Canada’s economy better than expected in November, but impact of COVID-19 surge looms
The Canadian economy is managing to plow ahead despite the second wave of COVID-19. Real gross domestic product rose 0.7% in November, almost twice as much as expected, Statistics Canada said on January 29. And in a preliminary estimate, the agency said December was poised for a 0.3% gain. Many economists had feared a pullback in economic activity last month, given that many regions tightened pandemic restrictions to curb new infections.
If that December estimate pans out, real GDP will have declined 5.1% in 2020 – the worst hit in generations. And while 2021 holds the promise of blistering growth, the economy will be tested in the coming weeks by elevated caseloads of COVID-19, new variants of the virus and sluggish vaccination rollouts.
“Outside of sectors most directly affected by the virus, the economy seemed to still be faring well,” said Royce Mendes, senior economist at CIBC Capital Markets, in a client note. “That said, there are obvious concerns about how long GDP can outrun the virus.”
November was marked by broad-based strength. Fourteen of 20 industrial sectors saw their output increase. Real GDP jumped 1.2% in goods-producing industries, while the services sector climbed 0.5%.
The largest contributor to November’s growth was mining, oil and gas extraction, which notched a 3.9%. “Given the ongoing rebound in energy prices, as well as the surprising strength in many other commodity prices, the natural resource group may continue to be a big contributor to the near-term recovery,” Bank of Montreal chief economist Doug Porter said in a report.
Manufacturing was another standout, rising 1.7%, largely owing to higher inventories. Finance and insurance climbed 1.3% – lifted for various reasons, including buoyant stock markets and massive demand for mortgages.
Despite the economy’s resilience, the near-term outlook is undoubtedly weak. The labour market shed about 63,000 positions in December, and another setback is forecast for January. And while the number of new infections is falling in many regions, progress isn’t sufficient to significantly ease restrictions, effectively keeping the doors shut in many industries.
During the week of January 18, the Bank of Canada said that the second wave of the pandemic would hamper the start of 2021, with the central bank projecting GDP would fall at a 2.5% annualized rate in the first quarter. Still, the economy is expected to grow 4% this year as a whole and almost 5% in 2022. “The earlier expected arrival of vaccines is a very positive development, and we do expect to see stronger growth through the second half of this year and into the first half of next year,” bank governor Tiff Macklem said in a news conference.
Beyond Canada, the outlook for this year is similarly positive. The International Monetary Fund this week upgraded its global growth forecast for 2021 to 5.5% from 5.2%, thanks to the availability of vaccines. But it also warned that uneven distribution – with those in advanced economies getting inoculated first – posed a threat to the recovery.
“The recovery could quicken given the arrival of vaccines. But the timing remains uncertain,” Sri Thanabalasingam, senior economist at Toronto-Dominion Bank said. “Recent stumbles in the vaccine-rollout process, and the presence of more contagious strains of COVID-19, cloud the near-term outlook.”
Source: Globe and Mail
Preliminary GDP data suggests 2020 was worst year on record
Canada’s economy appears to have suffered its worst year on record as the national statistics agency’s preliminary estimate showed a contraction of 5.1% in 2020. The flash estimate, which has yet to be finalized, is worse than 1982 when the economy contracted by 3.2%, which was the worst over the course of six decades of comparable data. Statistics Canada said it will finalize the numbers in March.
The drop last year is largely due to steep declines in March and April of 2020 as large swaths of the economy were shut down during the first wave of the COVID-19 pandemic. Since then, economic activity has slowly and steadily grown.
The growth has been uneven to create a K-shaped recovery with some sectors doing well while others lag behind, and further strained by the second wave of COVID-19 even if it doesn’t seem reflected in GDP numbers.
While our personal lives may be as affected as they were during the first wave of the virus, the economy is not as impacted because of how we’ve changed the ways we work and spend, said CIBC senior economist Royce Mendes. “That’s why you’re seeing some of the numbers not only be better than they were during the first wave, but also maybe be better than they were expected to be.”
Statistics Canada said on January 29 that the economy grew 0.7% in November, marking the seventh straight month of gains after the steep drops in the spring. The growth followed a 0.4% increase in October.
November saw positive news about vaccines and a presidential election south of the border where Joe Biden defeated Donald Trump. Improved sentiments fuelled stock market activity as the finance and insurance sector grew by 1.3% in November. Mining saw an increase in demand for things like potash and non-metallic minerals. Likewise, the oil and gas sector saw gains as facilities in Alberta restarted production. The retail sector was up by 1.1% in November, including growth of 6.1% in the food and beverage subsector that Statistics Canada attributed to higher activity in grocery stores and stores selling beer, wine and liquor.
Statistics Canada said total economic activity in November remained about 3% below where it was in February, just before the pandemic.
