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Markets News

UPDATE 3-Canada's GDP likely to climb in July, large Q3 rebound looms

(Adds details on government COVID-19 spending)

OTTAWA, Aug 28 (Reuters) - Canada’s real GDP is likely to climb 3% in July, edging economic activity closer to pre-pandemic levels, Statistics Canada said in a flash estimate on Friday, as data continued to paint a picture of a sharp fall followed by a strong rebound.

Canada’s second-quarter annualized growth tumbled a record 38.7% even as June real GDP surged a record 6.5%, beating analyst expectations for growth of 5.6%. Economic activity still remains about 9% below pre-pandemic levels, StatsCan said.

The better-than-expected economic growth in June builds on strong data across a number of indicators, buoyed by the reopening of more businesses from COVID-19 closures.

“For now it’s definitely a V-shaped” recovery, said Derek Holt, head of capital markets economics at Scotiabank.

“When I hear people tamping down the strength of the data, we have to put that in the context of how all the data has surprised to the upside,” he added. “Few people expected this magnitude of a rebound to begin with.”

Indeed, economists expect a “mammoth” increase in Canada’s third-quarter economic activity, predicting a rebound nearly twice that of the United States, reflecting Canada’s more stringent COVID-19 response and strong fiscal stimulus.

Canada’s budget deficit is forecast to top C$343.2 billion ($261.8 billion) this fiscal year, the largest shortfall since World War Two, amid billions in COVID-19 aid spending.

The government said on Friday that the deficit for April to June topped C$120.4 billion, as emergency transfers more than doubled program expenses in the quarter. Canada has paid out C$71.3 billion in emergency wages to people who lost their jobs.

That stimulus helped boost household disposable income by almost 11% in the second quarter, with the household savings rate climbing 28.2%, StatsCan said.

Still, Bank of Canada Governor Tiff Macklem warned Thursday that while the rebound from the depths of the crisis has been “impressive,” the road ahead will be long and bumpy.

The central bank has repeatedly said it expects Canada’s economic recovery to have a rapid “reopening” phase followed by a slower “recuperation” phase.

June indicators beat expectations, while the July data has so far been less impressive. Canada added slightly more jobs than expected in July, though most were part-time and the gain was well below June’s record increase. Inflation, meanwhile, fell back in July compared with June and came in below analyst expectations.

Spending growth plateaued in July and has slowed into August, according to the RBC Economics COVID Consumer Spending Tracker.

Analysts noted that even with the strong early bounce-back, there is still a long way to go.

“We continue to expect the economy to operate well below capacity into next year, but perhaps not quite as far below capacity as previously feared,” said Nathan Janzen, senior economist at RBC Economics, in a note. ($1 = 1.3119 Canadian dollars) ($1 = 1.3107 Canadian dollars) (Reporting by Julie Gordon and Kelsey Johnson in Ottawa; Additional reporting by Dale Smith and Steve Scherer in Ottawa, Jeff Lewis in Toronto; Editing by William Maclean, Andrea Ricci and Leslie Adler)

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