DLC UPDATE: Canadian Q2 GDP Growth Plunge–Rebounds Since April

Latest News Mark Goode 28 Aug

Canadian Economy Took a Record Nosedive in Q2

Canadian real GDP plunged 11.5% in the second quarter, or -38.7% at an annualized rate, the worst quarterly decline on record (see chart below). This followed an 8.2% plunge in Q1. The worst of the contraction occurred early in the quarter as the lockdown in March and April wreaked havoc on activity. Since then, the economy has shown surprisingly strong signs of recovery.

StatsCan revealed today that GDP rose 6.5% in June following the 4.8% rise in May and an estimated 3.0% growth in July. Even so, Canada’s recovery is expected to be bumpy and long. No doubt, not all businesses and sectors will expand in sync, and not all jobs will be recovered.

One of the brightest spots in the recovery has been housing, where activity surged in July, reflective of record-low mortgage rates and pent-up demand. Apparently, many homebound Canadians are reassessing their housing needs. Demand for increased space, especially in the suburbs or exurbs, has been robust.

Virtually every sector of the economy was battered in Q2. Household spending dived 43% while business investment collapsed at a 57% annual rate. Virus containment weighed on both, with a fall in oil prices exacerbating the decline in oil & gas investment. Net exports were the only sector that added to economic activity, but only because imports fell more than exports as housebound consumers and shuttered businesses had little need for imported products.

On a year-over-year basis, the monthly rise in June and July will leave GDP down a much milder 5%, but still worse than the -4.7% drop during the financial crisis. The surge in June–itself a record bounce–reflects the gradual re-opening of the economy, with retail, wholesale and manufacturing leading the way. Retail trade jumped 22.3% in June, surpassing its pre-pandemic level of activity. Motor vehicle dealers contributed most to growth.

Following a 17.3% jump in May, the construction sector rose 9.4% in June as a continued easing of emergency restrictions across the country contributed to the return to nearly normal levels of activity at construction sites. Residential construction grew 7.1% as increases in multi-unit dwellings construction and home alterations and improvements more than offset lower single-unit construction. Non-residential construction rose 11.0%, surpassing the pre-pandemic level of activity, as all three components were up.

Real estate and rental and leasing grew 2.5% in June. Activity at the offices of real estate agents and brokers jumped 65.2% in the month, following a 56.4% increase in May, as home resale activity in all major urban centres saw double-digit increases. The output of real estate agents and brokers was about 7% below February’s pre-pandemic level, but other data show it was up sharply in July, hitting new record highs.

GOVERNMENT PROVIDED A MUCH-NEEDED CUSHION 

Household disposable income surged last quarter despite the pandemic thanks to government income support (see chart below). The rise in income, coupled with the massive decline in consumer spending as well as the deferral of mortgage payments for many triggered a surge in the savings rate. The household saving rate jumped to 28.2% from 7.6% in the prior quarter. Savings rates, of course, are generally higher for higher income brackets.

BOTTOM LINE

The plunge in economic activity in the second quarter–though awful–was not as deep as the Bank of Canada expected (-43%) in its most recent Monetary Policy Report. As well, the rebound since the end of April has been stronger than expected, especially in the housing sector. To be sure, labour market conditions are still very soft with the jobless rate at 10.9% in July, but the new programs announced last week by the federal government to replace CERB will help ease the transition for people still looking for work.

A possible resurgence in the virus remains a risk unless an effective vaccine can be distributed. The economy will operate below capacity into the next year, but perhaps not as drastically below capacity as previously feared.

Dr. Sherry Cooper

DR. SHERRY COOPER

Chief Economist, Dominion Lending Centres
Sherry is an award-winning authority on finance and economics with over 30 years of bringing economic insights and clarity to Canadians.

