It could be a while before normalcy returns to Canadian economy
Activity in May still 15 per cent below that of pre-lockdown
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.
Statistics Canada reported on Friday that real gross domestic product in May was 4.5 per cent higher compared to April, which was better than the Bay Street consensus of 3.5-per-cent 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 per cent 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 five per cent 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 per cent in economic output for the second quarter of 2020 — the equivalent of approximately 40 per cent 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 per cent of February levels, “still leaving a big hole to climb out of.”
Many sectors, including travel, international tourism, and recreation, will continue to feel the pain of pandemic response measures for some time to come
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 Thursday that U.S. economic output dropped at an annualized rate of 32.9 per cent 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.”