Canadian Economy Bounces Back in May, but ‘Normal’ Could Be a Long Time Coming

Canada’s economy is healing, but the damage done by the COVID-19 pandemic and the threat posed by a second wave of the coronavirus means a return to normalcy isn’t happening anytime soon, experts say. On July 31, Statistics Canada reported that real gross domestic product in May was 4.5% higher compared to April, which was better than the Bay Street consensus of 3.5% growth.

The positive economic growth in May came as provinces and territories began reopening parts of their economies, StatsCan noted. It also followed two sharp drops in Canadian GDP seen in both March and April, when the pandemic and government shutdowns took big bites out of the country’s output.

However, May’s green shoots come with a caveat, as StatsCan said economic activity was still 15% below pre-pandemic levels in February. Moreover, the growth was supported by time-limited government support for people and businesses, and it could still be buckled by a second wave.

“Many sectors, including travel, international tourism, and recreation, will continue to feel the pain of pandemic response measures for some time to come,” wrote Brian DePratto, senior economist at Toronto-Dominion Bank, in a note. “‘Normal’ is still a long way away.”

StatsCan also provided a preliminary forecast of an approximately 5% rise in real GDP for June. That growth, the agency said, was supported by increased output from a wide variety of industries, including manufacturing, retailing and construction.

But the flash estimate from StatsCan still indicated a drop of around 12% in economic output for the second quarter of 2020 — the equivalent of approximately 40% on an annualized basis — compared to the first three months of the year. Bank of Montreal economist Benjamin Reitzes also wrote that StatsCan’s June estimate would put GDP at around 90% of February levels, “still leaving a big hole to climb out of.”

Canada could now have to eke out additional economic growth. Although the “bounce-back” in May and June looks to be stronger than expected, much of it stemmed from the easing of measures taken to stop the spread of COVID-19, as well as support from governments to prop up household income, Royal Bank of Canada economist Claire Fan said.

“Further marginal gains will be harder to come by in the months to follow,” Fan wrote in a note. “And, absent a vaccine or more effective treatments, the threat of resurgence in virus spread will keep some containment measures in place — and spending (on services in particular) subdued.”

The Bank of Canada has likewise warned that the comeback could lose steam after the initial burst from the economic reopening. The central bank’s governor, Tiff Macklem, said on July 15 that it will take a long time before the economy gets back to where it was at the end of 2019. “Some businesses will close, while others will be unable to return to pre-pandemic levels of activity,” Macklem said. “Business and consumer confidence have been shaken, and consumers are likely to be cautious with their spending.”

One thing Canada does have going for it is a grip on the spread of COVID-19 that is far firmer at the moment than that of the United States. It was also announced on July 30 that U.S. economic output dropped at an annualized rate of 32.9% in the second quarter. 

The “more cautious reopening” by Canada has helped keep case numbers under control and suggests the domestic economy could outperform U.S. growth in the third quarter, Canadian Imperial Bank of Commerce economist Royce Mendes said. “If Canada is able to keep new COVID-19 cases low, the divergence in growth between the two countries could be stark,” Mendes wrote in a note. “However, with the reopening in Canada continuing to add to the list of sanctioned activities, there’s ample risk around the forecast both to the upside and downside.”

Source: Financial Post


U.S. Economy Shrunk at Record 32.9% Rate in Second Quarter as COVID-19 Shattered Spending

The U.S. economy shrank at a dizzying 33% annual rate in the April-June quarter — by far the worst quarterly plunge ever — when the viral outbreak shut down businesses, throwing tens of millions out of work and sending unemployment surging to 14.7%, the government said on July 30. The Commerce Department’s estimate of the second-quarter decline in the gross domestic product, the total output of goods and services, marked the sharpest such drop on records dating to 1947. The previous worst quarterly contraction, a 10% drop, occurred in 1958. 

Last quarter’s drop followed a 5% fall in the January-March quarter, during which the economy officially entered a recession triggered by the virus, ending an 11-year economic expansion, the longest on record in the United States. The contraction last quarter was driven by a deep pullback in consumer spending, which accounts for about 70% of economic activity. Spending by consumers collapsed at a 34% annual rate as travel all but froze and shutdown orders forced many restaurants, bars, entertainment venues and other retail establishments to close.

Business investment in structures, equipment and intellectual property slumped an annualized 27% pace, the steepest slide since 1952, while residential investment dropped at a 38.7% rate, the most since 1980. More recently, figures have shown a pickup in home sales as Americans take advantage of record-low mortgage rates. The pandemic’s toll on household spending for services was breath-taking: A 43.5% annualized slide during the quarter, subtracting nearly 23 percentage points from GDP. 

The job market, the most important pillar of the economy, has been severely damaged. Tens of millions of jobs vanished in the recession. More than one million laid-off people have applied for unemployment benefits for 18 straight weeks. So far, about one-third of the lost jobs have been recovered, but the resurgent virus will likely slow further gains in the job market.

So dizzying was the contraction last quarter that most analysts expect the economy to produce a sharp bounce-back in the current July-September quarter, perhaps of as much as 17% or higher on an annual basis. Yet with the rate of confirmed coronavirus cases having surged in a majority of states, more businesses being forced to pull back on re-openings and the Republican Senate proposing to scale back government aid to the unemployed, the economy could worsen in the months ahead. 

“We have seen some signs in recent weeks that the increase in virus cases, and the renewed measures to control it, are starting to weigh on economic activity,” Fed Chairman Jerome Powell said at a news conference on July 29 after the central bank’s two-day policy meeting. “On balance, it looks like the data are pointing to a slowing in the pace of the recovery,” though it was too soon to say how large — or sustained — this period would be, he said. The Trump administration is betting against that outcome in asserting that the economy will undergo a V-shaped recovery in which last quarter’s plunge would be followed by an impressive rebound in the current quarter — a hoped-for dose of good news that would be reported in late October, not long before Election Day.

Source: Globe & Mail