Canadian GDP had its worst one-month drop on record in March, but stark projections for April are fuelling the belief that the worst is yet to come. On May 29 Statistics Canada reported that the economy on an annualized basis shrank 8% during the first quarter, the worst decline since the financial crisis in 2009 and one that outpaced the 5% blow dealt to the U.S. economy.

The grim figures were widely expected since the federal and provincial governments locked down the economy in an attempt to stop the spread of COVID-19. RBC senior economist Nathan Janzen called the numbers “jaw-dropping” in a note, and said the 7.2% loss in March was unprecedented but could have been worse.

“That was easily the largest one-month drop on record but was still less-bad than feared,” he said. “Statistics Canada had earlier estimated the drop at 9% in March.”

The losses were across the board: 19 of the 20 sectors that Statistics Canada reports on yielded negative results. Only agriculture, forestry, fishing and hunting had an increase in activity. The hardest-hit sectors — accommodation and food services and arts, entertainment and recreation — are the ones that heavily rely on consumer spending and each plunged by 40%.  Consumers can’t be blamed for being more careful with their spending, which fell by 9% in the quarter to become the second-largest drop on record, given that talks of a recession were mounting. Not even health care was spared, suffering an 11% decrease in activity because of non-COVID-19-related medical care plunging, Janzen said. 

But the economy was only locked down for half of March, so the numbers, while bad, may not paint a completely accurate picture. “As the restrictions on activity only came into effect in the middle of March and oil firms slashed output in April, it is clear the data will get much worse,” Capital Economics senior Canada economist Stephen Brown said in a note.

Statistics Canada estimates the economy contracted 11% in April. Janzen said GDP will have declined approximately 17% between March and April, 3.5 times the entire cumulative 10-month, peak-to-trough decline in GDP during the financial crisis. 

Brown is still projecting that GDP will begin to rise again in May and June — as the economy reopens — but it won’t be enough to stop GDP from free-falling in the second quarter. The economist has penciled in a 45%  decline on an annualized basis, although that number may end up closer to 40%, he said, because housing starts held up better than he expected and more oil production cuts may have taken place in March than April.

However, it is possible that April will represent the bottom of the economic downturn. Since provinces began to reopen in May, several indicators – new job postings, cross-border truck traffic and business confidence – have shown improvement, even though they remain well below pre-crisis levels.

A positive turn for GDP in May, when Brown is projecting a 5%, and in June, when he expects a 10% boost, would reinforce the idea that the Canadian economy is past the worst. The increased activity could be led by a new surge in consumer spending, CIBC senior economist Royce Mendes said in a note. The reduced spending, which has led the savings rate to jump to 6.1% from 3.6%, could “translate into pent-up demand and additional spending in the near-term as businesses reopen.”

Despite waning pessimism, more than 40% of small businesses say they are in bad shape, according to recent survey results from the Canadian Federation of Independent Business. Many companies are reopening to weaker sales but face larger debt obligations. Moreover, some households will be living off less income for some time. As such, the recovery is subject to considerable uncertainty.

“Even if people are going back [to stores] and we start to see some growth, how robust will it be?” said Brian DePratto, TD senior economist. “Will we really see enough to [quickly] replace the size of the hit we’ve seen? I would argue probably not, that it’s going to be a slower recovery.”

Source: Globe and Mail
Source: The Star
Source: Financial Post