Five Economic Charts to Watch in 2021: Canada

Despite renewed lockdowns this spring as a third wave of COVID-19 hit Canada, economic data suggests that activity is rebounding. Here we present five charts that will guide us in tracking the Canadian economy in the second half of 2021.

The Economy Continues to Work Its Way Back

After contracting sharply in the first half of 2020, Canadian real GDP surged in the second half of the year. The strong performance continued into the first quarter of 2021, with real GDP surging by 5.6% (quarter-over-quarter, annualized rate); however, the economy remains 1.7% smaller than it was before the pandemic. Analysts surveyed by FactSet expect second-quarter real GDP growth to slow to 1.9% as several provinces reinstated lockdowns in the spring. Growth is projected to pick up again in the second half of the year, with 2021 annual GDP expected to expand by 6.0%.

Surging Inflation is Expected to Be Temporary

In May, Canada’s consumer price index (CPI) rose 3.6% compared to May 2020, up from a 3.4% gain in April. This was the fastest year-over-year price increase since May 2011. The comparison to weak 2020 numbers, the so-called base year effect, is largely responsible for the strong numbers. However, the transportation and shelter price components are up sharply compared to their pre-pandemic levels as prices for housing, passenger vehicles, and gasoline have all jumped as the economy has reopened.

The Bank of Canada’s monetary policy has an inflation-control target of 2%, as measured by the total CPI; the target rate is the midpoint of a 1-3% target range. Recent comments by Bank of Canada Deputy Governor Timothy Lane reinforced the central bank’s view that the current elevated inflation numbers will subside. According to Lane, “We expect inflation to stay around 3 percent through the summer and then to ease later in the year as remaining slack in the economy pushes inflation down.” The bank has held the target for the overnight rate at 0.25% since March 2020.

Retail Sales Dip in April Due to Renewed Lockdowns

Canadian retail sales fell sharply in April, down 5.7% compared to March; this was the biggest decline in 12 months. So-called core retail sales, which excludes gasoline stations and motor vehicle and parts dealers, fell by 7.6% for the month. Nine of 11 subsectors fell for the month, led by a 28.6% drop in sales at clothing and accessories stores. Ontario saw the biggest drop of all the provinces, with sales dropping by 13.4%. The nation’s most populated province has instituted some of the toughest lockdown restrictions in the country, only moving to Step 1 in its reopening plan on June 11.

Employment Growth Falters

Canada’s unemployment rate rose in April and May as third-wave restrictions remained in effect across the country. Following a 207,000 decline in April, employment fell by an additional 68,000 in May. Most of the May decline was in part-time work, which fell by 54,000. While April job losses were concentrated in the services-producing sector, the May losses were mainly in manufacturing. Separately, Statistics Canada reported that manufacturing sales fell 2.1% in April due to lower sales of transportation equipment and petroleum and coal products. While reopening plans vary from province to province, caution reigns as the pace of vaccinations ramps up; the rapid spread of the Delta variant is a major concern. Currently, just under 30% of the population is fully vaccinated.

New Home Prices Are Skyrocketing

Similar to what we are seeing in the U.S. housing market, Canadian home prices are rising dramatically. Nationwide, new home prices were up 11.3% in May compared to a year ago. This was the largest year-over-year increase since November 2006, just before the bursting of the housing market bubble that led to the 2008-2009 recession. Rising input costs are contributing to the higher prices, especially in western Canada because of “building material shortages due to supply chain issues at lumber and steel mills, as well as rising transportation costs within Canada, and higher U.S. import duties.” Statistics Canada reports that prices for lumber and other wood products have more than doubled in the last 12 months.