A banner hangs outside a restaurant in Toronto's Financial District on Jan. 4, 2021.Fred Lum/The Globe and Mail
The Canadian economy showed resilience over the winter, managing to escape the second wave of COVID-19 without a decline in overall output.
It’s become something of a trend in the recovery process: Macroeconomic indicators are frequently topping estimates. Notably, the economy is running much hotter than the Bank of Canada predicted in January, when it forecast a contraction for the first quarter.
Instead, a healthy expansion has taken hold. Real gross domestic product rose 0.7 per cent in January, outrunning a previous estimate of 0.5 per cent, Statistics Canada said Wednesday. That leaves economic activity about 2.6 per cent lower than prepandemic. A further 0.5-per-cent expansion is estimated for February. Even if March comes in flat, first-quarter growth is tracking above 5 per cent on an annualized basis.
Heading into the winter, the fear was that economic output would fade somewhat, on account of rapidly rising COVID-19 cases that prompted tighter restrictions. But the economy has been buoyed by stronger commodity prices, a breathless housing boom and minimal job losses outside of public-facing industries. That leaves Canada on course for a resurgent year that undoes a great deal of economic damage inflicted by the pandemic.
“This is yet another pleasant upside surprise,” Bank of Montreal chief economist Doug Porter said in a note to investors. “Given that we are now facing yet new restrictions in many regions, the economy’s ability to soldier forward through the shutdowns is truly encouraging.”
Wednesday’s report was emblematic of the concentrated nature of economic troubles. Real GDP fell in January in the hospitality, retail and transportation industries, all subject to tighter public-health measures that month.
Still, that weakness was offset elsewhere. Wholesale trade jumped 3.9 per cent in January, bolstered by imports of machinery and demand for building supplies. Manufacturing rose 1.9 per cent, supported by higher sales and inventories. And mining and oil and gas extraction expanded 2.7 per cent – a fifth consecutive monthly increase – as oil sands facilities in Alberta ramped up production.
“The big thing is the heterogeneous nature of what we see unfolding,” Greg Peterson, assistant chief statistician at Statscan, said in an interview. The early GDP returns show “a strong start to the year,” but “there are some sectors that are still quite weak.”
The impact from the real estate industry was apparent in January’s numbers. Construction activity rose 1.4 per cent, with residential construction growing 3.1 per cent. Statscan also noted that banks benefited from a 7.1-per-cent gain in households’ total mortgage debt, relative to a year earlier.
That said, frenetic housing activity is raising alarms. Royal Bank of Canada and BMO have recently urged policy-makers to find ways of taming the exuberance. The average household will emerge from the pandemic with a higher debt load, encouraged by low mortgage rates.
The Bank of Canada is poised to issue a hefty upgrade to its growth outlook on April 21, the date of its next rate decision and monetary policy report. Several analysts on Wednesday reiterated their view that the bank will start to pare back its purchases of Government of Canada bonds – part of its first foray into quantitative easing – at the April meeting, given the underlying strength of the recovery.
As ever, economic momentum is tenuous, in light of rising COVID-19 cases in much of the country. B.C. is grappling with a third wave and recently imposed a three-week “circuit-breaker” lockdown that prohibits dine-in service at restaurants and bars, among other things.
“The pace of the [vaccine] rollout has accelerated in recent weeks, but it must continue to do so in order to allow for a safer reopening of the economy through the spring and summer,” Toronto-Dominion Bank senior economist Sri Thanabalasingam said in a note. “Supply-chain issues, or vaccine hesitancy, could further complicate the economic recovery.”
For now, the third wave hasn’t provoked a rethink of Canada’s recovery path. The median estimate from private-sector economists is that real GDP will grow 5.4 per cent this year, and several domestic banks have pencilled in growth of around 6 per cent.
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