Canadian Economic Performance – 2nd Qtr Reports

As we wrestle with the economic carnage caused by the pandemic on various industry sectors and its effect on your business survivial. Here are some reports from some key industry sources that show what the bumpy ride ahead may look like as we deal with this disruption to the economy.

The effects of the COVID-19 pandemic have been severe. Mandated business closures and a collapse in both business and consumer confidence will result in an 8.2 per cent contraction for the Canadian economy this year—the worst annual contraction on record.

At its peak, roughly 3 million Canadians had lost their jobs due to the pandemic. The worst does appear to have passed, however, as nearly 300,000 jobs were regained in May. Nevertheless, the road to recovery will be long and employment will still be nearly 1.1 million lower for 2020 as a whole than it was in 2019.

The devastation in labour markets is weighing heavily on spending this year. Household consumption dipped by 11.3 per cent in the first quarter, and we expect a staggering 57.5 per cent drop in the second. And while a recovery is inevitable in the second half of the year, spending is not forecast to return to its pre-pandemic level until the second half of 2021.

The business sector will fare no better. With global demand drying up, exports are forecast to contract by 14.3 per cent in 2020. Unsurprisingly in this uncertain environment, firms are reluctant to invest in new capacity, and we expect an 11.3 per cent drop in private sector investment this year.

With the worst of the recession likely over, the outlook for 2021 is brighter. The economy is forecast to rebound by 6.7 per cent in 2021 and 4.8 per cent in 2022. As the threat of the pandemic eases, how well the reopening of the economy and the withdrawal of government support is managed will be a crucial determinant of the economy’s trajectory over the next several years.

All industry-groups posted declines in April as a full month of virus containment measures took its toll. Manufacturing and construction output both fell more than 20%, as did retail trade. Health care and social assistance fell another 10%, education output fell 9%. Still, the largest 2-month declines were, unsurprisingly, in accommodation & food services and arts, entertainment and recreation which fell 64% and 56%, respectively, over March and April combined.

Statistics Canada estimated that GDP increased 3% in May. That would retrace less than 15% of the March/April declines, but containment measures have continued to ease and early reports on June have looked significantly less-bad.

  • Canada GDP fell (an unprecedented) 11.6% in April, but recovery began in May
  • Employment jumped by 953 thousand in June – still down 1.8 million from February
  • May retail sales grew 18.7% from April, and preliminary estimate points to further growth (24.5%) in June
  • Total housing starts up to 212k in June
  • Exports increased 6.7% in May, imports fell further (-3.9%), and the net deficit narrowed to $0.7 billion
  • CPI was up +0.7% from a year ago from – 0.4% in May

Global Outlook: An Unprecedented Decline, But Recent Data Consistent With Rebound

Following the sharpest economic decline in recent history, a lengthy uphill climb will be required to get back to pre- pandemic levels. Global economic growth is forecast to contract by an unprecedented 4.1% in 2020. We expect advanced economies (AEs) to contract by 5.3% and emerging markets (EMs) excluding China by 3.4%. China’s economy is anticipated to pull back by 2.5%.

Canada Outlook: Double Jeopardy

Not only has COVID-19 hammered the Canadian economy, but so too has the impact of dramatically lower oil prices that softened the outlook even before the pandemic struck its shores. Real GDP already dropped more than 8% (annualized) in the first quarter, despite most pandemic response measures occurring only in mid-to-late March period. An even larger drop on the order of four times that magnitude is expected this quarter.  This would leave real GDP registering a contraction of 6.1% this year.

Fortunately, policymakers have been quick to respond.  The Bank of Canada has slashed the overnight rate to 0.25% and introduced a slew of asset purchase programs.  The Federal government has similarly responded with income backstops for individuals, wage subsidies, and loan guarantee programs.  This, together with a controlled re-opening of the economy, should support a modest bounce-back of activity in the second half of this year. Early signs of improvement were already evident in the May employment report.

The economic impact of the pandemic will not be even across industries, with some such as food stores and online retailers only modestly impacted. For others, like restaurants and air travel, the pandemic will drive lasting changes in activity, employment levels and business models.

By all accounts we are still in for a rough ride as we enter the second half of the 2020 until consumer demand rebounds but that will take time as job security that is top of the list will cause people to cut back on spending and conserve money in the rainy day fund.