MNI PREVIEW: Canada June GDP Rebound Can’t Save Record Q2 Fall

Canada's GDP is headed for a 40% annualized second quarter decline that may outpace even the Great Depression as much of the economy shut to stave off Covid-19, a government report Friday will likely show.

The quarter will finish strong with a 6% monthly gain for June according to an MNI survey, reflecting an economy that re-opened auto factories and restaurants locked down in April. Investors are also looking for Statistics Canada to report a flash figure for July setting the tone for the third quarter.

Success in containing the virus should underpin strong third quarter growth, though returning GDP to pre-pandemic levels could take another two years to accomplish by some estimates. Growth will slow following the burst around re-opening and remain weighed down by job losses and fears of a second wave. The 75% of exports sent to the U.S. will also be hurt as relief payouts stall and some states struggle to curb the virus.

The report is key for updated Bank of Canada guidance at its Sept. 9 decision. The record low 0.25% policy rate is seen as being on hold for several years, and CAD5 billion of weekly government bond purchases have swelled the balance sheet to a record CAD547 billion or 24% of GDP.

More Sustainable Re-Opening

The expected GDP figure would be the worst in records back to 1961. While there aren't comparable figures for the Great Depression in the 1930s, rougher data from back then suggest output may never have fallen so much over three months.

What's different this time is there is little sign of a deflation spiral, with a federal deficit of at least 15% of GDP propping up consumer demand, and unemployment peaking below 15% as opposed to around 25% in the 1930s.

The potential for a double-dip recession lingers and managing such weakness could force Justin Trudeau's Liberal government into a snap election.

"For now, Canada has been able to keep new virus case counts low, which should translate into a more sustainable reopening relative to other jurisdictions that have had to reimpose shutdowns," CIBC senior economist Royce Mendes wrote in a research note.

GDP was 15% below pre-pandemic levels even with the May increase of 4.5%. Output declined at an 8.2% annualized pace in the first quarter, the fastest since 2009, as the Covid 19 mostly took hold in March.