Gross domestic product by industry, March 2021.

Canada’s economy continued its recovery from pandemic damage in the first quarter, driven by a surge in home construction. Gross domestic product expanded at a 5.6% annualized rate in the three-month period, according to a report on June 1 from Statistics Canada. That’s slightly below the 6.8% median forecast in a Bloomberg survey of economists.

The data show housing is helping the country’s economy power through restrictions meant to curb the spread of COVID-19, providing some resiliency to the rebound. One reason for optimism in the economy has been recovering with little support from consumers and businesses, who have held off from spending over the winter months amid the restrictions to activity.

“There’s lots of spending power left,” Avery Shenfeld, chief economist at Canadian Imperial Bank of Commerce, said in a report to investors. The Canadian dollar was little changed after the report, up 0.3% to 1.2032 per U.S. dollar.

Housing spending grew at an annualized 43% pace, bringing residential investment to 8.6% of GDP — the highest in records to 1961. 

Consumption also picked up slightly from anemic levels at the end of last year, but still remains sluggish. Spending by households was up an annualized 2.7%, versus 0.9% at the end of the fourth quarter. The household savings rate actually increased to 13.1%, from 11.9% at the end of last year. That suggests pent-up demand could be building to drive outsize growth later in the year. Businesses pared back their investments in inventories, which was the biggest drag on growth in the first quarter.

The gains bring the economy closer to a full recovery. Economic activity at the start of the year was 1.7% below levels at the end of 2019. Still, output reversed in April, contracting 0.8% on the month amid a fresh wave of lockdowns, according to preliminary data.

But economists are anticipating the pace of growth will return to above 6% in the second half of 2021. The economy expanded 1.1% in March, versus a 1% gain expected by economists.

When looking at Real GDP by industry, Construction rose 2.2% in March, building up on increases in the previous three months, as all subsectors were up. The residential building construction subsector contributed the most to the growth, with a 4.1% expansion in March, as all types of construction activities were up. Single-family home construction and alterations and improvements led the expansion, as strong demand continued into March. With the exception of November (-0.3%), the subsector has been continuously growing since May 2020. Repair construction increased 1.8% in March, while non-residential building construction rose 1.3%, as all components increased. Engineering and other construction activities also grew (+0.3%).

Preliminary Estimate shows a Contraction for April

Following 11 months of growing GDP, Canada’s economy likely contracted in April, the first decline in a year, due to widespread lockdowns amid a third wave of coronavirus infections, slowing the country’s march toward recovery. In a preliminary estimate, Statistics Canada said the economy contracted 0.8% in April. Economists said the April decline was largely expected and is unlikely to change the Bank of Canada’s outlook for interest rate hikes. 

BMO chief economist Douglas Porter said Tuesday the GDP numbers have been as much a health report as an economic report. “The good news is we’re seeing pretty clear signs that we’re well past the peak of the third wave now and things are poised to start opening again,” Porter said.“Hopefully, this one will last longer — hopefully permanently — and we do look forward to a pretty solid comeback by the Canadian economy in June and through the summer.”

Source: Financial Post
Source: Toronto Star
Source: Globe and Mail
Source: Statistics Canada

Canadian Retail Sales Plunge 5.1% in April as COVID-19 Pandemic Restrictions Hit 

Retail sales rose 3.6% to $57.6 billion in March as COVID-19 restrictions relaxed in some parts of the country. Statistics Canada said that based on respondent feedback, 2.1% of retailers were closed at some point in March. The average length of the closure was less than one day. 

However, Statistics Canada said a preliminary estimate pointed to a drop in April as the rules were tightened again. The agency said that a preliminary estimate suggests retail sales in April fell 5.1% as governments brought back restrictions to slow the spread of the pandemic. It noted that the unofficial estimate would be revised as it received more responses from the companies it surveys.

TD Bank economist Ksenia Bushmeneva said preliminary estimates, combined with spending and mobility data, suggest that spending will be weak in April and May. “The picture may brighten in June: with caseloads declining and vaccinations rates ramping up significantly across the country, many provinces are slated to start easing restrictions,” Bushmeneva wrote in a report.

CIBC senior economist Royce Mendes said after strong GDP growth in the first quarter, the economy is likely set to prove weaker than the Bank of Canada expects in the second quarter. “But, with virus cases falling and some provinces now planning a reopening strategy, there is good news to come,” Mendes wrote.

Retail sales in March were up in 10 of the 11 subsectors tracked by Statistics Canada. The agency said the March increase overall was led by a 19.8% increase at building material and garden equipment and supply stores.

Meanwhile, sales at clothing and clothing accessories stores were up 23.6% to reach their highest level since the start of the pandemic. Sales at food and beverage stores fell 1.3%, on a 1.6% drop at supermarkets and other grocery stores as well as a 12.0% drop at specialty food stores. Sales at beer, wine and liquor stores rose 3.1%. Core retail sales — which exclude sales at gasoline stations, and motor vehicle and parts dealers — rose 4.7%.

In volume terms, retail sales rose 3.2% in March.

Source: Globe and Mail
Source: Toronto Star

Canada’s Annual Inflation Rate in April Rises at Fastest Pace in Nearly a Decade

Consumer prices in Canada climbed in April at the fastest rate in a decade, outpacing estimates and potentially fuelling concerns that the country, much of which is still in lockdown, is entering a period of persistent inflation. Annual inflation accelerated to 3.4% in April, compared with 2.2% in March, Statistics Canada reported on May 19. That exceeded economist predictions of a 3.2% annual pace. On a monthly basis, inflation rose 0.5% versus the 0.2% economists were expecting.

The annual reading — the highest since May 2011 — may raise worries that price pressures could be stronger than predicted by the Bank of Canada, which has been cautioning against over-reacting to an inflation spike it expects will be only transitory. If inflation proves more durable, however, that could force the central bank to bring forward interest rate increases that investors aren’t anticipating until later next year.

Core inflation — often seen as a better measure of underlying price pressures — rose to 2.1% from 1.9% in March. That’s the highest reading since 2012.

Higher gasoline prices were the biggest upward contributor to annual inflation. They were up 62.5% in April compared with the same time last year, when prices plunged to an 11-year low in the early weeks of the pandemic, the report said. 

Shelter, clothing and health and personal care products all saw notable upticks in prices. The shelter component on the index rose 3.2%, owing to a 9.1% jump in the homeowners’ replacement cost index, which tracks the price of new houses, including lumber costs. Excluding energy prices, CPI was up 1.6% year-over-year.

The annual consumer price index reading is distorted because the year-ago period used as comparison coincided with broad demand and price declines at the beginning of the pandemic, a phenomenon known as the base effect.

A similar phenomenon also drove inflation higher in the U.S. in April to an annual 4.2% pace. Unlike in the U.S., inflation in Canada may be rising at a slower pace because much of the country was still in some form of a COVID-related shutdown in April, stunting demand for goods and services. Recent gains in the Canadian dollar also may have dampened inflation pressures.

Canada’s dollar fell after the report, trading 0.3% lower at $1.2101 per U.S. dollar at 9:01 a.m. on May 19 in Toronto trading. Yields on Canadian government five-year bonds were little changed at 0.95%.

Bank of Canada Governor Tiff Macklem had predicted that inflation would rise to about 3% because of these base effects, but he also said he believes that underlying price pressures remain depressed because of continued slack in the economy. In its latest forecasts released last month, the central bank forecast inflation to average 2.9% in the second quarter before returning near its 2% target by the end of the year.

Source: Globe and Mail
Source: Toronto Star
Source: Financial Post