Throwback Edition: 2008 Recession in Canada and It’s Impact on the Automotive Industry

In this week’s blog post we are going to be throwing it back all the way to 2008! There were so many reasons that many Canadians will never be able to forget that year; the iPhone was expected to be released on Roger’s wireless service provider, the federal government issued a formal apology for the acts committed in Residential schools, and of course the economic crisis. We will be covering the impact of the crisis specifically on the automobile industry and ways to (possibly) prevent it from happening again in the future.  

What is a Recession and how is it different than an Economic Depression? 

A recession is defined as a sustained period of time, usually after two back to back quarters (six months) where there is weak or negative growth in real GDP (output). A larger increase in unemployment rates and reduced consumer spending often follow a recession. They are less impactful in comparison to a depression. 

An economic depression on the other hand is an occurance where the economy is in financial turmoil, often leading to a result in time where there is a negative activity base on the country’s GDP rate. 

An economic depression can last years and comes with acute unemployment, lower prices and incomes, and a lack of consumer confidence in the economy. There is no link between a recession and an economic depression. 

What Caused the Economic Recession in 2008 in Canada?

There are a couple of contributing factors that in combination with one another, caused the recession in 2008 in Canada. The main reason for the recession was the crash of the stock market. Too many people had taken out loans during that time and they couldn’t afford to pay it back. Lenders had relaxed their strict requirements to extend credit to people who otherwise were less than qualified. As a result, house prices began to rise, so much so that people weren’t able to afford them. 

This started to become a very repetitive occurrence, as more and more lending establishments began to do the same. However, the build up of bad debt started to result in many government bailouts starting with Bear Stearns. Bear Stearns was a New York City based-global investment bank, securities trading, and brokerage firm. 

In September 2008, investment firm, Lehman Brothers collapsed because of its overexposure to subprime mortgages. It was known as the largest bankruptcy filing in United States history to that point. Later that month, American International Group (AIG), an insurance giant, was the next investment company the government bailed out. They ran out of money playing the subprime mortgage game. 

With every government bailout, the Dow Jones was affected. These companies that were going bankrupt, were major contenders in the stock market, so this was bound to happen at some point. The Fed had announced a bailout package, which temporarily helped with investor confidence. 

The bank bailout eventually made its way to Congress, where the Senate voted against it on September 29, 2008. The Dow Jones plummeted a shocking 777.68, the largest drop in history to that point. Global markets were swept up in the panic, ultimately causing global instability. 

In October, Congress passed the bailout bill, but of course by then the damage was already done. The Labor department reported big job losses across the board, as the Dow Jones continued on its downward spiral. 

Other factors included: the collapse of oil and other commodity exports, failure on the government’s part to regulate the financial industry, and financial firms took too much risk. 

What About the Automotive Industry in Canada?

The automotive assembly industry in Canada in 2008 employed 45,091 people and they manufactured 2.1 million vehicles that year. However, little did they know what the future held for them. Motor vehicle sales fell by 3.1 million units to 16.2 million units (about 16% in just one year). 

North America has an integrated automotive industry which means whatever happens in Mexico, Canada, or the United States affects one another. Keeping this in mind, we turn to the origin country of the problem – the United States and sales data backs this up. Although motor vehicle sales held up rather well in both Canada and Mexico in 2008, they were down marginally from 2007. Additionally, since sales were declining in the United States, which by far was proven to be the dominant market in North America, Canadian and Mexican motor vehicle production was impacted by this.

Auto Sector Bailout

The auto sector in Canada was another area that needed to be bailed out. The North American automotive sector was in trouble before the recession hit, but the recession didn’t help either. It pushed General Motors and Chrysler into bankruptcy, but Ford was able to withstand the crisis. Chrysler ended up getting the short end of the stick and it was eventually purchased by the Italian automaker Fiat, where it was able to continue operations.

General Motors on the other hand, didn’t have a “saviour” and it was “too big to fail”. With the risk of a catastrophic collapse of GM’s network of suppliers and associated industries looming, the governments in Canada and the United States both stepped in. They took an equity stake in General Motors and the sudden burst of capital allowed GM the time to restructure and continue operations. The federal government and government of Ontario sold the last of its GM holdings in 2015.  

Final Thoughts – Is it possible to prevent it in the future?

Recessions are a normal part of the Canadian economy, and thus even if we prevented them, it would have other repercussions. There are ways to prepare for a recession and an article out of the University of Toronto explains. Here are 6 ways to prepare yourself: 

• Reduce spending, particularly on non-essential items, IMMEDIATELY
  • Rather than spending money on lunch everyday, pack a lunch
  • Reconsider subscriptions that renew automatically 
• Pay off credit card debt now
  • Lower balances allow a lower level of interest payments during any period of lost income or employment, making it easier to navigate financially during hard times
• Pay close attention to bill payments and avoid paying late charges
  • Make a plan to ensure bill payments are paid on or before the due date
• Become more hirable
  • Keep your job related skills up to date
• If possible, try to move into a recession proof job
  • Depends on skill levels, but generally includes being in the government sector, health care, and education
  • Consider options that are conducive to your skill set and preferences

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