Recovery started strongly in May - Capital Economics
Canada Economics

Recovery started strongly in May

Canada Economics Weekly
Written by Stephen Brown

The data this week showed a stronger rise in GDP in May than the consensus expected, and the timelier indicators point to an even larger increase in June.

The data this week showed a stronger rise in GDP in May than the consensus expected, and the timelier indicators point to an even larger increase in June.

The 4.5% m/m rise in GDP in May was stronger than the consensus estimate of a 3.5% gain, albeit a touch softer than our own estimate of a 5% increase. GDP rose in almost every sector, with the construction, retail, and accommodation & food services sectors seeing the strongest m/m gains of between 17% and 24% as the first restrictions were lifted. (See here.)

The strong rise in retail trade GDP appears to have been followed by an even larger increase of around 20% in June. As retail activity was 17% below its pre-virus February level in May (see Chart 1), that would take retail trade GDP above where it was before the virus struck. However, the strength of that recovery partly reflects a shift in consumption away from services toward goods, so overstates the health of overall household spending. It seems likely that GDP in the main two customer-facing service sectors will remain depressed for at least another 12 months as some restrictions remain in place. (See here.)

Chart 1: GDP (February to May, %)

Source: Refinitiv, Capital Economics

The further lifting of restrictions in June nevertheless bodes well for GDP last month. For example, it was only in mid-June that restaurants were allowed to start re-opening in Ontario and Quebec, and we know that restaurant visits continued to rise in British Columbia and Alberta. Meanwhile, the labour market regained almost a million jobs in June, which was a lot stronger than the 270,000 rise in employment in May. The larger 9.8% rise in hours worked In June is one reason why we are pencilling in a further gain in GDP of 7%. (See Chart 2.)

Chart 2: Hours Worked & GDP (% m/m)

Source: Refinitiv, Capital Economics

The pace of monthly gains is likely to slow from July, but as the lifting of restrictions has been gradual there should still be decent sized increases in July and August. For example, it is only today that the heavily-populated Greater Toronto Area is moving to “Stage 3” of the re-opening process, some weeks behind the rest of the province. That should benefit GDP in several customer-facing service sectors in August.

All this leads us to think that that a 40% annualised contraction in second-quarter GDP will followed by an expansion of around 35% in the third quarter. Our forecasts are stronger than those published by the Bank of Canada earlier this month, although still imply that GDP will remain below its pre-virus level until late 2021. (See here.)

The week ahead

Next week sees the release of the July Labour Force Survey and the June trade data. We expect the trade data to show that exports rebounded at a stronger pace, boding better for the manufacturing sector after its relatively soft start to the recovery in May. We expect the Labour Force Survey to show a smaller rise in employment than in June, but still a substantial one of 500,000.


Data Preview – International Trade (Jun.) 08:30 5th Aug

Forecasts

Previous

Median

Capital Economics

Merchandise Trade Balance (C$bn)

-0.7

-2.5

Exports and imports to rebound

We estimate that a 10% m/m rise in exports and a 15% rebound in imports caused the trade deficit to widen in June.

In May, the goods trade balance narrowed sharply as exports rebounded by 6.7% m/m while imports fell further, by 3.9%. (See Chart 3.) The advance US trade data imply that Canada’s trade deficit widened in June, given that US imports rose by less than half as much as exports. We are assuming a 15% rise m/m in imports and a 10% increase in exports, which would cause the goods trade deficit to widen back to $2.5bn, from the smaller-than-normal $0.7bn in May.

We suspect that the trade deficit will widen further in the coming months. The recovery in retail sales back to pre-virus levels implies that imports should recover relatively quickly, whereas the likelihood that oil prices will remain low and demand for investment goods will remain weak is bad news for exports.

Chart 3: Exports & Imports ($bn)

Source: Refinitiv

Data Preview – Labour Force Survey (Jun.) 08.30 7th Aug.

Forecasts

Previous

Median

Capital Economics

Change in Employment (000s)

+950

+500

Unemployment Rate (%)

12.3

11.0

Another decent rebound

We estimate that employment rebounded by a further 500,000 in July, although the number of unemployed people probably fell by less.

The June LFS, which showed a 950,000 rise in employment, captured the bulk of the initial lifting of restrictions across the country, including the first stages of restaurants re-opening in parts of Ontario and Quebec. The LFS will capture the further lifting of restrictions in those provinces, including in the big cities of Toronto and Montreal, although the overall effect on employment is likely to be smaller. We are therefore pencilling in a further rebound in employment of 500,000.

In June, the number of people active in the labour force remained much lower than the February pre-virus level. It is likely that many people that lost their jobs during the lockdown started looking for work again in July and will be officially counted as unemployed for the first time, so we are pencilling in a smaller fall in unemployment of 250,000. That would pull the unemployment rate back down to 11%, from 12.3% in June. If we are right that there will be further decent gains in employment in the coming months, then the unemployment rate should be back below 10% by September. (See Chart 4.)

Chart 4: Unemployment Rate (%)

Source: Refinitiv, Capital Economics


Economic Diary & Forecasts

Upcoming Events and Data Releases

Date

Release/Indicator/Event

Time EST (BST-5)

Previous*

Median*

CE Forecasts*

Mon 3rd

No Significant Data Released

Tue 4th

Manufacturing PMI (Jul)

09.30

47.8

51.5

Wed 5th

International Merchandise Trade (Jun)

08.30

-C$0.7bn

-C$2.5bn

Thu 6th

No Significant Data Released

Fri 7th

Unemployment Rate (Jul)

08.30

12.3%

11.0%

Employment, 000s (Jul)

08.30

950.0

500.0

Ivey Purchasing Managers Index (Jul)

10.00

58.2

60.0

Selected future data releases and events

10th August

Housing Starts (Jul)

08.15

11th August

Building Permits (Jun)

08.30

14th August

Manufacturing Sales (Jun)

08.30

Home Sales (Jul)

09.00

*m/m(y/y) unless otherwise stated

Sources: Bloomberg, Capital Economics

Main Economic & Market Forecasts

%q/q ann. (%y/y) unless stated

Q1 2020

Q2 2020

Q3 2020

Q4 2020

Q1 2021

Q2 2021

2020

2021

2022

GDP

-8.2

-40.0

35.0

15.0

5.0

3.0

-6.3

5.5

3.5

CPI Inflation

1.8

-0.2

0.5

0.7

1.2

2.5

0.7

1.9

1.9

Unemployment Rate (%)

6.3

13.0

9.6

8.8

8.5

8.1

9.3

8.0

6.5

Overnight Rate, End Peri’d (%)

0.25

0.25

0.25

0.25

0.25

0.25

1.75

0.25

0.25

10 Yr GoC., End Period (%)

0.71

0.55

0.65

0.75

0.75

0.80

0.75

0.90

1.00

USD/CAD, End Period

0.70

0.73

0.74

0.75

0.75

0.76

0.75

0.80

0.82

Sources: Refinitiv, Capital Economics


Stephen Brown, Senior Canada Economist, stephen.brown@capitaleconomics.com