From Recession to Recovery in the G7 - An Early Assessment

Jun 28 2010

Ranga Chand’s Notes on the Global Economy & World Financial Markets – June 2010 
 
From Recession to Recovery in the G7 – An Early Assessment
 
Thankfully, the global recession that rocked the world economy in 2008 and 2009 and dealt a savage blow to several advanced economies is now history. Although economic growth has resumed in all the major economies of the world the road ahead will not be an easy one. In particular, investors continue to fret that unless governments take control of their burgeoning budget deficits and soaring public sector debt levels, a second down leg of the Great Recession is inevitable.
 
However, as the focus of government policy makers is now on economic recovery, this seems an appropriate time to evaluate the damage the recession inflicted on the major advanced economies and gauge the strength of the recovery in each of the G7 countries.
 
Recession’s Impact on GDP
Table 1 highlights the impact of the recession on GDP for the major economies. As you can see, the impact of the slump on the overall level of output varied considerably across the G7 hitting some countries much harder than others. The length of the recession also varied but the United Kingdom was the stand-out; it experienced the longest recession which lasted for 18 months.
 
TABLE 1
DEPTH & DURATION OF THE RECESSION
IN G7 ECONOMIES
  GDP Peak Quarter GDP Trough Quarter Quarters in Recession1 Cumulative Decline in GDP2
Canada Q4 07 Q2 09 5* -3.4%
France Q1 08 Q1 09 4 -3.9%
Germany Q1 08 Q1 09 4 -6.7%
Italy Q1 08 Q2 09 5 -6.7%
Japan Q1 08 Q1 09 4 -8.6%
United Kingdom Q1 08 Q3 09 6 -6.3%
United States Q2 08 Q2 09 4 -3.8%
1 Number of negative quarters; 2 From peak to trough
*the Canadian economy recorded small back-to-back falls in GDP in the first two quarters of 2008, rebounded somewhat in the third quarter, and then contracted for three consecutive quarters before finally hitting bottom in the second quarter of 2009.
Source; OECD, Chand Carmichael & Company Ltd.
 
Canada’s recession was less severe than other G7 countries. Between the fourth quarter of 2007 and the third quarter of 2009, real GDP fell by a cumulative 3.4%. In contrast, Japan, the world’s second largest economy, contracted by 8.6% over a period of four quarters. Similarly, Europe’s big economies were also hit pretty hard with Germany, Italy and the United Kingdom suffering output declines of more than 6%.

 

But what’s particularly remarkable to note is that the United States, despite being at the epicenter of the financial crisis which triggered the global downturn, experienced an overall decline in output of ‘only’ 3.8%. With the exception of Canada and France, this was considerably less than the declines recorded by the other G7 countries.
 
An Uneven Growth Path but Canada Alone has a V-shaped Recovery
When it comes to the recovery, the economies of Germany, France and Japan resumed growing in the second quarter of 2009. Canada and the US pulled out of recession in the third quarter while the UK economy returned to growth in the final three months of 2009 and was the last G7 member to exit recession (see Table 2). As in the case of the recession, the pace of the recovery has also varied considerably. On a comparable basis, the annualized rate of growth in GDP has ranged from a low of 0.7% in the UK to a high of 4.2% in Japan.

 

Interestingly, since pulling out of recession the pace of economic growth in Canada has accelerated and it is the only major economy that is experiencing a ‘V’ shaped recovery. The country’s GDP growth has speeded up, going from 0.9% in Q3 2009, to 4.9% in Q4 2009 to 6.1% in Q1 2010.
 
TABLE 2
THE UNEVEN ROAD TO RECOVERY
  Start of Recovery Quarters in Recovery GDP Growth Cumulative GDP Growth Annualized % From Previous Peak
Canada Q3 09 3 2.9% 3.9% -0.5%
France Q2 09 4 1.2% 1.2% -2.8%
Germany Q2 09 4 1.5% 1.5% -5.3%
Italy Q3 09 3 0.7% 1.0% -6.1%
Japan Q2 09 4 4.2% 4.2% -4.75
United Kingdom Q4 09 2 0.7% 0.9% -5.55
United States Q3 09 3 2.7% 3.6% -1.2%
*From start of recovery to 2010 Q1
Source: OECD, Chand Carmichael & Company Ltd.
 
