Canadian and U.S. GDP and Some Thoughts on Government Deficits

April 30, 2012

Canadian real GDP in the three months to February exceeded GDP in the previous three months by 2.0% at a seasonally adjusted annualized rate.  For service-producing activities, GDP went up 2.1% annualized, while the growth rate for goods-producing industries, and its subset of industrial production, was 1.9%. 

The U.S. Commerce Department reported last Friday first-quarter GDP growth of 2.2% annualized.  U.S. real GDP had risen 2.2% between 1Q09 and 1Q10 and again by that exact percent in the year to 1Q11.  In the most recent four quarters to 1Q12, the GDP expansion rate was 2.1%.  Perhaps the most interesting trend in the U.S. national income accounts concerns government spending.  The shrill warnings about the U.S. deficit characterize U.S. fiscal spending as a runaway train that needs discipline.  In fact, government expenditures posted their sixth consecutive quarterly contraction during the first quarter of this year.  Such fell by 3.0% at an annualized rate in 1Q12.  After rising just 1.2% in the year to 1Q10 — Barack Obama’s first as president — U.S. government expenditures fell 1.1% in the year to 1Q11 and by 2.1% over the most recent four quarters to 1Q12.  U.S. government spending fell at a 3.6% annualized pace over the most recent two quarters, and this is not nearly as severe as the contraction planned for early 2013.

U.S. government debt has ballooned in large part because of weak economic growth.  Prior to expanding about 6.6% over the three years between 1Q09 and 1Q12, real GDP plummeted 4.5% in the four quarters between 1Q08 and 1Q09.  Over the 17 reported quarters since the end of 2007, real GDP rose just 1.3% cumulatively or at a measly 0.3% per annum pace.  Governments that impose austerity in such circumstances are badly misguided and doomed to pointlessly chasing their own tail.  U.S. public-sector debt, moreover, is not the root problem.  Such grew rapidly because of the original sin, which was skyrocketing household debt. 

Next to the United States, Europe, and Japan, Canada’s fiscal books are in terrific shape.  Over the first eleven months of fiscal 2011-12, which ended in March 2012, Canada posted a deficit of C$ 14.5 billion.  Not only was that 49% less than a year earlier, it was also C$ 10.4 billion smaller than projected in the Canadian annual budget presented on March 29.  That budget called for a a path of diminished deficits of C$ 21.1 billion in fiscal 2012/13, C$ 10.2 billion in fiscal 2013/14, and C$ 1.3 billion in fiscal 14/15 before restoring a surplus of C$ 3.4 billion in fiscal 2015/16.  Canadian debt is currently smaller than 35% of GDP and projected to shrink to 28.5% of GDP in fiscal 2016/17.  Almost certainly, it will be smaller than that by then.

Copyright 2012, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.



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