More Posts – Website

Follow Me:
TwitterFacebook

DLC UPDATE: RECORD-SETTING CANADIAN HOUSING MARKET IN JULY

General Mark Goode 18 Aug

Canadian Housing Market Very Strong in July

Today’s release of July housing data by the Canadian Real Estate Association (CREA) showed a blockbuster July with both sales and new listings hitting their highest levels in 40 years of data. This continues the rebound in housing that began three months ago.

National home sales rose 26% month-over-month (m-o-m) in July, which translates to a 30.5% gain from a year ago (see chart below). July’s sales activity was the strongest for any month in history. According to Shaun Cathcart, CREA’s Senior Economist,  “A big part of what we’re seeing right now is the snapback in activity that would have otherwise happened earlier this year. Recall that before the lockdowns, we were heading into the tightest spring market in almost 20 years. Things may have gone quiet for a few months, but ultimately the market we’re seeing right now is mostly the same one we were heading into back in March. That said, there are some new factors at play as well. There are listings that will come to the market because of COVID-19, but many properties are also not being listed right now due to the virus, as evidenced by inventories that are currently at a 16-year low. Some purchases will no doubt be delayed, but the new-found importance of home, lack of a daily commute for many, a desire for more outdoor and personal space, room for a home office, etc. will certainly also spur activity that otherwise would not have happened in a non-COVID-19 world.”

For the third month in a row, transactions were up on a month-over-month basis across the country. Among Canada’s largest markets, sales rose by 49.5% in the Greater Toronto Area (GTA), 43.9% in Greater Vancouver, 39.1% in Montreal, 36.6% in the Fraser Valley, 31.8% in Hamilton-Burlington, 28.7% in Ottawa, 16.9% in London and St. Thomas, 15.7% in Calgary, 12.1% in Winnipeg, 9.7% in Edmonton and 5.4% in Quebec City.

New Listings

The number of newly listed homes climbed by another 7.6% in July compared to June, to a level of 71,879–the highest level for any July in history. New supply was only up in about 60% of local markets, as the rebound in supply appears to be tapering off in many parts of the country. The national increase in July was dominated by gains in the GTA. More supply is expected to come on the market in future months, particularly once a vaccine is widely available.

With the ongoing rebound in sales activity now far outpacing the recovery in new supply, the national sales-to-new listings ratio tightened to 73.9% in July compared to 63.1% posted in June. It was one of the highest levels on record for this measure, behind just a few months back in late 2001 and early 2002.

Based on a comparison of sales-to-new listings ratios with long-term averages, only about a third of all local markets were in balanced market territory, measured as being within one standard deviation of their long-term average, in July 2020. The other two-thirds of markets were all above long-term norms, in many cases well above.

The number of months of inventory is another important measure of the balance between sales and the supply of listings. It represents how long it would take to liquidate current inventories at the current rate of sales activity.

Housing markets are very tight, especially in Ontario, as demand has far outpaced supply. There were just 2.8 months of inventory on a national basis at the end of July 2020 – the lowest reading on record for this measure. At the local market level, a number of Ontario markets shifted from months of inventory to weeks of inventory in July.

Home Prices

The Aggregate Composite MLS® Home Price Index (MLS® HPI) jumped by 2.3% m-o-m in July 2020 – the second largest increase on record (after March 2017) going back 15 years. (see Table below). Of the 20 markets currently tracked by the index, they all posted m-o-m increases in July.The biggest m-o-m gains, in the range of 3%, were recorded in the GTA outside of the city of Toronto, Guelph, Ottawa and Montreal; although, generally speaking, most markets east of Saskatchewan are seeing prices accelerate in line with strong sales numbers. Price gains were more modestly positive in B.C. and Alberta.

The non-seasonally adjusted Aggregate Composite MLS® HPI was up 7.4% on a y-o-y basis in July the biggest gain since late 2017.

The MLS® HPI provides the best way to gauge price trends because averages are strongly distorted by changes in the mix of sales activity from one month to the next.

The actual (not seasonally adjusted) national average price for homes sold in July 2020 was a record $571,500, up 14.3% from the same month last year.

