- What might have been a decent start to the year was not to be. Although it came in the final few weeks of the quarter, the impact of the pandemic was already enough to drive a 8.2% (annualized) contraction in Q1. Nominal GDP, which includes the impact of price changes, didn’t fare much better, contracting 6.5%.
- Social distancing to control the pandemic meant a quick stop to many ‘high touch’ activities, so it was no surprise to see services consumption leading the contraction, down 10.8%. Due to its large share of spending, it subtracted 3.5 percentage points from headline growth on its own. Only non-durable goods spending rose, up 12.9%, the strongest performance since the mid-1970s, supported by food and beverage stockpiling. Government expenditures also fell (-3.8%) reflecting school and government office closures.
- Business investment also fell, albeit more modestly (-1.4% overall, which includes residential investment). This was largely down to a drop in machinery and equipment spending (-13.1%), itself driven by drops in almost all major subcategories. Residential structures investment fell modestly (-0.4%), as solid new construction activity (+6.6%) offset drops in renovations and ownership transfer costs (-3.1% and -8.9% respectively). Investment in non-residential structures was up 4.1% on strength in both non-residential buildings and engineering structures.
- On the trade front, exports were down 12.3%, while imports dropped 9.3%. With inventories drawn down modestly given production disruptions (subtracting 2 percentage points from growth), final domestic demand was down 6% on the quarter.
- Incomes were also hit hard. Aggregate compensation of employees fell 3.5%. Given the dramatic drop in household spending, the household savings rate rose to 6.1% (from 3.6% in 2019Q4). The gross operating surplus, a measure of corporate earnings, was down 11.6%.
- The pandemic not only hit the data, but also the collection of the data. Statistics Canada noted challenges in getting complete data in several areas, including building construction investment, corporate financial information, and spending on new motor vehicles. The GDP data is always subject to revision, but the pandemic means that today’s data has a bit more uncertainty around it than normal.
- The March GDP data turned out a bit better than Statistics Canada’s earlier nowcast, but was still down 7.2% month-on-month, with 19 of 20 major industries in decline. Unsurprisingly, the drop was skewed towards the service producing industries (-8.2%). Statistics Canada provided a nowcast update for April, estimating an even larger, 11% monthly decline.
Key Implications
- The coronavirus hits hard. Today’s data puts some hard numbers around what we’ve all been living through, and while the worst is yet to be revealed in the data, the early days already paint a dire picture. It is hard to find any bright spots. A surge in non-durable spending came from stockpiling activity. Non-residential construction was surprisingly decent, but this component tends to be driven by the energy sector, and given rock-bottom oil prices since March, including briefly negative prices, a repeat performance appears unlikely.
- Typically, the quarterly GDP gives us good insight into the starting point for the current quarter. These days are anything but typical. The reported data is likely to get worse (indeed, Statcan’s nowcast implies the worst back-to-back monthly performances on record, implying a more than 18% drop in the level of activity relative to February), but there is reason to believe that last month may have been the nadir. Provinces continue the ‘opening up’ process, and while it will take some time for things to truly get back to some sort of ‘normal’, it is not unreasonable to think that a modest recovery may already be forming.
- The key question is what kind of recovery? Given the significant hits to incomes and longer-lasting impacts on some industries, a marathon appears more likely than a sprint.
