As elsewhere, the Covid-19 pandemic has led to a dramatic recession in Canada. Sectors such as travel, tourism, hospitality, entertainment and many other sectors of the economy were hard hit. In addition, since Canada is an important producer of oil, it was hard hit by the sharp drop in oil prices this spring. As expected, GDP fell dramatically in the second quarter of 2020 (minus 11.5 percent). In the first quarter of 2020, the Canadian economy had already dropped at a rate of 2.1 percent. Both household consumption (minus 13.1 percent ) and business investment (minus 16.2 percent) considerably decreased in the second quarter. As one may expect, the decrease in consumption was particularly strong for durable goods such as cars. Export volumes decreased by 18.4 percent and import volumes declined 22.6 percent. In the summer, I was relatively optimistic as regards the short-term recovery, but relatively pessimistic as to economic developments in the fall and the coming years (I also hold this view for several other countries). The economic recovery started in May and was first strong, in particular retail spending and real estate activities rebounded. For the third quarter of 2020 (that started in July), one can expect a strong rebound. Gross domestic product could increase by around 6 percent. The recovery has recently slowed down, which implies that economic growth in the fourth quarter will only be modest. For instance, the Monthly Survey of Manufacturing published by Statistics Canada showed even a decline of factory sales of 2 percent for August. The situation on the labor market has improved since May, but remains bad. The unemployment rate in September was at 9.0 percent (compared to 5.6 percent in February before the lockdown).
For the whole year of 2020, I think that there will be a severe contraction of the economy of around 6 percent. This will be followed by a rebound of 4 to 5 percent in 2021. In a more dramatic scenario (depending on how the current second wave of the pandemic evolves), the contraction in 2020 would be more severe at perhaps 6 to 7 percent. During 2020, fiscal and monetary policy measures particularly support the economy. The government adopted measures such as income backstops for households and loan guarantee programs. The Bank of Canada reduced its interest rate and adopted asset purchasing programs. As I mentioned above, forecasts are obviously associated with a high degree of uncertainty at the moment. In particular, there is the risk of a severe second wave of the pandemic. At the global scale, worldwide tensions could increase – especially between the United States and China.
While I use several models in my forecasts, my published numbers are also strongly influenced by my experience and judgment.
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