The national average price is heavily influenced by sales in the Greater Vancouver and the GTA, two of Canada’s most active and expensive housing markets. Excluding these two markets from calculations cuts around $117,000 from the national average price. The extent to which sales continue to fluctuate in these two markets relative to others could have further compositional effects on the national average price, both up and down.

Bottom Line

CMHC has recently forecast that national average sales prices will fall 9%-to-18% in 2020 and not return to yearend-2019 levels until as late as 2022. I continue to believe that this forecast is overly pessimistic. Here we are in the second half of 2020, and the national average sales price has risen 14.3% year-over-year.

The good news is that the housing market is contributing to the recovery in economic activity. While the course of the virus is uncertain, Canada’s government has handled the COVID-19 situation very well from both a public health and a fiscal and monetary perspective. The future course of the economy here will depend on the virus. While no one knows what that will be, suffice it to say that Canada’s economy is en route to a full recovery, but it may well be a long and bumpy one.

Dr. Sherry Cooper

DR. SHERRY COOPER

Chief Economist, Dominion Lending Centres
Sherry is an award-winning authority on finance and economics with over 30 years of bringing economic insights and clarity to Canadians.

More Posts – Website

Follow Me:
TwitterFacebook

DLC UPDATE: COVID SUPERCHARGES CANADIAN HOUSING– YET CMHC STILL GLOOMY

General Mark Goode 13 Aug

Pandemic Triggers Red-Hot Summer Housing Market

We will get the full story on July housing in Canada when the Canadian Real Estate Association releases its July data in the next few days, but local real estate boards have reported a robust July market. Even in Calgary, year-over-year sales have jumped by double digits. Sales in Montreal were up more than 45% y-o-y, while Ottawa and the GTA were also very strong. Out west, Vancouver and other hot spots in BC saw the results of pent up activity, from both homebuyers and sellers, that had been accumulating over the past year.

Remember, had it not been for the pandemic, a record spring sales season was in the cards. The lockdown postponed that strength, with sales jumping sharply in May, June and July. Supply continues to remain limited relative to demand, and the Bank of Canada is looking towards housing as a leading sector in the recovery.

Record-low interest rates have boosted affordability everywhere. The Bank of Canada has made it clear that interest rates will remain low for an extended period. Mortgage rates have fallen, as have interest rates on home equity lines of credit. Even five of the Big Six banks have cut their advertised 5-year fixed mortgage rates (posted rates) by about 15 basis points to 4.79%.

These rates have been very sticky on the downside, as banks are reluctant to cut posted rates, which are is used to calculate the penalty for breaking a mortgage. Indeed, the gap between the posted rate and the 5-year government of Canada bond yield is historically wide. So is the gap between posted rates and actual contract mortgage rates at the very same banks.

The Bank of Canada posted rate is the qualifying rate for the mortgage stress test for insured and uninsured mortgages at the federally-regulated lenders–the so-called B-20 rule. That qualifying rate is set to fall from its current level of 4.94% to 4.79% later today when the central bank is due to update its figure. 

Last February, following months of pressure from the real estate industry, the Department of Finance and the federal banking regulator announced they would rejig the “floor” of stress tests that borrowers must pass to qualify for insured and uninsured home loans. Then came COVID-19, and a sweeping government rescue that included regulatory relief for lenders. As part of the response, the change to the stress test, which was planned for April, was suspended indefinitely.

Last month, the Office of the Superintendent of Financial Institutions announced it would “gradually restart” policy work in the fall. Still, it made no mention of resuming consultations on the change to its stress test for uninsured mortgages, a vital component of the regulator’s B-20 guideline. If the new rules had been implemented, it is estimated that the qualifying rate floor would be roughly 4.09% rather than the new rate of 4.79%.