In contrast, the latest GDP growth numbers show that in several G7 countries there was a marked slowdown in the recovery in the first quarter of 2010. For example, growth in the United States decelerated from 5.6% in Q4 2009 to 3.0% in Q1 2010. During the same period, growth in France fell from 2.2% to 0.5% and in the United Kingdom from 1.8% to 1.2%.
 
Returning to Pre-Recession Levels – A Likely Timeline
Despite the return to growth, the level of output in several G7 economies nevertheless remains significantly below pre-crisis levels. For example, output in Italy is still 6.1% below its pre-recession level. Similarly, the economies of the United Kingdom and Germany are 5.5% and 5.3% smaller than they were at the start of the recession two years ago. And although Japan’s GDP is up 4.2% from the bottom, it is still off 4.7% from the pre-recession peak (see Table 2, column 6).

 

In sharp contrast to Europe and Japan, output in North America is now nearly back at pre-recession levels. Canada’s overall GDP is currently only 0.5% below its pre-recession peak and the comparable figure for the US is 1.2%. While growth is projected to moderate in the second half of 2010, both North America economies will most likely transition from recovery to expansion later this year.
 
But, as noted above, the same cannot be said for Europe and Japan. It will take them longer to get back to pre-recession levels of economic activity. Indeed, based on the latest (April 2010) growth projections of the International Monetary Fund, France, Germany, the UK and Japan are not expected to return to pre-recession levels of real GDP until sometime in late 2011 or 2012 at the earliest. And that’s assuming that the forecasts are bang on target.
 
Bottom Line
Although the G7 economies are continuing to recover from recession, the upturn remains tentative and uneven. In particular, the economic recovery in Europe is at risk of coming unglued. The sovereign debt crisis that is currently plaguing Greece, Portugal and Spain remains a major threat and one that could yet engulf other European economies and stall global growth.
 
 
To date, the recovery has been supported by the unprecedented levels of government spending which, while preventing a repeat of the Great Depression, has sent budget deficits and government debt levels soaring. But, as the support from fiscal stimulus starts to fade and policy makers begin to tighten fiscal policy, the public sector will no longer be the main driver of the economy. The onus will now increasingly be on the private sector in the G7 countries to carry the baton. However, unless the other main components of GDP, including business investment and exports, vigourously kick in, a self-sustaining recovery will remain elusive.

Unfortunately, the pain that the recession inflicted on the major advanced economies is not expected to end anytime soon.

 

© Copyright 2010 Chand Carmichael & Company Limited
 
About Ranga Chand
Ranga ChandRanga Chand is recognized both domestically and internationally as one of Canada's leading economists and mutual fund analysts. Professionally, he held senior positions with Canada's Department of Finance, then served as a director of the Conference Board of Canada, before joining a major stock brokerage firm. He has also taught economics at the University of Waterloo, published extensively in the field of economics, and represented Canada at numerous economic forums, including the OECD in Paris, the United Nations, and the World Institute of Economics in .
 
A media personality with a huge following, his popular television show "Talking Mutual Funds with Ranga Chand" aired weekly on Canada’s Report on Business Television (ROBTV) for three years from 2000 to 2003 and reached over 4.3 million viewers nationwide. Much in demand by organizations, industries, and associations throughout
  • Ranga Chand's Top 50 Mutual Funds
  • Ranga Chand's Getting Started with Mutual Funds
  • Best of the Best Mutual Funds, Featuring America's top 50 Heavy Hitter funds
Highly respected in the investment community, Ranga Chand is founder and President of the research and consulting firm Chand Carmichael & Company Limited, located in Ottawa, Ontario.

 

Back to Market Commentary Index