The Canadian economy hit a rough patch in the third wave of the pandemic despite a recent surge of residential investment, which is pacing the recovery.
Real gross domestic product fell 0.8 per cent in April, the first decline since April of 2020, Statistics Canada said Tuesday in a preliminary estimate. Many provinces were forced to enact tighter restrictions that month to slow a variant-driven spread of the coronavirus.
The second wave was less disruptive, with real GDP climbing at a 5.6-per-cent annualized rate in the first quarter. Absent the April estimate, economic activity is now within 2 per cent of its prepandemic peak and on pace for a quicker recovery than is typical for a Canadian recession.
Despite recent stumbles, the consensus on Bay Street is that the economic recovery will accelerate this summer as the virus is brought under control and restrictions are eased, allowing consumers to spend some of the billions they’ve accumulated over the past 15 months.
“The bigger picture is that the Canadian economy has shown a clear ability to rebound rapidly when it even partially reopens, and we would expect a similar quick comeback in [the] coming months,” Bank of Montreal chief economist Doug Porter said in a note to clients.
Once again, real estate has taken an outsized role in the situation. Housing investment jumped 9.4 per cent in the first quarter – an annualized rate of 43 per cent. New construction and renovations were big contributors, and Canadians took on $30-billion in additional mortgage debt as they drove up resale activity in markets from coast to coast.
“Growth in housing was attributable to an improved job market, higher compensation of employees and low mortgage rates,” Statscan said.
Consumption should be a major source of growth in the months ahead. Real household spending rose 0.7 per cent in the first quarter but was still down 1.9 per cent from a year earlier.
At the same time, the combination of rising employment income, generous government supports and fewer places to spend has left Canadians with ample savings. The household savings rate rose to 13.1 per cent from 11.9 per cent in the final quarter of 2020. (Between 2015 and 2019, the average was 2.1 per cent.)
Real business investment in machinery and equipment fell 2.7 per cent in the first quarter – attributed to a 98.7-per-cent decline in aircraft investment, with a large number of used planes disposed of through exports. The largest drag on growth was an $8.7-billion drawdown in inventories.
While real GDP hasn’t returned to its prepandemic peak, nominal GDP has surged to a record, owing to sharply higher prices of commodities and construction materials. “Ultimately, it is nominal GDP that drives incomes, profits and government revenues,” Mr. Porter wrote.
Despite the setback in April, the economic outlook is fairly bright. Vaccinations have picked up, caseloads are on the decline and many regions are taking their first steps toward reopening, perhaps on a permanent basis.
“These conditions will set the stage for a strong rebound in demand,” Sri Thanabalasingam, senior economist at Toronto-Dominion Bank, said in a research note.
“At the same time, we should see a rotation in economic activity away from housing and durable goods consumption to the services sector, especially high-contact businesses still reeling from the pandemic,” he added. “This could fuel extraordinary growth this summer.”
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Matt Lundy