Canadian economy posted record drop in second quarter due to pandemic
The Canadian economy suffered its worst three-month stretch on record in the second quarter as the economy came to a near halt in April before starting to recover in May and June. On August 28, Statistics Canada said real gross domestic product contracted plunged 11.5% in the three months ended June 30. Expressed as an annualized rate of 38.7% for the quarter, the worst posting for the economy dating back to when comparable data was first recorded in 1961.
Almost every single component of the economy used to calculate GDP was at its lowest point during the three-month stretch — driven largely by widespread lockdowns in April meant to slow the spread of COVID-19. However, economic output rebounded in May by 4.8%, and the agency said June saw an increase of 6.5%, a monthly record, beating the 5.6% preliminary forecast.
The agency’s preliminary estimate for July indicated a 3% increase in real GDP, which on its own would have been a monthly record prior to this year, BMO chief economist Douglas Porter said. The economy is starting to come back faster than most expected, and the decline in the second quarter wasn’t as steep as predicted, he said. “It’s the direction here that counts.”
Even with the gains in June, economic output remains about 9% below pre-pandemic levels, Statistics Canada said. Gains in the third quarter likely won’t recover all that was lost as some businesses remain unable to open even as restrictions are rolled back. TD senior economist Brian DePratto wrote that the new data suggest the shape of the recovery could look more like a “K” where some sectors rebound well, while others are left behind.
Household spending dropped 13.1% in the quarter, and business investment fell 16.2%, Statistics Canada said. Employee compensation fell by 8.9%, the steepest drop ever recorded, as workers were laid off, furloughed, or had their hours slashed.
Activity in some sectors continues to be weighed down by restrictions, profound uncertainties and the effects of a deeply shaken global environment. Air transportation remained all but non-existent in June, down 94% from February; other tourism services are still deeply hampered by restrictions and border closings. Restaurants and bars, despite a rebound, were still operating at 40% below their pre-COVID-19 levels in June. Output of petroleum, metal and forestry products remained far below normal, amid still-low prices and tepid global demand.
Federal emergency aid, including the Canada Emergency Response Benefit, more than offset that drop, the agency said, noting a 10.8% increase in household disposable income. That drove up the savings rate from single digits to 28%, “potentially leaving some extra cash for spending” in the coming months, said CIBC’s Royce Mendes.
Overall, federal benefits increased by 193.5 between April and June compared with the same period last year, hitting almost $70.6 billion, not including the wage subsidy program that cost $22.7 billion over that time, the Finance Department said on August 28. The most recent figures show the government has spent almost $30 billion in wage subsidies, and nearly $71.3 billion through the CERB. The Liberals are proposing a $37-billion income-support package that would extend the CERB by four more weeks before winding it down and replace it with a trio of benefits and changes to employment insurance, which will add to the $343-billion record deficit.
Economist and consultant Roslyn Kunin said the massive spending made sense early on in the crisis, but it may not as the economy emerges from crisis mode. “They have put out the fire, they have saved us from a 1930s depression, we are in slow economic times, but we’re getting back into a situation that … could be normal for five or 10 years,” said Kunin, a former B.C. regional economist for the federal government. On August 27, credit rating agency Fitch Ratings said government spending will remain high while economic activity takes years to recover, and warned it may have to further downgrade the country’s credit rating if deficits and debts weren’t brought under control.
U.S. economy plunged an annualized 31.7% in second quarter
The U.S. economy shrank at an alarming annual rate of 31.7% during the April-June quarter as it struggled under the weight of the coronavirus pandemic, the government estimated on August 27. It was the sharpest quarterly drop on record.
The Commerce Department downgraded its earlier estimate of the U.S. gross domestic product last quarter, finding that the devastation was slightly less than the 32.9% annualized contraction it had estimated at the end of July. The previous worst quarterly drop since record-keeping began in 1947 was a 10% annualized loss in 1958.
Last quarter, businesses shuttered and millions of workers lost jobs as the world’s largest economy went into lockdown mode in what succeeded only fitfully in limiting the spread of reported viral infections. The U.S. economy fell an annualized 5% in the first three months of the year as the coronavirus began to make its presence felt in February and March.
A bounceback in hiring as many businesses reopened suggested that the economy began to recover in June with third quarter growth estimated to be around 20% annualized. But economists say a full recovery remains far off given that the virus has yet to be contained and the government’s financial support has faded. “As we approach the fall, we see four important risks for the economy: a failure to provide further fiscal stimulus, a second wave of COVID-19 infection during the flu season, major election uncertainty and rising trade tensions with China,” said Lydia Boussour, senior U.S. economist at Oxford Economics.
Unemployment is still high at 10.2%, and roughly 1 million people are applying for jobless aid each week even as the amount of aid they receive has shrunk. Consumer confidence has tumbled. Though the stock market and home sales are surging, the broader economy shows signs of stalling, and millions face potential evictions from their homes.
The challenges reflect the unusual nature of the downturn. Many U.S. households have increased their savings and paid off debt — which could either signal a hesitancy to spend as they have in the past or pent-up demand that could be unleashed once the pandemic ends.