MNI DATA REACT: Canada Q3 GDP +41% Annualized, Seen Flat in Q4

Canada's gross domestic product climbed at a record 41% annualized pace in the third quarter following the 38% drop in the second, leaving output 5.3% below where it was before the spring lockdown.

Statistics Canada said Tuesday the gains were broad and led by pent-up consumer spending and exports following the Covid-19 shutdown. There were record gains in auto sales and housing, and resumed demand from the U.S. and Europe boosted shipments abroad. The gain lagged the economist consensus for a 48% increase.

Economists and the central bank say growth will nearly stall in the fourth quarter because of new health restrictions that have shut down much of Toronto and the province of Manitoba. On Monday, Finance Minister Chrystia Freeland outlined a budget deficit approaching 20% of GDP and further plans for stimulus beyond even the end of the pandemic, even while citing good news on vaccines.

Government stimulus so generous it lifted household incomes in the second quarter loomed large in the third quarter GDP report. The savings rate dropped from a record 28% to 15% in the third quarter as government jobless benefit payouts dropped by half as the unemployment rate tumbled from a record high. Household disposable income fell 3.1%.

Business inventories tumbled another CAD33 billion in the third quarter, in a year mixed with stronger demand for essential goods and supply disruptions.

Final domestic demand grew at a 51% annualized pace, while exports gained 72% and imports surged 114%.

The quarter ended with a 0.8% GDP gain for September, the fifth straight increase, and StatsCan's flash estimate anticipates a much slower increase of 0.2% for October. Economists predicted a 0.9% September gain.

"The next several months are not going to be pretty," TD Bank senior economist Sri Thanabalasingam wrote in a research note. "There is a good chance that the economic recovery doesn't just stall but shifts into reverse this winter. While light has finally appeared at the end of the tunnel in the form of vaccine distribution, it will not cure the near-term pain in store for the Canadian economy."