Several factors, in addition to low interest rates, have contributed to the housing market surge. Having spent so many months working from home, many people are looking for more space. With a significant number of businesses announcing that telecommuting will be the new normal, at least most of the time, buyers are moving to more remote suburban locations where their dollars buy more space. This has been reflected in the slowdown in the condo market. This is not just a Canadian phenomenon but is evident in the US and parts of Europe as well.

Despite the surprising strength in homebuying during COVID, CMHC continues to blast warnings.

CMHC Wants To Expose The “Dark Economic Underbelly”

Yesterday, Evan Siddall, the CEO at the Canada Mortgage and Housing Corp, published an August 10 letter to the financial industry imploring lenders to “reconsider” offering mortgages to highly leveraged households, saying excessive borrowing will worsen the pain of the coming economic adjustment. Evan Siddall said the Crown corporation had lost market share due to restrictions it imposed on high-risk borrowers earlier this summer. Private mortgage insurers have picked up that business, weakening CMHC’s position and threatening the agency’s ability to protect the mortgage market in the event of a crisis, he said.

CMHC continues to project that house prices will fall later this year, and next, “once government income supports unwind, bankruptcies increase and unemployment starts to bite.” A highlighted sentence in the letter says, “We don’t think our national mortgage insurance regime should be used to help people buy homes with negative equity. But by offering 95 percent loan-to-value mortgages subject to a 4 percent capitalized insurance fee in the midst of an economic calamity, that’s what insurance providers are doing.” Siddall, who steps down from his position at the end of the year, goes on to say that we risk exposing too many people to foreclosure. 

CMHC announced in June it would narrow eligibility criteria to require higher credit scores and lower debt burdens to qualify for a mortgage. The move, which took effect on July 1, was intended to protect new home buyers from falling prices and reduce taxpayer risk to any market correction.

We have sustained a reduction in our market share to promote a more competitive marketplace for your benefit,” Siddall said in the letter. “However, we are approaching a level of minimum market share that we require to be able to protect the mortgage market in times of crisis. We require your support to prevent further erosion of our market presence.”

CMHC’s private-sector competitors, Genworth MI Canada Inc. and Canada Guaranty Mortgage Insurance Co., opted not to follow along with the rule changes and have increased their market share, as a result, said Siddall.

Siddall concluded with two requests for lenders: “We would hope you would reconsider highly leveraged household lending. Please put our country’s long-term outlook ahead of short-term profitability. Second, please don’t aggravate the impact by undermining CMHC’s market presence unnecessarily.”

CMHC’s ability to respond effectively in a crisis will be weakened if its market share deteriorates significantly further, he said. “If you want us in wartime, please support us in peacetime.”

Dr. Sherry Cooper

DR. SHERRY COOPER

Chief Economist, Dominion Lending Centres
Sherry is an award-winning authority on finance and economics with over 30 years of bringing economic insights and clarity to Canadians.

More Posts – Website

Follow Me:
TwitterFacebook

DLC UPDATE: GREAT NEWS ON THE JOB FRONT IN JULY

Latest News Mark Goode 7 Aug

Better-Than-Expected Canadian Jobs Report in July Shows Economy’s Resilience

The July Labour Force Survey, released this morning by Statistics Canada, reflects labour market conditions as of the week of July 12 to 18. Although public health restrictions had been substantially eased in most parts of the country—with the exception of some regions of Ontario, including Toronto—some measures remained in place, including physical distancing requirements and restrictions on large gatherings.

From February to April, 5.5 million Canadian workers–30% of the workforce–were affected by the COVID-19 economic shutdown. This included a drop in employment of 3.0 million and a COVID-related increase in absences from work of 2.5 million. Today’s jobs report showed that total employment rose by 418,500 (+2.4%). This is on the heels of a 953,000 (5.8%) gain in June and 290,000 in May. Altogether, this brought employment to within 1.3 million (-7.0%) of its pre-COVID February level.

The number of Canadians who were employed but worked less than half their usual hours for reasons likely virus-related dropped by 412,000 (-18.8%) in July. Combined with declines recorded in May and June, this left COVID-related absences from work at just under 1 million (+972,000; +120.3%) above February levels.

