Canada’s economy suffers worst plunge on record

Shelly Hagan

Canada’s economy suffered its worst contraction on record in the second quarter, though more recent data suggests a rebound is well underway on the back of massive government aid.

Gross domestic product plunged by an annualized 38.7% in the first three months through June, adding to a 8.2% drop in the first quarter, Statistics Canada said Friday in Ottawa. Economists had anticipated a 40% decline.

The second quarter will go down as by far the worst on record. However, the collapse largely reflects losses during one month – April – the nadir of the pandemic. Separate monthly GDP data released on Friday added to evidence that a sharp recovery has taken place since then, with growth of 3% in July and 6.5% in June.

A farmer harvests her hay on a farm near Cremona, Alberta, Sunday, Aug. 16, 2020.

Still, Canada’s economy isn’t expected to fully make up the losses until 2022 in what’s anticipated to be a long and uneven recovery.

The Canadian dollar pared some of its gains for the day after the report, still trading 0.3% higher at C$1.3084 against its U.S. counterpart at 9:02 a.m..

The data show historical declines across the board. Household consumption plunged by an annualized 43%, housing investment was down 48%, and non-residential business capital spending was down 57%.

Trade Contribution

Exports and imports plummeted by more than half. The drop in imports was larger than the collapse in exports, which means the trade sector actually contributed positively to growth in the second quarter.

The second quarter contraction is worse than the U.S. and Germany, but better than other parts of Europe like the U.K., Italy and Spain.

With July’s estimate of a 3% increase, Canada’s economy is now at 94% of February’s levels, or put another way, has recouped around two thirds of lost output from the height of the pandemic

Canada has had to deal with the impact of containment measures like other countries, and it’s energy-rich economy has also been hit by falling world oil prices.

Savings Surge

But the outlook is improving. Canada is expected to outperform the U.S. in the second half of this year. Oil prices have recovered, the country’s housing market is booming again amid historically low interest rates, and the federal government has pledged to keep the fiscal taps open into the recovery period – keeping disposable income elevated.

Government transfers rose 88% non-annualized in the quarter, the largest jump on record. Coupled with a pullback in household spending, that pushed the savings rate to 28% in the quarter. Nearly a third of household income was from government transfers, a record.

“The good news is that disposal incomes actually increased during the period as government support more than offset the drag from the sharp rise in unemployment,” wrote CIBC economist Royce Mendes in a note to investors. The higher savings rate potentially leaves “some extra cash for spending in upcoming periods.”

Another reason for optimism: Canada has also avoided a new wave of cases like the one that continues to hamper the expansion south of the border.