Federal spending has looked to keep a financial floor under businesses and workers hit hard by the pandemic. The Finance Department said that the deficit hit $232 billion between April and November, compared with a deficit of $11.8 billion over the same period one year earlier. The Liberals estimate the deficit will reach $381.6 billion this fiscal year, but it could hit $400 billion depending on the depth and duration of lockdowns that started in December.
Statistics Canada said its preliminary estimate for December shows growth of 0.3%, even with heavy restrictions and a loss of 63,000 jobs. If December’s pace were to be sustained, it would take until November of this year for the economy to get back to its pre-pandemic levels, wrote TD senior economist Sri Thanabalasingam.
The preliminary estimate for the fourth quarter shows an annualized growth rate of 7.8%, suggesting the economy healed more than expected over the last three months of 2020, Mendes said. But it may not last long. “When we start to look at what the January data will reveal, I think you could see more evidence of the second wave of the virus infecting the overall economy, and even more pain in those sectors such as restaurants and bars,” he said.
U.S. economy contracts 3.5% in 2020; worst performance since 1946
The U.S. economy contracted at its deepest pace since World War Two in 2020 as the COVID-19 pandemic depressed consumer spending and business investment, pushing millions of Americans out of work and into poverty. Though a recovery is underway, momentum slowed significantly as the year wound down amid a resurgence in coronavirus infections and exhaustion of nearly $3 trillion in relief money from the government. The moderation is likely to persist at least through the first three months of 2021.
The economy’s prospects hinge on the distribution of vaccines to fight the virus. President Joe Biden has unveiled a recovery plan worth $1.9 trillion, but some lawmakers have balked at the price tag soon after the government provided nearly $900 billion in additional stimulus in late December.
White House economic advisor Brian Deese said the report from the Commerce Department underscored the urgency for Congress to pass Biden’s plan, warning that the cost of doing nothing was too high. “Without swift action, we risk a continued economic crisis that will make it harder for Americans to return to work and get back on their feet,” said Deese.
Gross domestic product decreased 3.5% in 2020, the biggest drop since 1946. That followed 2.2% growth in 2019 and was the first annual decline in GDP since the 2007-09 Great Recession.
Nearly every sector, with the exception of government and the housing market, contracted last year. Consumer spending, which accounts for more than two-thirds of the economy, plunged 3.9%, the worst performance since 1932. The economy tumbled into recession last February.
Delays by the government to offer another rescue package and renewed business disruptions caused by the virus restricted GDP growth to a 4.0% annualized rate in the fourth quarter. The big step-back from a historic 33.4% growth pace in the third quarter left GDP 2.5% below its level at the end of 2019. The economy is expected to return to its pre-pandemic level in the second quarter of this year.
On January 27, the Federal Reserve left its benchmark overnight interest rate near zero and pledged to continue pumping money into the economy through bond purchases, noting that “the pace of the recovery in economic activity and employment has moderated in recent months.”
“We foresee record-breaking consumer spending growth in 2021 with households benefiting from a watered-down $1.2 trillion version of Biden’s rescue plan, vaccine diffusion gradually reaching two thirds of Americans by July and employment accelerating this spring,” said Gregory Daco, chief U.S. economist at Oxford Economics in New York.
Stocks on Wall Street rallied as mega-cap technology shares tried to recoup recent losses. The dollar slipped against a basket of currencies. U.S. Treasury prices were lower.
Services businesses like restaurants, bars and hotels have borne the brunt of the recession, disproportionately impacting lower-wage earners, mostly women and minorities. That has led to a so-called K-shaped recovery, where better-paid workers are doing well while lower-paid workers are losing out.
The stars of the recovery have been the housing market and manufacturing as those who are still employed seek larger homes away from city centres, and buy electronics for home offices and schooling. A survey by professors at the University of Chicago and the University of Notre Dame showed poverty increased by 2.4 percentage points to 11.8% in the second half of 2020. The sharpest rise since the 1960s boosted the ranks of the poor by 8.1 million people.
Rising poverty was highlighted by persistent labour market weakness. In a separate report on January 28, the Labor Department said initial claims for state unemployment benefits totalled a seasonally adjusted 847,000 for the week ended Jan. 23. While that was down 67,000 from the prior week, claims remain well above their 665,000 peak during the 2007-09 Great Recession.
The economy shed jobs in December for the first time in eight months. Only 12.4 million of the 22.2 million jobs lost in March and April have been recovered. About 18.3 million Americans were receiving unemployment checks in early 2021.
Lack of jobs and the temporary expiration of a government weekly jobless subsidy curtailed growth in consumer spending to a 2.5% rate in the fourth quarter after a record 41% pace in the July-September quarter.
But business investment grew at a 13.8% rate, with spending on equipment rising at a 24.9% pace. Spending on non-residential structures rebounded after four straight quarterly declines.
Businesses also accumulated inventories last quarter, contributing to GDP growth. But the inventory build pulled in more imports, leading to a larger trade deficit, which subtracted from output.
Source: Globe and Mail