The Canadian economy grew by 1.2% in August, slightly better than the 1% flash estimate for the month that Statistics Canada provided alongside the release of GDP figures for July. Despite the slightly better-than-expected reading, growth has slowed sharply in recent months. In June, real GDP increased by 6.5 per cent and in July by 3.1%. The gain in August leaves the Canadian economy down 4.6% relative to its February level and 3.8% below where it was last year.
In addition to a slower pace of growth, the gains were not as broad-based in August. Just 15 of 20 industries grew in August. In July, all 20 major industries posted higher levels of activity and in June, all but one sector was growing. Of the categories where output was flat or declining, the sharpest drops were in utilities and mining. The decline in utilities comes after an unseasonably warm July which drove up demand for air conditioning. The decline in mining is more troublesome, reflecting widespread weakness in demand. Oilsands mining was down 7.5% to a level last seen in 2015 (excluding the Fort McMurray wildfire) and potash mining dropped by 21.7% suggesting that the summer recovery will not be as strong in Alberta and Saskatchewan as what we expect to see in other parts of the country.
On the positive side, activities linked to the real estate sector continue to do well, propelled by significant growth in resale home markets and new housing construction. Legal services and residential construction both experienced strong gains and the 8.6% increase in the offices of real estate agents and brokers propelled activity in that industry to its highest on record. Growth was also very strong in the public sector as easing restrictions allowed municipalities to continue to reopen services, the education sector had unusually strong growth as schools worked to implement the required COVID-19 protocols and healthcare services continued to recover from the spring shutdowns that resulted in cancelled surgeries and the closure of services like dental offices.
Manufacturing activity had a mixed month with gains in durable manufacturing offsetting losses in non-durable production. Machinery manufacturing was up strongly as was medical equipment and wood products. On the non-durable side, output was down in plastics, chemical, petroleum and food products.
The hospitality industry continued to recover in August with both the food and accommodation and arts, recreation and entertainment sectors posting strong gains. Nevertheless, output in food services and accommodation is 28.9% below its last August levels while arts, entertainment and recreation is down 45.9%.
Statistics Canada’s preliminary estimate for September GDP predicts a gain of 0.7% putting the third quarter increase at 10 per cent, which is right on the Deloitte economic forecast. The message from today’s report is clearly one of slowing growth. And when we look to October, we know that Canada’s largest provinces were back under modified restrictions to slow the spread of the virus, meaning that as we look into the fourth quarter, the pattern of slow and uneven growth that is already emerging, will continue to dominate the economic narrative.
Next week, all eyes will be on the US election. The polls are predicting a Democratic sweep, with the party retaining the House of Representatives and taking control of the Senate and the White House. This is the outcome financial markets are hoping for, because it provides the highest probability that there will be a large fiscal stimulus package after the transition in government. While pre-COVID, markets were concerned by Biden’s platform of reversing tax cuts and imposing more regulation, the rising health risks and the loss of government fiscal support to the economy have become the greater concern. The most negative impact would be an unclear victory that takes time to resolve, in which case brace for significant market volatility – negative for equities and the US dollar but positive for bonds. In the case that Biden wins the White House but the Senate remains in Republican hands, markets are likely to assume that additional stimulus will come but the total fiscal package will be smaller – so a small negative. A Trump victory would be a status quo outcome, which would lead to concerns about the handling of the pandemic and uncertainty of the fiscal support to the economy that would be negative for financial markets. In fact, Trump would likely deliver stimulus but less than the Democrats. The election outcome will have many implications for the Canadian economy and various industries, but we will cover the implications once we know the results of the voting. The possibility of an unclear outcome or imagining how a lame duck President Trump responds to the election are the best Halloween scares I can think of.
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