Canada GDP rebound: four months, and counting

Statistics Canada reported today that real GDP grew 1.2 percent in August, marking the fourth straight month of gains after the first wave of the COVID pandemic. Preliminary estimates suggest a further 0.7 percent growth for September, which would mean that growth for the third quarter as a whole would be close to 10 percent. That is on a non-annualized basis: it annualizes to more than 46 percent, significantly stronger than the 33 percent annualized rate posted by the US in the same quarter. One wonders if Conrad Black has noticed.

Despite the rebound, August's GDP reading remained about 5 percent below its pre-pandemic (i,e, February) peak. Even allowing for the likelihood that growth persisted through September, it seems inevitable that things will only get more difficult from here. Renewed lockdowns in the more populous Provinces, though less stringent than in March and April, mean it is unlikely that any further growth will be seen in the last three months of the year, even with the customary stimulus from Black Friday and the holiday season. 

The takeaway from today's numbers, on the part of the media and Bay Street analysts alike, is generally downbeat, even though the August number is higher than the analysts' consensus, and even though nobody expected the rapid growth seen earlier in the summer to continue. Back in March or April,  anyone who dared to forecast that the economy would post double-digit growth in the third quarter would have been shouted down, but here we are.     

Looking beyond the difficult fourth quarter, the outlook for growth depends on two main factors: the progress of the pandemic, which will in turn depend on whether the hoped-for vaccine materializes, and the support provided by policy-makers. The Bank of Canada has already laid its cards on the table: monetary policy will remain stimulative. New Federal Finance Minister Chrystia Freeland also made her stance clear this week. The Federal Government will continue to spend money to promote full economic recovery, in the belief that Canada can afford the future deficits and debt that this implies.    

Freeland is expected to provide an updated fiscal statement in the next few weeks. The Government has already indicated that this statement will not contain a "fiscal anchor", such as a commitment to reducing the debt-to-GDP ratio, although Freeland appears to accept that the current level of largesse cannot continue indefinitely. The statement will update the Government's fiscal position in light of developments over the past six months, which gives rise to an intriguing possibility: given that the economic rebound in Q3 was so far above expectations, is it possible that this year's deficit projection may actually be lower than the current C$ 340 billion forecast? We shall see.