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Canada Suffers Worst Contraction Since the Great Depression

  • Real GDP increased 9.6% (annualized) in the fourth quarter as the Canadian economy continued down the road to recovery. This was considerable higher than consensus expectations (+7.3%). However, even with the solid showing last quarter, output was down an awful 5.4% in 2020. In nominal terms, GDP was 4.6% lower than what it was in 2019.
  • Most expenditure components posted improvements in the fourth quarter. Inventories led the way, recording a small accumulation after a large drawdown in the third quarter. In annualized terms, inventories contributed 7.2 percentage points to growth in the fourth quarter. The retail sector was responsible for this surge, with stockpiling observed in motor vehicle, building supply and sporting good retailers.
  • Following inventories, housing investment also recorded a solid increase, rising 18.4% in the quarter. Improvements were seen in new construction (+17.5%), renovations (+20.6%), and ownership transfer costs (+17.3%). Relative to a year ago, housing investment was up 3.9% in 2020. Like housing, investment in machinery and equipment experienced strong gains, increasing 31.1%. Investment in non-residential structures, on the other hand, fell 10.2%, the third straight quarter of contraction.
  • Household spending weakened in the fourth quarter, declining 0.4%. The contraction was driven by lower outlays on durable (-0.6%) and semi-durable (-17.7%) goods. The weakness was concentrated in new trucks, vans and sport utility vehicles (-13.2%), new passenger cars (-23.2%) and clothing purchases (-31.3%). Spending growth on services also decelerated, but remained positive at 0.8% for the quarter. Public health restrictions and ongoing health concerns resulted in weak showings for food, beverage and accommodation services (-37.7) and personal care services (-17.6%).
  • In terms of trade, growth in both exports and imports slowed in the fourth quarter. Export growth slowed to 5% from 73% in the third quarter, similarly, import growth cooled from 118.8% to 10.8% in the fourth quarter. This resulted in net exports subtracting slightly from growth.
  • On the income side, household disposable income declined 3.8% in the fourth quarter, as a result of  lower government benefits such as the Canada Emergency Response Benefit. Still, disposable income was up 10% relative to 2019 as government supports remained elevated. With disposable income high and consumption stagnant, the savings rate was high at 12.7% in the fourth quarter.
  • Statistics Canada also released December GDP data today, which showed growth slowed to 0.1% m/m following a 0.8% increase in November. The agency also provided a flash estimate for January, which indicated a 0.5% increase in the month.

Key Implications

  • It’s official. The COVID-19 pandemic caused the Canadian economy to suffer its steepest contraction since the Great Depression. The historical GDP decline in the second quarter, was not completely made up in subsequent quarters, as the pace of the recovery slowed through the second half of the year. The level of output in the fourth quarter was 3.2% below where it was at the end of 2019.
  • Having said that, the economy’s performance in the fourth quarter displayed resilience. Despite the onset of the second wave of the pandemic and tougher provincial restrictions, 18 of the 20 industries saw growth last quarter providing evidence that consumers and businesses were adapting to the challenges posed by the pandemic. Indeed, while growth slowed in December, early indications suggest a solid bounce back in January.
  • Looking ahead, the near-term picture is brightening. Provinces are gradually relaxing restrictions, the vaccine rollout has quickened, and case counts have trended lower. This should support growth in February and March, but the more contagious variants of the virus pose downside risks. If restrictions are lifted too quickly and the spread of the virus accelerates, provinces will be left with no choice but to close parts of the economy again. This could slow the speed of the recovery.
RBC Financial Group
The statements and statistics contained herein have been prepared by the Economics Department of RBC Financial Group based on information from sources considered to be reliable. We make no representation or warranty, express or implied, as to its accuracy or completeness. This report is for the information of investors and business persons and does not constitute an offer to sell or a solicitation to buy securities.

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