By the week of July 12 to July 18, the total number of affected workers stood at 2.3 million, a reduction since April of 58.0%.

MOST EMPLOYMENT GAINS IN JULY WERE IN PART-TIME WORK

Most of the employment gains in July were in part-time work, which increased by 345,000 (+11.3%), compared with a much smaller increase of 73,000 (+0.5%) in full-time work.

The COVID-19 labour market shock was felt particularly hard in part-time work. From February to April, losses in part-time work (-29.6%) were significantly heavier than in full-time employment (-12.5%). This was due to a number of factors, including part-time work being more prevalent in industries that were most affected by the COVID-19 economic shutdown, namely retail trade and accommodation and food services.

Growth in part-time employment has outpaced full-time growth in each of the past three months. With July gains, part-time work is now closer to its pre-COVID level (-5.0%) than full-time employment (-7.5%).

The relatively flat growth in full-time work in recent months is reflected in an increase in the proportion of part-time workers doing so involuntarily. In July 2019, 22.2% of those working less than 30 hours per week would have preferred full-time work. One year later, this proportion had increased 7.6 percentage points to 29.7%, an indication that the COVID-19 economic shutdown and subsequent re-opening has resulted in a reduction, at least temporarily, in the number of hours being offered by employers.

STRONGER EMPLOYMENT GAINS FOR WOMEN IN JULY, BUT MEN CONTINUE TO BE CLOSER TO PRE-SHUTDOWN LEVELS

In July, employment rose faster among women (+3.4% or +275,000) than men (+1.5% or +144,000). Due to heavier employment losses among women in March, however, employment in July was closer to its pre-shutdown level for men than for women.

Employment was little changed in July among both male and female core-aged workers with children under 18.  As in June, employment in July was furthest away from pre-shutdown levels among mothers whose youngest child was aged 6 to 17.

THE NUMBER OF CANADIANS WORKING FROM HOME CONTINUED TO FALL IN JULY

Among those who were employed and not absent from work, the number working from home dropped by 400,000, compared with an increase of 300,000 in the number working at locations other than home. Despite this decline, the number of Canadians who worked from home in July (4.6 million) remained significantly higher than the number who usually do so (1.6 million).

THE PACE OF IMPROVEMENT FROM JULY ON IS LIKELY TO CONTINUE TO SLOW. 

Compared to February, there were still 274,000 fewer people working in goods production jobs in July. There were still 309,000 fewer workers in accommodation and food services, 109,000 fewer in information, culture, and recreation, over that period – and those services jobs will probably be slower to return with households still sticking closer to home. The recovery in the goods-producing side of the economy will be limited at some point by ongoing weakness in the oil & gas sector.

UNEMPLOYMENT RATE CONTINUES TO DROP FROM MAY’S RECORD HIGH

The unemployment rate was 10.9% in July, falling 1.4 percentage points for the second consecutive month and down from a record high of 13.7% in May. The unemployment rate was 5.6% in February.

The number of unemployed people fell for the second consecutive month in July, down 269,000 (-11.0%). Despite this decrease, almost 2.2 million Canadians were unemployed in July, nearly twice as many (+92.6%) as in February (1.1 million).

In July, temporary layoffs declined sharply for a second consecutive month, down 384,000 (-45.5%). Among those on temporary layoff in June, approximately half became employed in July, either returning to their old job or starting a new one (not seasonally adjusted). Despite the sharp declines in June and July, the number of people on temporary layoff (460,000) was more than four times higher than it was in February.

In July, the number of people searching for work increased 115,000 (+7.1%), mainly the result of people entering the labour force to look for work.

Employment Increases in Most Provinces in July–Led by Ontario and Quebec

In Ontario, employment rose by 151,000 (+2.2%) in July, building on an increase of 378,000 in June and bringing jobs to 91.7% of its pre-pandemic February level. The initial easing of COVID-19 restrictions occurred later in Ontario than in most other provinces. Additional easing was introduced in most regions of the province on July 17, at the end of the survey week.

