CANADA’S RECOVERY GAINS MOMENTUM BUT NEW THREATS CLOUD OUTLOOK
Enthusiasm about the rebound from a second-quarter contraction will be dulled by revisions that show gross domestic product (GDP) declined at an annual rate of 3.4 per cent between April and June, not Statistics Canada’s initial estimate of a drop of 1.1 per cent.
The outlook for the fourth quarter is now in doubt, since early estimates predict the extreme flooding in British Columbia could turn out to be the most expensive natural disaster in Canadian history. Economists at Desjardins last week predicted Canada’s economy likely contracted in November, but it will rally in December as companies and governments clean up the damage in B.C.
Near-term uncertainty will be made easier knowing that the economy has plenty of momentum. A separate Statistics Canada report showed that monthly GDP as measured by industrial output increased 0.1 per cent in September to $1.98 trillion, about 1.4 per cent below its level in February 2020. Statistics Canada said preliminary information suggests GDP grew 0.8 per cent in October, which would be an unusually large month-to-month gain.
Spending numbers of that sort show there is lots of consumer demand, justifying both the federal government’s decision this fall to end most emergency COVID-19 benefits, and the Bank of Canada’s decision in October to stop creating money to buy bonds. Government payments represented 25 per cent of compensation in the third quarter, the lowest since a peak of 44 per cent in the second quarter of 2020, but still elevated compared with the pre-pandemic level of about 20 per cent.
“With the easing of health restrictions, households were able to unleash pent-up demand,” Matthieu Arseneau and Alexandra Ducharme, economists at National Bank, said in a note to their clients. “We remain optimistic that the recovery will continue in a context where consumption of services is still short of its pre-recession level. This is especially true as consumers are currently in good financial shape.”
“The economy took a bigger step back earlier in the year than first estimated, but then took a bigger step back up in recent months,” said Douglas Porter, chief economist at Bank of Montreal. “This rebound, combined with the pop in services spending and the still-strong level of savings cushion, suggests that the economy had solid underpinnings heading into the winter.”
“We expect economic activity to remain robust in the coming quarters,” said Charles St-Arnaud, chief economist at Alberta Central. “How strong will depend on households’ willingness to spend the money saved during the pandemic and how quickly disposable income will return to its pre-pandemic trend.”
Story by: Financial Post