With Canada GDP Drop, Analysts Expect Worse to Come -- Update

By Paul Vieira

OTTAWA -- Canadian economic output plunged by a near record in the first quarter, as household spending collapsed on coronavirus-induced shutdowns. Exports also fell markedly.

Canada's gross domestic product, or the broadest measure of goods and services produced in an economy, fell at an 8.2% annualized rate in the first quarter, to 2.10 trillion Canadian dollars ($1.53 trillion), Statistics Canada said Friday. Markets were looking for an annualized drop of 9%, according to economists at Bank of Nova Scotia.

The record quarterly decline in Canadian economic activity occurred in the first quarter of 2009, or the height of the last global recession, when output fell 8.7% annualized. Economists expect the record to be broken in the second quarter, with some analysts calling for a contraction of up to 45% in the April-to-June period.

"It is clear the data will get much worse," said Stephen Brown, economist for forecasting firm Capital Economics.

The drop in Canadian output in the first three months of 2020 was steeper relative to the U.S., its biggest trading partner and southern neighbor. Commerce Department data indicate U.S. GDP fell at a 5% annual rate in the first quarter.

Statistics Canada said GDP in March fell 7.2% from February. The agency issued an early estimate for April, indicating output shrank by a deeper 11% on a month-over-month basis.

The International Monetary Fund expects Canada's GDP to drop 6.2% in 2020, followed by a 4.2% advance in 2021. The economic restrictions aimed at containing the new coronavirus have already caused widespread economic damage. Roughly three million Canadians lost their jobs in March and April, erasing 15 years of job creation, and over a third of the labor force are either unemployed or underused. Meanwhile, Canada is the first major economy to be hit with deflation, as consumer prices in April retreated 0.2% on a one-year basis.

The Bank of Canada said last month it expects the level of GDP to be between 15% and 30% lower in the second quarter compared with the end of last year. The central bank also said a best-case scenario for the Canadian economy would involve a short-lived recession, followed by a strong rebound in activity -- and Gov. Stephen Poloz, whose term ends June 2, said this remains a strong possibility.

Strategists at TD Securities said Friday's GDP data, along with an early estimate on April activity, "suggest the economy is evolving in line with the Bank of Canada's less-downbeat scenario."

Mr. Poloz said the economy would require significant monetary-policy stimulus for the foreseeable future to help in the rebuilding process.

In March, the Bank of Canada cut its main interest rate from 1.75% to near zero, or 0.25%, and analysts expect it to remain there until 2022. The central bank has also engaged for the first time in large-scale asset purchases, or quantitative easing, to stabilize financial markets. The Canadian government has responded with roughly C$240 billion in stimulus spending and tax deferrals to buttress economic activity.

Some regions in Canada have started to ease the economic restrictions put in place to contain the spread of the new coronavirus. Canada's most populous province, Ontario, has moved cautiously, as have authorities in Montreal, Canada's second-biggest metropolitan area.

Montreal, in the province of Quebec, is the country's virus hot spot as it accounts for a third of all of the country's reported Covid-19 cases.

In the first quarter, final domestic demand -- which captures household and government spending, along with business investment -- declined 1.5% on a nonannualized basis. The data agency said household spending dropped 2.3%, the steepest quarterly drop for this category ever recorded, because of job losses, income uncertainty and business closures.

Because of reduced consumption, the household savings rate surged to its highest level in 19 years in the first quarter, to 6.1% from 3.6% in the previous quarter.

Exports fell 3%, on lower demand related to Covid-19 but also rail blockades in February that disrupted freight-rail traffic through a central Canadian corridor. Business investment in machinery and equipment fell 3.5%, or the fourth straight quarterly retreat.

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