MNI REALITY CHECK: Canada's Q3 GDP Rebound Won't Last

Canada's economy faces a twisted path back from the spring lockdown, with a strong third quarter likely followed by a near stall as some regions move back into tough health restrictions.

Third quarter GDP will grow at a 48% annualized pace according to economists, following a 39% decline in the second quarter. Even with the big gain, output will remain about 5% below pre-pandemic levels.

This rebound is driven by pent-up demand and government stimulus that boosted household income. Housing has also been a source of strength amid low interest rates and demand for bigger houses to cope with social isolation rules.

The quarter will likely end with a monthly increase of 0.9% for September, mainly on higher hours worked. Industry reports from Statistics Canada suggest strength in manufacturing, energy, and some hospitality services being allowed to further open. The monthly advance would lag gains that peaked at 6.5% in June and slid to 1.2% in August.

The Bank of Canada sees a tougher slog for growth and estimated the Q4 gain at a 1% annualized pace. Some private economists wonder if things will be worse as recent health shutdowns may again keep shoppers away from stores.

Key notes from industry leaders ahead of the report due Tuesday at 8:30am ET:

• There has been a shift in preferences towards single detached homes
• There is some evidence 2021 will be better than 2020, mainly on low interest rates, labor market recovery and household spending
• Producers still face sharp divides based on whether they supply firms that are mostly open or those facing stricter health rules
• Sources are optimistic the second wave will be easier to cope with

Brendon Ogmundson, Chief Economist at BC Real Estate Association:

Kevin McKinley , President & CEO of Canadian Wood Council:

The rebound on wood products was driven by home renovations, businesses building outdoor facilities, and provinces allowing bigger construction projects to resume, McKinley said.

"You are going to see that kind of interest in construction, but there is a lot of uncertainty around what type of construction and how much," he said.

Some wood processors are expanding facilities or opening new ones to keep up with demand. That's a change from an industry that for years was curbing production.

"We are seeing a great interest in single family homes right now, it might be a trend for couple of years," he said.

Mathieu Frigon, President & CEO of Dairy Processors Association of Canada:

Producers are still seeing drops in sales to hotels, restaurants and institutions struggling with pandemic restrictions, including a 60% decline in sales of cream that often go to those businesses, he said. Milk is much more often sent to grocery stores and those sales are up slightly.

Overall sales are slightly below what's normal for this time of year, and profitability is squeezed because major food retailers are passing cost increases back to dairy producers, Frigon said.

"The costs that large grocery stores are imposing to the suppliers would definitely impact the Canadian food supply chain's resilience," he said. "Consumers have to pay at the end." Farmers are also seeking compensation the government promised after free trade agreements opened up more foreign competition, he said.

Dennis Laycraft, Executive Vice President Canadian Cattlemen's Association:

"During the third quarter, we got back to the last year's production levels or above, as all plants had a significant modification to proceed with the pandemic, so they are able to continue to operate at normal or above normal," he said. That a followed a period of supply disruptions when meat processing plants were shut or reduced production, and some ranchers are still losing money as a result.

Sales to fast food restaurants have been strong and helped offset weakness in other hospitality segments, he said. "We also started to see a lot of home meal delivery, but certainly when we get the food service sector back to normal, the demand for the higher quality products would increase, like stakes and roasts." Export demand has also remained strong, he said.