The Canadian economy roared back to life in the third quarter, recording its biggest ever expansion, but it was a lower than expected increase and early data show the momentum is quickly fading. Gross domestic product rose by an annualized 40.5% in the July to September period, Statistics Canada reported on December 1, erasing much of the record 38.1% drop in the second quarter. Economists were predicting a 48% increase. The rebound brings total output to 95% of pre-pandemic levels. 

Household consumption was a key driver in the third-quarter, rising 63% annualized. Canadians had accumulated savings during the initial lockdown, and spent much of it once restrictions were lifted. The household savings rate declined to 14.6%, from 27.5%.

Still, the data show much of that spending went toward buying imported goods, dulling the effect on growth. Imports surged by an annualized 114% in the third quarter, outpacing a 72% gain in exports.

Canada’s housing market, which has been on a tear, was also a major contributor to growth. Residential investment surged 187% on the back of strong housing starts and renovations. Statistics Canada reported that the increase in the housing market was due to low interest rates, driven down by the central bank in a bid to prod spending, as well as on home renovations.

Non-residential business investment disappointed, however, rising by just 26% annualized in the third quarter, a sign of how much the downturn has undermined business confidence. Non-residential business is still 13% below end of 2019 levels.

After the results were released on December 1, the Canadian dollar strengthened against its U.S. counterpart as the greenback broadly declined. The Canadian dollar was trading 0.4% higher at 1.2953 to the greenback, or 77.20 U.S. cents, having traded in a range of 1.2942 to 1.3006.

Early success controlling the spread of the virus allowed the economy to rebound quickly, as massive government aid propelled consumer spending and low interest rates fuelled a surge in the housing market. However, the data suggest further gains will be harder to achieve from here, particularly with a surge in COVID-19 cases and fresh lockdowns.

“The latest restrictions are set to cause GDP to stagnate at the end of 2020 and activity will remain depressed until an effective vaccine is rolled out,” Stephen Brown, senior Canada economist at Capital Economics, said in a report to investors. StatsCan released a preliminary estimate for October of 0.2% growth, which would be the lowest monthly gain since the sharp decline in April.

In new global economic forecasts, the Organisation for Economic Co-operation and Development estimated that Canada’s economy will have shrunk 5.4% in 2020 but predicted it will grow 3.5% next year. Canada’s private-sector economists are more optimistic about 2021, with projections ranging from about 4% to 5.5%.

Source: Toronto Star
Source: Financial Post
Source: Globe an Mail
Source: Globe and Mail