June 30, 2021 | 09:10
GDP — Not Canada's Day
The Canadian economy stumbled in April and May amid tough third-wave restrictions, but the damage was lighter than expected overall. Real GDP fell a 0.3% in April, considerably better than the flash estimate of a -0.8% drop from StatsCan, while March was revised up two ticks to +1.3%. Somewhat offsetting those two months was StatsCan's early estimate for May of another 0.3% GDP decline. However, even with the two-month setback, the strong starting point for the quarter and the likelihood that activity took a big step up in June as restrictions lightened suggest there will be some modest growth after all in Q2. Taking all these moving parts together, we now look for Q2 to grow at roughly a 2.5% a.r. (previously we had a flat reading), just a bit below the BoC's latest projection of 3.5%.
April's mild drop was supported by solid gains in three specific sectors, and it's quite telling what industries held up well during third-wave restrictions. Construction was the big driver, rising 2.4% on the buoyant housing market. The resource sector chipped in with a 1.4% gain as well, with mining especially strong (and that group has handily surpassed pre-pandemic levels). Finally, the public sector churned out a solid 0.4% gain. On the flip side, the areas of weakness were no mystery amid the shutdowns, with retail activity plunging 5.5%, and hotels & restaurants dropping 4.6%. The one notable pullback was in finance (-0.6%), partly due to the slide in home sales from super-heated levels. For May, the areas of weakness were reportedly retail and real estate (again), but also with a reversal in construction.
Bottom Line: As with almost every economic report these days, there are a lot of moving parts, spinning off mixed messages. But based on what was known ahead of this release, we would rate this is a bit better than weak expectations overall. This takes into account the March revision (plus), the less-bad than expected April drop (plus), and the early flash read on a similar May drop (minus). As a result, we are revising up our Q2 estimate to 2.5% growth (from zero). However, we are sticking with our full-year call of 6.0%, as the expected rebound in the summer will be somewhat dulled by the shallower than expected retreat in the spring.