Employment in the census metropolitan area of Toronto increased by 2.2% in July. This was the same rate of increase as the province, despite the loosening of the COVID-19 restrictions occurring later in the provincial capital than in most other regions. Employment in Toronto reached 89.9% of its February level.

Employment in Quebec increased by 98,000 (+2.4%) in July, adding to gains in the previous two months and bringing employment to 94.4% of its pre-COVID level. The increase in employment in July was all in part-time work. The unemployment rate decreased 1.2 percentage points to 9.5%, the third consecutive monthly decrease.

Employment rose more slowly in Montréal  (+28,000; +1.3%) than in the rest of Quebec and reached 94.4% of its February level.

The number of employed British Columbians increased by 70,000 (+3.0%) in July, reaching 93.5% of the February employment level. The unemployment rate fell by 1.9 percentage points to 11.1%.

In Vancouver, employment increased by 48,000 (+3.8%) to reach 89.9% of the February level, a degree of recovery lower than the province as a whole.

In Alberta, employment increased by 67,000 (+3.2%) in July, including gains in both full-time and part-time work. The unemployment rate for the province fell by 2.7 percentage points in July to 12.8%, the first decline since the COVID-19 economic shutdown.

In Saskatchewan, employment rose by 13,000 (+2.5%), while the unemployment rate fell 2.8 percentage points to 8.8%.

Employment in Manitoba increased (+12,000) for the third consecutive month, and the unemployment rate declined by 1.9 percentage points to 8.2%.

Employment in Newfoundland and Labrador increased by 4,300 (+2.1%) in July, and the unemployment rate dropped 0.9 percentage points to 15.6%.

In Nova Scotia, employment rose by 3,400 (+0.8%) in July, reaching 92.7% of its February level. The unemployment rate in the province declined by 2.2 percentage points to 10.8%.

Employment in Prince Edward Island rose by 1,100 in July (+1.5%), adding to the gains in the previous two months. The unemployment rate declined by 3.5 percentage points to 11.7%.

In New Brunswick, employment was little changed in July after recording employment gains of 39,000 from April to June. Employment in the province—which was among the first to begin easing COVID-19 restrictions—was at 96.6% of its pre-COVID February level, the most complete employment recovery of all provinces to date.

BOTTOM LINE 

This was a strong jobs report, but the low-hanging fruit has already been picked. Undoubtedly, Canada’s economy is still digging itself out of a deep hole, and some jobs are gone for good. Accommodation and food services are still hard hit, as is leisure and entertainment.

Many small and some large businesses will not survive. But new sectors are proliferating as the pandemic accelerated the technological forces that were already in train. I expect to see strong job growth in the following new and burgeoning areas: telemedicine, big data, artificial intelligence, cloud services, cybersecurity, 5G, driverless transportation and clean energy. Online shopping will also continue to proliferate as Canadians have learned to use delivery services and online retail.

Unfortunately, those who can afford it least were hardest hit in the pandemic-shutdown. Many of the lost jobs will not return.

Canada has done an excellent job of flattening the pandemic curve, but as evidenced by what is happening in the US, we cannot let our guard down. As many students return to the classroom, the risk of disease spread will undoubtedly rise. Also, we have no idea what colder weather will bring or when a vaccine will be widely available. We must continue to prepare for the worst but hope for the best. In the meantime, our economy is proving its underlying resilience, and our government policies are cushioning the blow to those that are suffering the most.

South of the Border–US COVID Situation Is A Disaster 

Nearly every country has struggled with the pandemic and made mistakes along the way. But the US stands alone among affluent countries in the failure of its pandemic response. In the past month, about 1.9 million Americans have tested positive for the virus. That’s more than five times as many as in all of Europe, Canada, Japan, South Korea and Australia, combined.

