Canadian economic data is showing a ‘V’ shaped recovery so far. There are three fundamental questions about the shape of the recovery. First, will the domestic health risks remain contained as the economy fully reopens? The answer is probably ‘Yes’ but the recent news that Alberta’s testing system is being stressed by rising infections highlights the risks. Second, will the United States economy recover strongly? The answer is increasingly ‘No’ and that will likely lead to weakness in Canadian exports and temper commodity prices. Third, will there be a second wave of infection in the Fall? The answer is uncertain. So, the recent economic rebound is stronger than expected and is a very positive outcome; but, the risks still suggest a long recovery.
Getting into the details, Canadian retail sales rebounded by 18.7% in May. This left sales 20.0% below February levels, but Statistics Canada reported that the preliminary results from the June survey suggest a gain of around 24%. If the flash estimate is correct, the level of sales in June would be only 0.4% below pre-lockdown levels.
The sudden comeback reflects the reopening of the economy, but the strength is surprising given that the COVID-19 virus is still in circulation and the anecdotal evidence suggested that consumers were making fewer trips to stores and behaving in a more cautious way.
The gains in May were broad-based, with sales rising in 10 of 11 subsectors. Some of the sectors hardest hit by the lockdown posted the strongest sales growth, including motor vehicles, general merchandise, and clothing stores.
With the reopening of stores, the pace of e-commerce growth has slowed, posting a seasonally adjusted gain of 0.7% in May from April, but is up a remarkable 113% year-over-year now accounting for 8.0% of total retail trade.
Removing price effects, retail sales in volume terms were up 17.8% in May, which adds to the expectations of strong economic growth during the month.
In other news, Canadian building construction increased 60% in May, in both value and volume terms, partially rebounding from large declines in April. Residential construction rose 57%, with single-unit construction jumping 72% exceeding multi-unit construction gains of 45%. Non-residential construction investment increased 66%. The increase was concentrated in Ontario and Quebec. Residential and non-residential investment in total has recovered close to two-thirds of the losses in March and April. Again, this is very favourable and points to strong growth.
We also received some positive international news. EU leaders reached a deal allowing the European commission to borrow up to €750bn in financial markets and provide budgetary support to member states. About €390bn of this sum will be distributed in the form of grants and the rest will take the form of loans to facilitate the recovery in member states. Almost 80% of the grants will be distributed over the next 3 years through the Recovery and Resilience Facility which requires countries to prepare national recovery plans pledging to reform their economies. The remaining €77.5bn of grants will help support normal EU budgetary programmes. With regards to the rules determining how the money is allocated, the latest plan ties countries’ share of recovery money to the economic harm done by the pandemic as opposed to other metrics that relied on pre-crisis growth and unemployment data.
The package was approved together with the EU’s next 7-year budget (the MFF) worth €1.074tn. This is a big development since leaders have now settled on national contributions to the EU budget for the coming years, while also endowing the commission with new powers to borrow on the capital markets to fight the downturn. Among the most controversial elements of this were rebates secured by frugal states against their normal budget contributions.
Finally, as this is a health crisis, it is welcome news that an Oxford University vaccine is showing promising results. Around the world, there are concerted efforts to effective vaccine that would arrest the health risks. Of course, deployment of a vaccine would take considerable time on a global basis. Nevertheless, it is heartening to hear that progress is happening.
Craig Alexander is the first Chief Economist at Deloitte Canada. He has over twenty years of experience in the private sector as a senior executive and leading economist in applied economics and forecasting. He performed macroeconomic research, regional and sector analysis, and fiscal market forecasting and modelling. Craig is a passionate public speaker and holds a graduate degree in Economics from the University of Toronto.