====================================================================== Note: The electronic version of the following Topic Box is for informational purposes only. The printed version remains the official version. ====================================================================== THE RECESSION AND ITS IMPACT ON BRITISH COLUMBIA The Canadian economy contracted from the second quarter of 1990 to the first quarter of 1991. The economy subsequently grew slowly and Statistics Canada judged that the economy pulled out of the recession near the end of 1992. The downturn was prolonged by various external and domestic forces that slowed the recovery in economic activity and job creation into 1993. This topic box compares the 1990-91 recession to the 1981-82 downturn and reviews the forces that have slowed the recovery. Finally, it looks at the impact of the Canadian recession and slow recovery on the British Columbia economy. Canadian Recessions Compared The 1990-91 recession was drawn-out, lasting more than a year. Nevertheless, the downturn was not as severe as the 1981-82 recession. While the 1990-91 downturn was shorter and less severe, the subsequent recovery has been weak and employment remains well below its pre- recession level, two-and-a-half years after the recession began. The following charts show the pattern of growth in monthly real GDP (at factor cost) and employment during the recessions and subsequent recoveries in 1981-82 and 1990-91. During the 1981-82 recession, real GDP fell sharply but was followed by a more complete recovery than was the case with the recent downturn; output had not returned to its pre- recession peak by December 1992. Employment figures show a similar pattern. While the level of employment fell sharply and rapidly in the 1981-82 downturn, it returned to its previous peak by the end of 1984. During the recent recession, employment continued to drift down until April 1992, two years after it had peaked. Since then, employment has been rising modestly but, by February 1993, was still 2.6 per cent below its previous peak. Forces Slowing the Recovery The relatively weak recovery in the Canadian economy has been attributed to several structural changes that have dampened the normal cyclical recovery. The following are some of the domestic forces that have slowed the recovery. þ The country's industrial sector has undertaken extensive restructuring in order to improve its international competitiveness. These efforts, which have been focused in central Canada, have resulted in significant job losses and many plant shutdowns. þ Consumer spending, which accounts for two-thirds of total spending in the economy, remained weak for much of 1991 and 1992. While interest rates have been falling, high levels of unemployment have kept consumer confidence at low levels and have held down the rebound in consumer spending necessary for a broadly-based recovery. To some extent, depressed consumer confidence is due to a sense of uncertainty and unease about long-term economic prospects. þ High levels of household and corporate debt have dampened the rebound in domestic demand. In 1992, private sector debt totalled almost $800 billion, or 116 per cent of Canada's GDP. This is well above the previous peak in the debt-to-GDP ratio of 101 per cent reached in 1981. Efforts to lower the size of private sector debt to more sustainable levels have restrained consumer spending and business investment. þ Public debt of all levels of government and Crown corporations in Canada has been on an upward trend since the mid-1970s, rising from 52.8 per cent of GDP in 1974 to almost 100 per cent in 1992. The costs of servicing the large and growing public sector debt have accounted for a rising share of total government spending. As a result, stimulative fiscal policies that would help accelerate the economic recovery have not been an option. Most of these domestic forces - the level of consumer and business confidence, spending decisions and levels of private and public debt - are related. External developments have also contributed to the weak recovery. Until recently, a weak recovery inthe United States dampened growth in demand for Canada's exports. The U.S. economy grew only 2.1 per cent in 1992, following a 1.2 per cent decline in 1991. During the second half of 1992, however, the U.S. economy grew rapidly. In addition, the decline in the value of the Canadian dollar against most major currencies has made Canadian exports more competitive. Implications for British Columbia The British Columbia economy performed significantly better during the recent Canadian recession than was the case during the 1981-82 downturn. British Columbia was one of the provinces worst hit by the international slowdown in the early 1980s, with economic activity and job growth lagging well behind central Canada until the second half of the decade. This divergence in economic performance reflected continued weakness in international demand for the province's resource products as well as efforts by major provincial resource companies to become more competitive. In addition, the transition from double-digit to single-digit inflation had a significant negative effect on commodity prices. In the recent North American recession, however, the British Columbia economy avoided the worst effects of the downturn and outperformed most other Canadian regions. For example, while Canadian real GDP contracted 0.5 per cent in 1990 and 1.7 per cent in 1991, British Columbia real GDP rose 2.8 per cent in 1990 and remained unchanged in 1991. More recently, employment in British Columbia grew 1.9 per cent in 1992, while employment in Canada as a whole declined 0.8 per cent. Several factors contributed to British Columbia's relatively good performance during the 1990-91 recession. British Columbia is less reliant than the rest of Canada on the United States as an export market, helping reduce the negative effects of the recession south of the border. In addition, the efficiencies gained through industrial restructuring in British Columbia during the mid-1980s helped the province's businesses weather the downturn in export demand in 1990 and 1991. The province also continued to attract large numbers of in-migrants, both from overseas and from the provinces suffering extensive job losses. These people helped stabilize domestic demand, particularly consumer spending and residential investment. As a result, high levels of net in-migration have been the main driving force behind the economy's relatively strong growth. However, real per capita GDP in British Columbia - GDP adjusted for inflation and population growth - declined almost as much as in the rest of Canada during the last two years.