Even as Canada battles a fourth wave of COVID-19, policy makers face challenges on several fronts, including a tenuous global economic recovery, supply chain bottlenecks, and inflation. Here we present five charts that will guide us in tracking the Canadian economy in the final quarter of 2021.
The Canadian Economy Contracted in the Second Quarter
Canada’s real GDP declined 1.1% (annualized quarterly rate) in the second quarter, driven by substantial declines in home resale activities and exports. Analysts surveyed by FactSet were expecting growth of 2.5% for the quarter. Household consumption was essentially flat compared to the prior quarter, showing an increase of just 0.2%, as a 7.3% increase in the consumption of services barely outpaced the 7.0% decrease in goods consumption. The economy is expected to resume its growth path in the second half of the year, with the median forecast from FactSet Economic Estimates showing projections for 3.8% growth in the third quarter (to be released November 30) and 6.0% in the fourth quarter. For the year the economy is expected to expand by 5.0%.
Canadians Take on More Housing Debt
According to Statistics Canada, “housing investment has emerged as the predominant contributor to economic activities and to capital stock” as the economy continues to recover from the pandemic-induced economic slowdown. One result of this trend is a surge in the amount of residential mortgage debt held by Canadian households. In August, residential mortgage debt increased by C$13.6 billion compared to July, an increase of 0.8%. While this pace is considerably slower than the rapid increase in mortgage borrowing we saw in the second quarter, when residential mortgage debt surged by C$54.2 billion, housing debt is up 9.7% compared to August 2020. Households took on more residential mortgage debt in the first eight months of this year (C$110.5 billion) than in all of 2020 (C$108.4 billion). While both existing home sales and housing starts have retreated from the peaks seen earlier this year, the Canadian housing market is still operating at very high levels of activity as reflected in the continued strong growth in home prices.
Consumer Prices Grow at Fastest Pace in More Than 18 Years
Canadian consumer prices were up 4.4% year over year in September, the fastest growth rate since February 2003. Energy prices were the main driver of the increase, with gasoline prices surging 32.8% compared to September 2020. Higher prices for shelter (4.8%) and food (3.9%) also contributed to the overall price increase, with the latter largely due to a 9.5% surge in prices for meat products. With inflation more than twice the Bank of Canada’s 2% target, markets will be closely watching the central bank’s upcoming policy statement at the end of the month for any clues about future rate hikes or reductions in the ongoing quantitative easing program. Analysts surveyed by FactSet expect the central bank to keep interest rates where they are until the middle of 2022.
Employment Returns to Pre-Pandemic Levels
Canada added 157,100 jobs in September, the fourth consecutive monthly increase in employment. The country is now back to its pre-pandemic employment level (February 2020). Correspondingly, the unemployment rate fell for the fourth month in a row, dropping to 6.9%, the lowest rate since the start of the COVID-19 pandemic. The jobless rate remains higher than it was in February 2020 because the labor force has expanded, meaning that the number of unemployed persons is higher than it was before the pandemic.
In terms of wage growth, to paint a more accurate picture of wage trends, Statistics Canada has adjusted the data for employment composition to account for shifts in employment due to the pandemic. After the composition adjustment, the data shows a 4.6% increase in hourly wages in September compared to September 2019. Without controlling for these changes, the two-year growth rate for hourly wages was 7.3%. This will be another data point for the Bank of Canada to monitor as it sets monetary policy going forward.
Higher Exports for Energy and Metal Products Help to Widen the Trade Surplus
August goods exports rose 0.8% while imports fell 1.4%, resulting in a widening of Canada’s trade surplus from C$736 million in July to C$1.9 billion in August. This was the third consecutive monthly trade surplus, something we haven’t seen since 2014. The growth in exports in August was largely due to a 5.1% increase in exports of energy products and a 4.0% increase in exports of metal and non-metallic mineral products. These jumps were driven by surges in both prices and global demand. As mentioned above, trade was a drag on GDP growth in the second quarter, but the July and August monthly trade data bode well for the third quarter GDP figures.
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