Statistics Canada released the GDP estimates for the first quarter. Typically we annualize the numbers when presenting the performance, but the magnitude of the decline means that the numbers become crazy large when annualized. Therefore, for the most part, I will present the quarter-over-quarter change without annualizing. Hope you understand.
The Canadian economy contracted by a 2.1 percent (annualized 8.1 percent annualized) in the first quarter of 2020, reflecting the effects of the global pandemic and economic shutdown. The downturn was less pronounced than market expectations of a 10 percent plunge.
Nevertheless, this was the worst quarterly decline since the first quarter of 2009. In addition to the fallout from the virus containment measures that were imposed from coast-to-coast in March, the economy was also adversely impacted by the Ontario teachers' strike and rail blockades in February.
In March alone, Canadian real GDP dropped 7.2 percent from the previous month (-25.8 percent at annualized rates) as non-essential businesses faced mandatory shutdowns, the international borders closed, and travel restrictions and physical distancing measures became widespread.
Job losses and rising uncertainty led to a drop in household spending, which fell 2.3 percent in the first quarter—the steepest quarterly drop on record. With the closure of non-essential businesses and physical distancing limiting shopping opportunities, spending declined across both goods (-1.7 percent) and services (-2.8 percent).
However, spending on non-durable goods was up slightly, rising 3.1 percent as people stockpiled food and people shifted to cooking at home, transferring expenditures away from restaurants and bars.
Declines in services spending were mainly attributed to accommodation and food services (-10.9 percent) and air transport (-15.7 percent). These two sectors were some of the worst hit, with accommodation and food services output dropping by 36.9 percent and air transportation contracting 40.9 percent in March.
Government final expenditure was also down for the quarter, falling -1.0 percent, the largest decline since the first quarter of 2013, reflecting school closures and reduced government administration.
Housing investment fell -0.1 percent after experiencing a 0.3 percent increase in the previous quarter. Non-residential business investment also fell -0.4 percent, primarily due to a drop in machinery and equipment investment (-3.5 percent).
Both export and import volumes declined in the first quarter, with exports falling by 3.0 percent and imports falling by 2.8 percent due to the impacts of COVID-19 closures, but also from factors like the rail blockades in February. These events outweighed any positive influences the falling Canadian dollar had on exports, with the most affected items being intermediate metal products (-9.6 percent), passenger cars and light trucks (-10.0 percent), refined petroleum and energy products (-14.5 percent) and travel services (-16.3 percent).
Supply chain disruptions forced businesses to draw down $3.7 billion in non-farm inventories. Despite the drop in inventories, the substantial decline in sales volumes raised the economy wide stock-to-sales ratio from 0.863 in the fourth quarter of 2019 to 0.872 in the first quarter of 2020.
Corporate earnings for the quarter fell, with earnings for non-financial corporations declining 3.7 percent and financial corporations declining 3.2 percent, with some of the COVID-19 damages mitigated by wage subsidies. The sharp drop in the oil price further hurt revenues for businesses involved with the oil and gas sector.
Compensation of employees decreased 0.9 percent, led by manufacturing, wholesale and retail trade, and personal and professional services. The Canada Emergency Wage Subsidy (CEWS) slightly mitigated a further decline to employee compensation.
Despite this decline, household disposable income rose 0.4 percent in the quarter because of higher property incomes and net government transfers. When combined with the decrease in household spending, the household savings rate rose to 6.1 percent in the first quarter of 2020, up from 3.6 percent in the fourth quarter of 2019.
With the results of the first quarter, we have a better perspective of how the economy was trending heading into the second quarter. Given that much of the lockdown happened late in March and thus not fully captured in the survey data, there is little doubt that April will have a greater decline. Indeed, Stat Can indicated that the preliminary data suggests a drop of around 11 percent.
The magnitude of the fall means that the economy will contract deeply in the second quarter, but we already know that provinces are gradually reopening. Growth will likely remerge in May or June, and we expect a solid rebound in growth in the second half of the year. However, the growth will be from a very low level of economic activity and the economic scarring (including high unemployment, lower household income, weaker consumer and business confidence, etc.) will likely mean a slow recovery that will be fraught with risks—the main one being a second wave of infection. The main challenge is balancing reopening the economy while keeping health risks in check and while restoring confidence.
