March 02, 2021 | 09:25
Canadian GDP: Goodbye to all That
Canada's economy ended an extremely challenging 2020 on a surprisingly upbeat note, with a better than expected 9.6% annualized rise in Q4 after the huge 40.6% snap-back in Q3. Just to put that near-10% quarterly rise in context, U.S. Q4 growth was 4.1% and the Euro Area posted a 2.4% decline. And, perhaps even more encouraging, the early monthly estimate for January is for a solid 0.5% advance (not annualized), although December's surprisingly perky early read was revised down two ticks to +0.1%. Before digging into any details, the broader story here is that Canada's economy has clearly dealt with the second wave and its related restrictions much better than generally expected—and look for forecasts to be revised up accordingly.
There were a lot of moving parts in today's release, so let's work up from the most timely indicator, to the biggest picture. Stats Can's flash estimate for January GDP of +0.5% may be the most eye-popping of all the figures today, as that solid advance landed right in the heart of the second wave restrictions and is in spite of a heavy drop in retail sales in the month. Strength in manufacturing, resources, housing and wholesale trade—sectors that were able to keep operating—look to more than compensate, and mild weather may have helped too in the month. Even if that figure ultimately gets revised down, as December was, the strong start still points to a reasonable good quarterly result for Q1. Recall that many forecasters, including the Bank of Canada, have been assuming that Q1 would print negative (the BoC is at -2.5% a.r.) due to restrictions.
A positive Q1 would follow the astonishingly robust 9.6% a.r. reading for Q4. Just a few short months ago, the conventional wisdom was that Canada's economy would struggle to post any growth in Q4 amid the building second wave (not unlike the pullback seen in Europe). Instead, the economy had one of the best performances in the world in the quarter. Looking at the first table below, the strength did not come from the consumer (spending actually dipped in Q4), nor net exports (they dragged as imports jumped). Instead, housing remained hot, business investment added a bit (especially machinery), government outlays were strong, and inventories came back after dragging heavily. The latter, in fact, alone accounted for 7 percentage points of the overall growth in Q4. Now before letting the bears jump all over this fact, note that the turnaround in inventories simply offsets much of the drag from this component through the year. And it means that firms are preparing for the coming rebound in spending.
Finally, today also brings the first full-year estimate for how the economy fared for all of 2020, and of course it wasn't pretty. Even with the nice rebound late in the year, GDP still fell 5.4% for 2020, in line with prior estimates. That's the deepest annual drop in the post-war era, topping the prior worst-year drop of 3.2% in 1982. However, due to the sunnier start to the year, as well as a strengthened outlook for U.S. growth and strong commodity markets, we are boosting our view on 2021 growth by a full percentage point to 6% (while also shaving 2022 by half a point to a still-solid 4%). The Canadian economy has not posted 6%+ growth since 1974.
One final note: Part of the reason we look for strong growth this year is because of the mass of excess savings, with the savings rate holding very strong in Q4 at 12.7%, after averaging 14.8% for all of 2020 (up from just 1.4% in 2019). As earlier estimated, so-called excess savings totaled nearly $200 billion last year, or roughly 9% of GDP. In perspective, that's comparable as a share of the economy to the massive U.S. $1.9 trillion fiscal package working its way through Congress.
Bottom Line: The Canadian economy soldiered through the second wave restrictions much better than anticipated, supported by a big rebound in resource sector activity and a raging housing market. Look for new growth drivers to kick into gear as the economy re-opens in stages through this year, leading to roughly 6% growth—a nice mirror image to last year's deep dive. It's not precisely a V-shaped recovery, but it's Very close.