Canada GDP: a strong start to the year

The Canadian economy continues to surprise to the upside. Today Statistics Canada reported that real GDP rose 0.7 percent in January, beating the agency's own preliminary estimate of a 0.5 percent gain and easily topping the 0.1 percent gain eked out in December. This marks the ninth straight monthly rise in GDP since the sharp falls recorded in the first wave of the pandemic in Q1/Q2 of 2020, although real GDP remains about 3 percent below its pre-COVID peak. 

A business commentator from Bloomberg, who might have been expected to know better, described the gain as "small", notwithstanding the fact that monthly increases of this size annualize to a growth rate near 9 percent.  Aside from the size of the monthly gain, the composition of the increase was generally encouraging. Both services and goods output rose in the month, with gains in the latter category driven by both primary industries and manufacturing. The only notable weakness was recorded in retail sales and the hospitality sector, which continue to be hobbled by COVID restrictions. 

StatsCan's estimate for GDP growth in February calls for a further increase of 0.5 percent, and with some easing of restrictions in March, a further gain in that month seems all but assured. This means that the almost universal expectation for a fall in GDP in the first quarter of the year will turn out to be well wide of the mark.  The second quarter may be a different story, however. Despite an accelerated rollout of vaccines, COVID case numbers are accelerating in many areas of the country, and tighter restrictions are imminent. Ontario, for example, may well announce a third lockdown as early as tomorrow. 

The arrival of warmer weather and the continuing progress in vaccinations should mean that any economic impact of a third lockdown will be muted, in the same way that the second lockdown had far less impact than the first. Even so, the prospect of at best zero growth in the second quarter means that real GDP is unlikely to regain its pre-pandemic level until the final quarter of the year.