primarily, if they believed the economy was doing well because of the party they disagree with it would mean they’re wrong so they don’t believe it.

          Based on blog affiliations (Tim Blair considered one of the guys by conservatives in Canada) Canadian Conservatives would vote for Australian Liberals, while Liberals in Canada might be half Aussie Liberals and half ALP. If you joined our Liberals and NDP, the centrist and left Canadian parties, it would probably look a lot like the ALP. Although the most well known union leader in the country campaigned for the Liberals not that long ago so they are more union friendly than some might think, but that was still partly because the NDP has usually been the third place party.

        • In North America, we basically have a two party system: right-of-center neo-liberal-light (Liberal/Democrat) and right-wing neo-liberal (Conservative/Republican.) Canadian “Liberals” abandoned the Keynesian system 20 years ago.

          Here the right-wing party brings in reckless tax cuts and spending. Then the right-of-center party cleans up the mess. This produces a “starve the beast” process: the right-wing perpetrates it; the right-of-center enables it. Canada is just a few steps behind the US on the path of self-destruction. By destroying post-war government (which provided equality of opportunity) we are destroying post-war living standards.

          The biggest difference between the US and Canada is that Canadians didn’t vote for it. Like the UK, Canada is not a real democracy. We arbitrarily dole out majority power to minority parties via corrupt First-Past-the-Post.

          With 3-way center-left vote-splitting, this puts the right-wing party in the driver seat.

          There’s a chance Canada can become a democracy using the same voting system Australia has: the Alternative Vote (aka Preferential Voting.) The right-of-center party now tenuously supports this because it’s almost impossible for it to win a fake majority.

          Here, the corporate-owned media torpedoes the issue of electoral reform (even the “leftist” Toronto Star.) This is because the upper class (business community) has more influence under the two-party system FPTP perpetrates (i.e., plutocracy.)

  5. Well, we already have a few Murdoch wannabes … maybe
    if Gina Rinehart or Clive Palmer would buy up the Petroleum Club ..

  6. Whatever ……. who needs actually results, when you have lots of snappy “Economic Action Plan” ads.

  7. The real story here is Sweden: it suffered a deeper recession (due to external causes,) recovered it’s losses and came out with the same recovery as Canada.

    According to the 2012-2013 Global Competitiveness Report (World Economic Forum,) Sweden ranks #4; Canada #14; Australia #20.

    I can see why conservative economists might want to overlook this data. Among 31 OECD developed countries, Sweden ranks #2 in social spending and #31 in taxation. (Blows the whole “small government is better for the economy” hypothesis out of the water…)

    • Although there might be some particular reason for that, Sweden has surprisingly been considered a success story by conservatives for years. For instance, they have a full school voucher system: http://www.forbes.com/sites/modeledbehavior/2012/12/03/lessons-on-school-choice-from-sweden/

      I think Sweden can be seen as an example of smart government being more important than big or small. Their debt to GDP was 50% in ’04 and was cut quickly to around 40% before the slowdown and is still there with a blip in 2010. I suspect all of our parties could learn something from them.

      edit: Here’s an interesting paper from their finance minister one year ago about their recovery I’m just starting to read http://www.iie.com/publications/papers/borg20120423ppt.pdf

      • The reason Sweden and other northern European countries are success stories is because of balance. They have policies that are good for people and good for businesses. They blend socialist and free-market ideas together in a centrist mixed-market system. They have pendulum swings from left to right and back.

        In North America, the pendulum is stuck on the right-side. We have policies that are good for businesses on the belief that what’s good for business is good for people. (The wealth trickles down to the little people.) But this self-serving ideology does not work in the real world, unlike the practical approach taken in northern Europe. Here, 30 years of free-market reforms have produced an economic tide that only raised the yachts, while living standards were downsized for everyone else.

