Canada’s economy saw record decline in March, with worse numbers forecast for April

The Canadian economy took a historic dive in March as the country imposed lockdown measures to curb the spread of COVID-19 – and worse results are expected for April.

Real gross domestic product fell 7.2 per cent in March from February, the largest monthly decline on record, Statistics Canada said Friday. In the first quarter, real GDP shrank at an 8.2-per-cent annualized rate, the sharpest drop since the financial crisis of 2008-09.

Worse numbers are on the way. Statscan estimates an 11-per-cent decline in real GDP in April, the first full month with lockdown restrictions in place.

But it’s possible April will represent the bottom of the economic downturn. Since provinces began to reopen in May, several indicators – new job postings, cross-border truck traffic and business confidence – have shown improvement, even though they remain well below pre-crisis levels.

“We can start thinking about this being a very severe but a very short-lived downturn,” said Brian DePratto, senior economist at Toronto-Dominion Bank. “The worst is behind us, and now it’s that gradual path back to something like normal.”

As the pandemic began to take hold, the damage was almost unavoidable: Output in 19 of 20 industrial sectors fell in March, highlighted by steep declines in accommodation and food services, arts and recreation and transportation and warehousing.

Household spending fell at an annualized rate of 9 per cent in the first quarter, the largest drop on record, which Statscan pinned on “substantial job losses, income uncertainty and limited opportunities to spend” as non-essential stores were shuttered in much of the country.

Both export and import volumes fell in the first quarter for various reasons: weaker demand, the halt in cross-border tourism, the shutdown of manufacturing plants and the rail blockades in February. A weaker Canadian dollar also weighed on imports.

As expected during a recession, people are saving more when it’s possible. The household savings rate climbed to 6.1 per cent in the first quarter, the highest level since 2001, from 3.6 per cent in the previous quarter. This is an aggregate rate, with Statscan noting that savings rates are generally higher among higher-income households.

“The savings that some households have built up during the shutdown period could translate into pent-up demand and additional spending in the near term as businesses reopen,” said Royce Mendes, senior economist at Canadian Imperial Bank of Commerce, in a client note.

With its 8.2-per-cent drop, Canada’s first-quarter performance was right in the middle of G7 countries, bookended by Japan (down 3.4 per cent) and France (down 21.4 per cent). The COVID-19 crisis hit Canada’s economy harder than that of the U.S., where first-quarter output dropped at an annualized rate of 5 per cent, despite the countries getting hit by initial outbreaks at similar times.

“Canada’s quarantine has been more aggressive than the U.S. quarantine on the aggregate and consequently there’s more economic damage," said Eric Lascelles, chief economist at RBC Global Asset Management. "Let’s not forget that the primary channel of damage is people being told not to go to work and not to go to stores.”

Heading into the pandemic, Americans were saving at much higher rates than Canadians, a trend that has persisted. The U.S. personal savings rate soared to 33 per cent in April, helped by unemployment benefits and US$1,200 stimulus payments to individuals, according to figures released Friday. In theory, U.S. consumers should have greater capacity to spend during the recovery.

However, Mr. Lascelles cautioned against risks posed by the U.S. pandemic response. “One has to acknowledge that the countries with the least severe quarantines and with the most enthusiastic rebounds are probably at a greater risk of a double dip" for their economies should the virus flare up again, he said.

For Canada there are certainly risks as well. Despite waning pessimism, more than 40 per cent of small businesses say they are in bad shape, according to recent survey results from the Canadian Federation of Independent Business. Many companies are reopening to weaker sales but face larger debt obligations. Moreover, some households will be living off less income for some time. As such, the recovery is subject to considerable uncertainty.

“Even if people are going back [to stores] and we start to see some growth, how robust will it be?” Mr. DePratto said. “Will we really see enough to [quickly] replace the size of the hit we’ve seen? I would argue probably not, that it’s going to be a slower recovery.”

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