Reaction to Canada's dismal 4th quarter GDP

Gross Domestic Product or GDP is the sum total of a country's economic activity. It should always be getting bigger. When GDP shrinks, that's a bad thing. When it shrinks a lot — as the U.S. and Canadian economies did for the three months ending Dec. 31, 2008 — that's a really bad thing:

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It’s almost as if someone turned out the lights on Canada’s economy after October. November saw a 0.7% monthly drop in real GDP, and December followed up with a 1.0% decline. The cumulative two month decline was by far the worst since that particular series began in 1997, but also eclipsed the worst two month plunge in the early 1980s recession under the measure used at that time. Only the public sector was still growing in December. Financial markets have every reason to be concerned by the very steep pace of decline.
– Avery Shenfeld, CIBC Capital Markets

While the Canadian economy succumbed to the global pressures in the last quarter of 2008, it still remains amongst the best performing countries across the globe, and managed to outstrip a 6.2% decline in the U.S. However, the fourth quarter marks just the beginning of Canada’s recession. As producers attempt to correct for the unintended inventory build up, and as falling income puts further downward pressure on the domestic economy, we expect at least a 5% decline in the first quarter of 2009, to lead an overall annual decline of 2.2% in 2009.
–Diana Petramala, TD Bank

One would be stretched to find any good news in today’s dismal GDP report, with the economy recording its biggest quarterly retrenchment since the recession of the early 1990s (-3.4% q/q annualized). Moreover, the much larger-than-expected drop in December GDP (-1.0% m/m), the biggest monthly decline since the recession of the early 1980s, points to an accelerating pace of deterioration into the New Year. We now expect an output decline in the first quarter which is at least as large, if not larger, than in the fourth.
– Adrienne Warren, Scotia Capital

The decline in Q4 GDP was well in excess of the 2.3% drop projected by the Bank of Canada in its January Monetary Policy Report Update. They had suggested that the first quarter might even show a greater decline of -4.8%, which does allow the central bank to argue that the weakness in growth may be hitting the economy sooner than anticipated. However, the steady decline in monthly growth through the fourth quarter suggests little indication that the pace of decline is poised to reverse going into 2009. As a result, we expect that the Bank of Canada will opt to cut the overnight rate another 50 basis points to 0.50% following tomorrow’s policy-setting meeting.
– Paul Ferley, RBC Economics Research

“My own belief is if we were going to have some kind of big crash or recession, we probably would have had it by now.”
Prime Minister Stephen Harper speaking in Ottawa, Sept. 15, 2008, just two weeks before the beginning of that now-infamous fourth quarter.