“Even though some of these countries saw worrying new outbreaks over the past month, including 50,000 new cases in Spain … the outbreaks still pale in comparison to those in the United States. Florida, with a population less than half of Spain, has reported nearly 300,000 cases in the same period,” wrote David Leonhardt of the New York Times yesterday.

Moreover, the end of July saw the expiration of the $600/week federal top-up of unemployment benefits, which to-date has been successful at providing a floor for household income, and subsequently helps boost household spending. As well, the prohibition of eviction has ended as Congress continues to wrangle on a new relief package.

Larry Kudlow, the administration’s chief economist, declared last week that a “V-shaped recovery” was still on track. There is no way that will be possible given the suspension or reduction in federal assistance, the rapidly depleting funds of the state and local governments who are, by law, not allowed to run budget deficits, and the continued surge in the disease.

Today’s July jobs report in the US showed the economic rebound was still making headway as payrolls increased by 1.76 million in July, beating economists estimates. The unemployment rate fell to 10.2%, while a broader gauge of joblessness also declined to 16.5%.

The path forward for the US will remain quite difficult as businesses use up the last of their federal loans and reduced unemployment benefits pressure consumer spending. The rebound in the US economy is fragile, as high-frequency data continue to indicate. For the week of July 31st, new COVID cases continue to worsen. Some states have had to halt or even backpedal reopening plans; same-store sales are falling, as are restaurant bookings, electricity demand, airline tickets and public transit ridership.

At the time of this writing, the latest headlines are screaming that “US Virus Aid Talks Are On the Brink of Collapse,” as Trump mulls over an executive order on some jobless aid. American consumer confidence can’t help but be badly battered by such incompetence, as the world looks on in utter disbelief.

Dr. Sherry Cooper

DR. SHERRY COOPER

Chief Economist, Dominion Lending Centres
Sherry is an award-winning authority on finance and economics with over 30 years of bringing economic insights and clarity to Canadians.

More Posts – Website

Follow Me:
TwitterFacebook

DLC UPDATE: CANADA’S ECONOMY IS OUTPERFORMING THE US

General Mark Goode 4 Aug

Canadian Economy Recovers Almost Half Its COVID-Induced Loss in May and June

The Canadian economy bounced back sharply in May and June as Canadian provinces eased lockdown measures.

GDP expanded 4.5% in May, and activity in June was even more robust at an estimated 5% rise. Cumulatively, GDP rose 10% in May and June, after plummeting more than 18% in March and April. These figures are calculated on a month-over-month basis.

These figures point to about a 40% annual rate decline in second-quarter GDP in Canada, which is roughly in line with economists’ projections. South of the border, the US posted a 33% contraction in GDP for the second quarter, the most massive plunge on record (see details below). It’s not surprising that Canada’s economy tanked by more than the US in Q2, as Canada enacted more aggressive restrictions earlier than the US and eased them more slowly. These public health restrictions were well worth it, as Canada has had far greater success at flattening the curve of new cases and deaths. Moreover, Canada’s economy will likely outpace the US in Q3, showing the benefit of allowing the public health considerations to dominate.

Canadian output was up in most sub-sectors in May, with double-digit monthly gains by retailers coinciding with the reopening of many stores. Construction, too, recorded a strong rebound, with activity up 17.6% month-over-month in the sector.

Activity at food services and bars rose 35.1% in May as dining rooms and patios began to open in certain parts of the country, while other restaurants continued relying exclusively on take-out and delivery. Meanwhile, accommodation services dropped 2.3%, as ongoing restrictions on international and interprovincial travel kept most Canadians at home.

Real estate and rental and leasing increased 1.5% in May following a 3.4% decline in April. Activity at the offices of real estate agents and brokers jumped 57.1% in the month, as home resale activity in nearly all major urban centres increased in conjunction with a substantial increase in the number of newly listed homes. Nevertheless, the output of real estate agents and brokers remained 44% below February’s level.

