Canada’s economic recovery kept chugging along in the fall despite the growing second wave of the COVID-19 pandemic, but economists are worried that the latest restrictions to tame the spread of the virus will bring growth to a halt to start the New Year.
In its October gross domestic product (GDP) report Wednesday, Statistics Canada released a preliminary estimate that real GDP rose 0.4 per cent in November, even as many parts of the country ramped up containment measures amid rising COVID-19 infection counts. That matched the growth pace in October, which the statistical agency revised upward from its initial estimate of 0.2 per cent.
While the pace of the economy has slowed significantly from its dramatic upturn over the summer, when businesses and consumers sprang back to life following the spring lockdowns in the initial wave of the virus, economists were nevertheless encouraged by the continued solid growth in the face of growing pandemic fears and restrictions over the fall. The gains in October and November brought the economy to within 3.8 per cent of its prepandemic levels – after having plunged nearly 18 per cent in the spring.
Still, economists warned that the near-term road ahead looks rougher, as provincial authorities have clamped down further on activity this month and look likely to continue those tighter restrictions at least through much of January.
“Data on October and November suggest that the economy was in a slightly better position than anticipated, heading into what is shaping up to be a difficult period,” CIBC Capital Markets senior economist Royce Mendes said in a research report. “The fact that GDP growth is holding up in the fourth quarter might not come as much solace, as rising COVID cases and the necessary public-health response will make it more difficult for the economy to keep its head above water in the first quarter of 2021.”
While the GDP report contained few details about the preliminary glimpse at November, Statscan did say the manufacturing, wholesale trade and financial sectors were the main contributors to the month’s growth. That was partially offset by weaker construction activity.
The numbers for October, the focus of the report, showed broad-based strength across most of the economy, with 16 of 20 sectors posting gains. Indeed, the only major source of weakness was the accommodation and food-services sector, which slumped 3.9 per cent, hit by the tightening of pandemic restrictions that hampered restaurants and discouraged travel. Colder weather also contributed to the decline, as outdoor dining – a popular way around indoor-gathering limits during the summer – became less practical.
“What really stands out in the details of October’s advance is how almost every sector of the economy, outside of the areas directly hit by new shutdowns, stepped up,” said Bank of Montreal chief economist Doug Porter.
“Clearly, consumers and businesses are learning to cope with restrictions, and activity in less-affected sectors is stepping into the void.”
Still, economists are bracing for much weaker growth in December and the start of 2021, given the restrictions recently announced in key regions – most notably Ontario and Alberta, two of the country’s most populous provinces.
“Lockdowns in Alberta and Ontario point to an economic contraction in December and possibly January,” Toronto-Dominion Bank senior economist Sri Thanabalasingam said in a research note.
The strength in October and November should be more than enough to keep growth for the fourth quarter comfortably in positive territory, even if GDP contracts in December. The latest forecasts from private-sector economists suggest an annualized growth pace of about 2.5 per cent for the quarter.
But the tightening COVID-19 restrictions have forced many economists to go back to the drawing board on their first-quarter GDP forecasts. Some recent projections put the quarter flat or even slightly into negative territory.
Beyond the first quarter, economists are much more optimistic, as they expect the latest containment measures to reverse the growth in COVID-19 infections, while the arrival of vaccines promises to tame the pandemic as the year progresses. Economists see a snapback in activity in the second quarter, forecasting annualized growth of anywhere from 5 to 10 per cent.
For 2021 as a whole, they predict growth of between 4 and 5 per cent – a marked turnaround from the estimated contraction of roughly 5.5 per cent for 2020. But that recovery remains highly dependent on the course of the pandemic.
“Only as health outcomes improve, can the economy find its legs,” Mr. Thanabalasingam said. “Let’s hope this happens sooner rather than later.”
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