Canada’s Successful Q3 Growth Hits a Block in Q4
Canada had seen a sharp rebound in Q3 2020 with the biggest growth figures ever. It still fell short of expectations though. Now, new figures indicate that the momentum might be fading away as the country reels under another pandemic wave.
GDP increased by 40.5% (annualized) in Q3 2020, thus helping reverse the catastrophic 38.1% fall recorded in Q2. But these impressive figures were still not enough as they were lower than the predicted levels. Reports published just a few days back were assuming a growth of at least 47.5% in Q3 due to the lifting of lockdown restrictions in several parts of the country. However, it now appears that Canada will be recording a negative growth of 5.7% in 2020. The current rebound has brought the country’s output to around 90% of pre-coronavirus levels.
As COVID-19 cases rise in a second wave, new lockdown restrictions are being imposed by the government throughout the country, meaning that the rebound seen last quarter will fizzle out shortly. The months of September and October are estimated to have recorded a GDP growth of 0.8% and 0.2%, which is slightly encouraging. However, recovery is estimated to have flattened in November, followed by a decline the next month, bring down the annual growth rate to the 0-2% range.
The performance recorded in Q3 is still 5.2% less compared to Q3 2019. However, the gains recorded in November lower this down further to below 4% YoY growth levels.
Q3 GDP growth figures were mostly hampered by a fall in inventory levels. If that is removed from the picture, it shows that the country has made an amazing comeback. Imports, capital expenditure on equipment & machinery, and the housing market all saw triple-digit annualized growth rates. The housing market grew at an annualized rate of 187.3% with housing increasing by 9.5% YoY as well.
Consumers Led the Way
The drop in consumption was what triggered the contraction of the economy in Q2. It rose at an annualized rate of 63% as consumers finally rushed into stores after the lockdown restrictions were lifted. Spending pattern shifts due to restrictions and health concerns caused consumers to move from spending on tourism, travel, restaurants, etc., in favor of durable goods, which recorded a growth of 263%. On the other hand, the non-durable market witnessed a growth of 19%. Spending on non-durables and durables increased by 3.7% and 7.7% compared to pre-pandemic levels. High-contact businesses and service industries recorded a contraction of -12.4% though they recorded a strong recovery of 44.3% in Q3.
The pandemic has forced people to reevaluate their household finances. Although the savings rate dipped in Q3 2020, it’s currently at 14.6% compared to the 27.5% recorded in Q2. Household savings have jumped ahead by $150B compared to pre-pandemic levels. Although disposable incomes reduced in the previous quarter, they still increased by 10.6% YoY, which was better than the 3.8% hike seen in 2019.
However, consumer spending remains down by 3.7% YoY in nominal terms. The current circumstances are also making it difficult for the service industry. With spending levels falling and incomes spiking, many people have a considerable amount of savings, boosted by the government aid programs that sought to cushion the financial impact of the pandemic, including income support programs and payment deferrals.
The federal fiscal update presented recently confirmed that support programs would be strengthened further, causing the budget deficit to increase to $381B in 2020. The government of Canada launched the biggest COVID-19 fiscal stimulus compared to other industrialized countries. Although the Canadian government-debt-to-GDP ratio was rather low at 31% during the beginning of the year, it will increase to 50% in 2021.
Similar to consumption, the business investment levels in the country rebounded sharply as well, growing at an annualized rate of 82.4% in Q3. Equipment and machinery (+91.8%) and IP products (+30.8%) boosted this expansion. Non-residential property investments have declined though (-1.2%). The primary factor fueling growth right now is residential investment, which saw a growth of 187.3%. Changes in preferences due to the pandemic, pent-up market demand, and falling interest rates are driving sales activity levels to record-breaking levels.
The growth in the housing investment segment was due to ownership transfer expenses (+109.5%) and renovations (+17.7%). With home resales resuming in the country, ownership transfer expenses began skyrocketing as resale unit prices recorded massive increases too. New construction activity has increased by 9.7% compared to Q3 2019 after recording a 7.6% decline in Q2 this year. Increased employee compensation levels, improved employment conditions, and low mortgage rates have driven demand in Q3 2020.
Imports and exports have increased significantly as well (imports: 113.7%; exports: 71.8%). With imports growing faster than total exports, it has had a positive impact on Q3 GDP growth levels.
Over 33% of the total jobs lost in the months of March & April have been regained in Q3 with employee compensation levels seeing a rebound as well (+35.5%). Although government transfers via employment insurance reduced by around 91.9% in Q3, it is still big enough to have a tangible impact. The disposable income of Canadian households decreased by 12% in Q3 although savings rates remain high at 14.6% with the consumption rebound being offset by the government transfers and increased compensation levels.
Canada’s economy will contract by 5.7% in 2020 before rebounding by 5.5% in the next year. The last biggest YoY decline ever recorded was 3.2% back in 1982. However, the growth rate for 2021 will also be the highest since 1984. The growth rates recorded in Q3 2020 may continue their momentum in 2021 as well. Fiscal stimulus programs are expected to continue for another 2 years as well. Additionally, families have been saving their incomes for months now without the chance to spend it. Once the pandemic has been managed successfully, there’s no doubt that Canadian households will spend a significant portion of it in no time, thus stimulating the economy.