      • It should be noted that Sweden’s school voucher system is completely different from what conservatives in North America propose. Here conservatives want to take money out of the public system so wealthy parents can get a discount on costly private school tuition. There…

        “The authors discuss some important characteristics of the Swedish system that may contribute to the success. First, the Swedish system does not allow parents to pay additional fees on top of the voucher.Second, there are strong rules about how schools must accept students. They cannot use ability, socio-economic status, or ethnicity. The authors argue that if competition on selection is prevented, schools are more likely to compete on quality”

        • I think the Swedish differences are smart and something North American conservatives should really take a look at, however in my opinion it’s just an impression that the NA ideas would take money out of the public system. The typical plan I’ve heard of gives parents or a group of them a flat voucher of typically something like $6000 as the average private tuition, which is lower than the public cost and doesn’t affect public money. So parents who choose a non public school move their kid from a public school with the money they used to cost staying behind. (either all of it or the difference where just the extra money above the voucher value stays, the plans I’m remembering were from a few years ago) The conservative vouchers have usually been for low income people who have the least ability to move to a good school as well, those are the people without a real choice in many instances. Any comprehensive conservative voucher plan would most likely be taxed as income like child credits if not a purely low income deal. I think most conservatives would agree that non competition on selection is a good idea, but I’d agree a no additional fees plan would most likely only come from the left here.

          I think there are differences in the Swedish model though not essential ones. The biggest difference is probably the broader agreement in politics that allows ideas to be thought about without assuming one side or the other is trying to give an advantage to one group.

  8. anguAustralia has a AAA credit rating because of the conservative coalition government of John Howard. Howard governed from 1996-2007. During that time, he paid off all $97 billion of the federal government’s debt(had budget surpluses in last 8 years).He also had low unemployment and a strong growth rate. He privatized and sold off Telestra and all other government owned companies(no crown corporations). Labor won election under Kevin Rudd over labor reform laws passed by the Howard government. Since 2007, the Labor Party(under Rudd and later Gillard) have ran the federal debt back up to $170 billion. Also, Gillard introduced a mining tax which was supposed to generate $2 billion but only raised $120 million. Labor also introduced a carbon tax after promising not to in the 2010 elections. This tax has proven ineffective and very unpopular. Finally, Gillard and other Labor Party members are being investigated for their involvement in a union slush fund. This has been the source of several stories on Sydney Talk Radio station 2GB. Host Ben Fordham, Alan Jones, Steve Price, and Andrew Bolt(who previously had worked on 2 labor campaigns) have discussed this.
    It is for these reasons that the polls show Tony Abbott’s Liberal/Nationa l Party coalition trashing the Labor Party. Tony Abbott’s conservative coalition polls ahead in every state or territory except the ACT(Australian Capital Territory). In the last year, Labor has been routed in state elections In Queensland (90% of seats won by conservative LNP), New South Wales(75% of seats won by Liberal/National coalition), Western Australia(2/3rds of seats won by Liberal/National coalition), Northern Territory(2/3rds of seats won by Liberal/National coalition. The Liberal/National coalition also controls the state government in Victoria. In Tasmania, one year from election, the Liberal Party polls over 55% of the vote versus the comined votes of Greens and Labor.
    Both the Liberal and National parties would be probably be at or to the right of the Canadian Conservative Party. The National Party especially tends to be socially conservative. The Labor Party would be more akin to the Canadian Liberal Party under Chrietrien. The Greens would be the closest thing to the NDP but they only poll at 10%.
    As for Sweden, it has been ruled by a center-right coalition government since 2006. This government has continued to reduce the state’s role in the economy. The government made up over 80% of Sweden’s GDP in the early 1980’s and has been falling ever since(now at 54%) The corporate tax rate has been cut to 26%. Welfare and disability reforms have been implemented. The hand of government’s influence over healthcare is being reduced. . The current finance minister is a declared libertarian who plans far more extensive reforms.

    • Under Howard, our economy went from 12th largest in the world to 15th largest….this occurred during a resources boom n Australia.

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