GDP plunges record 38.7% in second quarter, but economy may be on mend faster than expected
Canada’s GDP contracted at an annualized rate of 38.7 per cent in the second quarter, according to Statistics Canada, but a better-than-expected recovery in June and July is making even the most bullish economists re-think their outlooks.
The harrowing decline in growth in the second quarter is the worst on record since the data was first recorded in 1961, although economists suspect it may very well be the worst showing since the Great Depression. Nothing was spared by the economic shutdown brought on by COVID-19, but trade suffered the deepest declines as imports sunk by 64.1 per cent and exports dropped 55.6 per cent. The quarter will also likely be remembered as having generated the largest decline in Canadian household spending on record.
Peak-to-trough, the current recession has already resulted in a 13.4 per cent drop in GDP despite only lasting two quarters. In comparison, the peak-to-trough declines seen during the global financial crisis in Canada only hit 4.4 per cent, according to the National Bank of Canada.
“Economic damage was all-encompassing in the shutdown quarter, with absolutely every major spending category falling at least at double-digit annual rates,” Bank of Montreal chief economist Douglas Porter wrote in a note.
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Economists expected the numbers to be this bad. In fact, the drop in growth was actually a bit better than Statistics Canada itself projected. What wasn’t foreseen was the economic rebound in June as GDP climbed 6.5 per cent.
The June number represents yet another record generated in the quarter, according to Canadian Imperial Bank of Commerce senior economist Royce Mendes. It wasn’t just higher than the consensus, it even toppled CIBC’s own projections which were even more bullish, Mendes wrote.
The economic reopening appeared to have provided an immediate boost — goods and services spending picked up substantially and 19 of 20 industrial sectors saw their growth increase, Mendes said. Standouts include two of the most battered sectors in the shutdown, accommodation and food and retail, jumping by more than 20 per cent each.
Statistics Canada also released its preliminary numbers for July which suggest continued growth for the economy, this time in the way of a three-per cent increase, which was also not projected by economists.
What’s also affecting how they view the outlook for the Canadian economy is the savings rate, which spiked to an all-time high of 28.2 per cent as a result of the decline in household spending. Thanks to the Canada Emergency Response Benefit, disposable incomes also rose in the second quarter, a 10.8 per cent increase. Government assistance in the quarter totalled $56 billion, according to the Royal Bank of Canada, and more than offset the $23-billion decline in wages and salaries. Mendes said Canadians may be able to use the extra cash from the quarter to lessen the impact of expiring mortgage deferrals and a still-elevated unemployment rate.
The combination of the June and July numbers and the strong savings numbers, both Porter and Mendes believe, are so good that they’ll each have to revise their outlook for the year. Porter has already done so. His projections for the year now stand at a 5.5 per cent decline, up from his previous estimate of six per cent. Mendes originally had a 7.1 per cent GDP contraction pencilled in.
“It’s not a big change, but it’s the first upward revision this year by us on Canada, which is a big deal,” Porter wrote.
Financial Post
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