Canada: May GDP Data Show Tentative Signs of Recovery

• The Canadian economy returned to growth in May as real GDP rose 4.5% month-on-month. May’s growth was a fair bit stronger than both Statistics Canada’s initial nowcast of a 3% gain and market expectations of a 3.5% climb. Growth was fairly widespread, as 17 of 20 major sectors reported increased activity.
• Statistics Canada provided an early nowcast for June, forecasting a further 5% climb. This would leave the level of economic activity 10.4% below February’s reading, and implies roughly a 12% drop for the second quarter as a whole, or about -40% annualized. That latter figure is perhaps a less useful way of presenting things given the unique nature of the shock – the notion of a ‘run rate’ implied by an annualized figure isn’t as helpful when the trend has already reversed itself (as implied by the May data and June nowcast). Regardless of how you calculate it, the story is the same: COVID-19 hit the Canadian economy like a wrecking ball.
• Output in the goods producing sectors, which had been hardest hit over March and April, rose 8%, but despite the strong performance, the level of activity was still 15% below February’s reading. Construction stood out, up 17.6% as restrictions on activity were eased in Quebec and Ontario. Manufacturing activity rose 7.4%, with transportation equipment in the driver’s seat as auto plants began to re-open from mid-month.
• In contrast, the much larger service sector rose a more modest 3.3%, and was 14.4% below February levels in May. There were some standout performers: retail trade rose 16.4%, driven by motor vehicle and parts dealers, but with 11 of 12 subsectors expanding, the bigger story appears to have been the re-openings as the month progressed. This can also be seen in the 24.2% gain in accommodation and food services, including a 35.1% increase in activity at food service and drinking places (accommodation services fell another 2.3%, reflecting ongoing travel restrictions). Real estate and rental and leasing was up 1.5%, driven by a 57.1% gain in activity at real estate agents and brokers. Transportation and warehousing also broke a five-month contraction streak, though there are clear splits: activity may have edged up in air transportation, but Statistics Canada notes that it stood 96% below pre-pandemic levels.

Key Implications

• As expected, the May GDP data gave us further confirmation that at least in aggregate, the immediate economic impact of the pandemic is now behind us. A solid nowcast for June, and a combination of further re-openings and encouraging early data for July all point to an ongoing recovery from the earlier hit.
• There is no understating the scale of that hit. Even with May and June set to be the strongest two months of growth recorded under the current definition, the economy was still about 10% shy of its pre-pandemic level of activity in early summer. The June forecast and early July indicators augur for a decent pop-back of activity this quarter, but once the initial effect of re-openings fades, we’re likely to enter a more gradual phase of recovery.
• That prolonged recovery will be beset by risks – although Canada has so far done a decent job bending the infection curve, the risk of a second wave remains. This fall will also see many potential pivot points as emergency support measures begin to roll off. It is also important to remember that even if we navigate these risks unscathed, the economic recovery is unlikely to be even. Spending data has shown that top-line recovery trends can mask significant variations in activity. Many sectors, including travel, international tourism, and recreation, will continue to feel the pain of pandemic response measures for some time to come. “Normal” is still a long way away.