Canadian Economy Seen Posting Second-Quarter Growth as COVID-19 Measures Ease

The Canadian economy appears to have bounced back after its worst two-month stretch since the start of the pandemic, eking out a gain in June and growth in the second quarter of the year. Statistics Canada said its preliminary estimate is that real gross domestic product grew at an annualized rate of 2.5% between April and June, buttressed by a 0.7% rise in June as pandemic restrictions eased following declines of 0.5% in April and 0.3% in May.

The decline in May put total economic activity about 2% below pre-pandemic levels seen in February 2020. The agency said that with growth in June, total economic activity was about 1% below pre-pandemic levels.

Getting through the last 1% may not take much longer, even though some sectors have longer to go than others, said Desjardins chief economist Jimmy Jean. Restrictions are rolling back in much of the country as vaccination rates rise, and with early indications suggesting a boost in activity, the country should see a pretty strong rebound in the third quarter absent any hiccups, Jean said.

“I think we will also be talking about the Canadian economy having fully recuperated its pre-pandemic losses,” he said. “That’s an important milestone, but I think we also have to remember that we’re still not quite there when it comes to the labour market. That’s where there’s still quite some ways to go.”

The GDP figures on July 30 outpaced the Bank of Canada’s forecast earlier in July that the economy would grow at an annualized rate of 2% in the second quarter. The central bank expects the economy to grow at an annualized rate of 7.3% this quarter. “Spring lockdowns in much of the country triggered the first monthly GDP declines in a year, but those setbacks are expected to be reversed in relatively short order, with June’s rebound alone almost doing the job,” said BMO chief economist Douglas Porter.

For May, Statistics Canada said retail declined by 2.7% after a drop of 5.7% in April as the sector was weighed down by restrictions on in-person shopping meant to combat the third wave of COVID-19. The accommodation and food services sector was similarly affected by restrictions and declined by 2.4% in May, which was not as bad as the 4.3% in April. Statistics Canada said manufacturing declined 0.8% in May, marking the third contraction in four months.

The agency also noted that residential building construction dropped 4.2% in May, down for the first time since November 2020, and a decline of 0.4% in the real estate sector as home resale activity slowed. “As housing sales and construction levels gradually return to more sustainable levels, this area of the economy could be a drag on growth in coming months,” noted TD senior economist Sri Thanabalasingam.

Statistics Canada said the easing of public health restrictions in many provinces in June helped reverse the slide in sectors reliant on in-person services, like retail, accommodation and food services, which all saw growth. The agency adds that there were also gains in manufacturing in June, while construction and wholesale trade appear to have contracted. The agency also said an incomplete tally of economic output suggests that GDP surged 0.7% in June.The figures for June and the second quarter will be finalized at the end of August.

CIBC senior economist Royce Mendes said the economy has some open road to recover more lost ground this summer with virus cases generally low across the country. “That said, there remain challenges on the horizon, most notably in the form of variants of the virus which have slowed progress towards healing in other developed economies,” he wrote in a note.

Source: Globe and Mail
Source: Financial Post

U.S. Economy Grows Solidly in Second Quarter; Weekly Jobless Claims Fall

The U.S. economy grew solidly in the second quarter, pulling the level of gross domestic product above its pre-pandemic peak, as massive government aid and vaccinations against COVID-19 fuelled spending on goods and services. The pace of GDP growth reported by the Commerce Department on July 29 was, however, slower than economists had expected. That was because businesses ran down inventories further to meet the robust demand. Supply constraints, which have caused shortages of goods such as motor vehicles and household appliances, are making it harder for business to replenish stocks.

GDP increased at a 6.5% annualized rate last quarter, the government said in its advance estimate of second-quarter GDP. The economy grew at a 6.3% rate in the first quarter, revised down from the previously reported 6.4% pace. The level of GDP is now 0.8% higher than it was at its peak in the fourth quarter of 2019, marking the shortest recession and fastest recovery in the nation’s history. After the 2007-09 downturn, it took the economy 3-1/2 years to return to its pre-recession peak.

Economists polled by Reuters had forecast GDP rising at an 8.5% rate last quarter. Inventories contracted at a rate of $165.9 billion, slicing 1.13 percentage points from GDP growth.

Trade, housing and government spending were also drags on GDP growth last quarter. Excluding inventories, trade and government spending, the economy grew at a 9.9% pace. This measure of domestic demand rose at an 11.8% pace in the first quarter.

Annual revisions to GDP data showed the economy shrinking 3.4% in 2020, instead of 3.5% as previously estimated. That was still the biggest drop in GDP since 1946. The revisions to growth in other years and quarters were minor. The National Bureau of Economic Research, the arbiter of U.S. recessions, declared that the pandemic downturn, which started in February 2020, ended in April 2020.

Even with the second quarter marking the peak in growth this cycle, the economic expansion is expected to remain solid for the rest of the year. Economists expect growth of around 7% this year, which would be the strongest performance since 1984.

The International Monetary Fund boosted its growth forecasts for the United States to 7.0% in 2021 and 4.9% in 2022, up 0.6 and 1.4 percentage points respectively, from the forecasts in April.

A resurgence in COVID-19 infections, however, poses a risk to the outlook. Higher inflation, if sustained, as well as ongoing supply chain disruptions could also slow the economy. Inflation soared in the second quarter, with the Federal Reserve’s preferred measure – the personal consumption expenditures price index, excluding the volatile food and energy components – surging at a 6.1 % rate after increasing at a 2.7% pace in the January-March quarter.

The Fed kept its overnight benchmark interest rate near zero and left its bond-buying program unchanged. Fed Chair Jerome Powell told reporters that the pandemic’s economic effects continued to diminish, but risks to the outlook remain. Stocks on Wall Street rose, with the S&P 500 and the Dow indexes scaling record highs on the GDP data and a slate of strong corporate earnings reports. The dollar fell against a basket of currencies. U.S. Treasury prices were lower.

Robust Consumer Spending

Consumer spending, which accounts for more than two-thirds of the U.S. economy, grew at an 11.8% rate in the second quarter after rising at an 11.4% pace in the prior period. Americans frequented restaurants, stayed at hotels and visited casinos. They also bought motor vehicles and clothing.

Though the fiscal boost is fading and COVID-19 cases are rising in states with lower vaccination rates, consumer spending will likely continue to grow. Households accumulated at least $2 trillion in excess savings during the pandemic. Record-high stock market prices and accelerating home prices are boosting household wealth. Wages are also rising as companies compete for scarce workers amid a strengthening labour market.

A separate report from the Labor Department on July 29 showed initial claims for state unemployment benefits fell by 24,000 to a seasonally adjusted 400,000 for the week ended July 24. Claims hit a two-month high in the prior week, but that was likely due to difficulties stripping out seasonal fluctuations from the data.

Source: Globe and Mail