Arts, entertainment, and recreation declined another 2.9%. We expect some of these services industries to continue to lag the recovery as demand will be slow to rise due to remaining safety protocols and concerns about virus spread.

Oil production remained sluggish in May, down another 2.7% from April and drilling activity has yet to show signs of a significant rebound into the summer.

US ECONOMY SHRINKS AT A RECORD 32.9% PACE IN Q2

US gross domestic product shrank 9.5% in the second quarter from the first, a drop that equals an annualized pace of 32.9%, the Commerce Department’s initial estimate showed on Thursday. That’s the steepest annualized decline in quarterly records dating back to 1947. The drop in GDP in the quarter was close to expectations but was still alone more than twice the total 6-quarter peak-to-trough decline in the 2008/09 recession.

Consumer spending, which makes up about two-thirds of GDP, slumped an annualized 34.6%, also the most on record. While employment, spending and production have improved since reopenings picked up in May and massive federal stimulus reached Americans, a recent surge in infections has tempered the pace of the recovery.

US Jobless Claims

A separate report Thursday showed the number of Americans filing for unemployment benefits increased for a second straight week. Initial claims through regular state programs rose to 1.43 million in the week ended July 25, up 12,000 from the prior week, the Labor Department said. There were 17 million Americans filing for ongoing benefits through those programs in the period ended July 18, up 867,000 from the prior week.

While the economic restart has helped put 7.5 million Americans back to work in May and June combined, payrolls are down more than 14.5 million from their pre-pandemic peak.

“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 Wednesday 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 extensive — or sustained — this period would be, he said. This is a reminder that there are limits to how much the economy can rebound to a ‘new normal’ in the absence of a vaccine or more effective treatments.

According to Bloomberg News, The US economy has stalled for the fourth consecutive week as new virus cases continue to surge and some lockdown measures have been reinstated. In the week ending July 24, we saw a decline in US public transit ridership, airline passengers, mortgage applications, consumer confidence, and same-store sales.

With the election only three months away, American voters will have to decide whether to re-elect President Donald Trump to a second term against a backdrop of the virus-induced recession and his response to the health crisis. Not surprisingly, Donald Trump floated the idea of delaying the election in a tweet yesterday morning, suggesting once again the false claim that widespread mail-in voting would make the election “inaccurate and fraudulent.” The president has no power to postpone or cancel an election on his own, and his comment triggered a hugely negative response from both his own party and the Democrats. 

In the meantime,a $600 weekly supplement to unemployment benefits that has provided a key economic lifeline for millions of Americans ends today with Republicans and Democrats still quarrelling over a path forward. This, while US coronavirus deaths now top 152,000, hitting records in Texas and Florida and Dr. Anthony Fauci warns that the disease is spreading rapidly to the Midwest.

BOTTOM LINE

The Canadian economy is outpacing the US in the early recovery period.

Some of the initial bounce-back in Canada – particularly in the housing market – probably reflects the release of pent-up demand generated during the lockdown. Unprecedented income supports have also helped prop up near-term household purchasing power. Payments from CERB alone looked larger than total wage losses through the downturn in April, and we expect to see more of the same in May payroll employment and wage numbers in the week ahead.

The threat of a resurgence in virus spread will still limit the amount that the economy can recover over the second half of this year – and activity in the oil and gas sector still looks exceptionally soft. We still expect GDP to be more than 5% below year-ago levels, and the unemployment rate elevated, in Q4. But there is some scope for Canada to outperform the US in the very near-term, provided virus spread can remain relatively well contained.

According to early advance data for July published by RBC economics, retail and recreation activity in Canada continues to recover more quickly than in the US states suffering surging COVID cases (see chart below).

Dr. Sherry Cooper

DR. SHERRY COOPER

Chief Economist, Dominion Lending Centres
Sherry is an award-winning authority on finance and economics with over 30 years of bringing economic insights and clarity to Canadians.

More Posts – Website

Follow Me:
TwitterFacebook