- Real Canadian GDP shrank by 38.7% (annualized) in the second quarter as the pandemic-led restrictions on activity in April shut down activity in many parts of the economy. Annualizing, which provides a sense of the economic ‘run rate’ may not be appropriate given the one-off nature of the shock. To put things differently, economic output was down 13% year-on-year, and was 13.3% smaller in Q2 when compared with the pre-pandemic peak of Q4 2019. Nominal GDP, which includes the impact of price changes, was down 14.8% relative to the end of 2019.
- Unsurprisingly, given its high share of total economic activity and the impact of social distancing measures, consumer spending led the contraction (-43% annualized). Consistent with the nature of the shock, the decline was most pronounced in services (-51.8%), but spending on durable goods also fell markedly (-49.8%). After a decent gain in the first quarter on stockpiling of food and supplies, spending on non-durable goods fell 13.8%.
- Business investment saw a massive drop, down 56.7% in Q2. Spending on machinery and equipment was down 64.6% on widespread weakness – only investment in computers and related equipment held up, gaining 18.1%. Residential investment fell 47.6%, with all major categories dropping. Border issues and shutdowns hammered international trade. Exports fell 55.6%, while imports dropped even more, down 64.1% on the quarter. This meant that final domestic demand was a hair better than headline GDP, falling 37.4% in the second quarter.
- Employment was hard hit in the second quarter, reflected in a 31.1% drop in the compensation of employees. However, government transfers more than made up the difference, driving a 50.9% annualized increase in household disposable income. With spending down, the household savings rate rose to 28.2%. The gross operating surplus, a measure of corporate profits, was down 36.6%.
- The monthly GDP data provided more confirmation that the worst is behind us. June saw GDP rise a record 6.5% month-on-month, on a broad basis (19 of 20 major industries were in expansion). Statistics Canada again provided an advance estimate, pointing to a further 3% m/m gain in July.
Key Implications
- At least it’s behind us now. The word “unprecedented” is sure to get lots of use today as analysts and others dig through the details of this report. Wherever you look, its double-digit declines, across nearly every category, reflecting the imposition of social distancing measures, including the closure of many workplaces, early in the quarter.
- The flip side of the coin is that as significant as the damage was, it was largely contained to March and April. June’s solid outturn and positive developments since then, including an estimated 3% m/m gain for July point to a strong, if partial, recovery in activity over the summer months as social distancing measures have been eased.
- Ultimately, however, partial means partial. Many sectors are going to continue struggling in the absence of a vaccine, creating the risk of a “K” shaped recovery where some see a quick rebound and others ongoing challenges – with some evidence of this seen in labour market outcomes. What’s more, with most provinces as “open” as can be reasonably expected, there is the risk that many of the snapbacks seen in recent data will give way to a more modest pace of expansion more generally. We may be through the worst of it, but it is still a long road to normal.
