News & analysis

Economists are renowned for doing a bad job at forecasting economic variables, especially in times of crisis, but today’s April GDP reading is one such event where the forecasts were surprisingly accurate.

Out of the 16 contributions to Bloomberg, the median estimate set a 12.2% MoM contraction expectation for today’s reading, which ultimately ended up slightly over-predicting the economic damage of the national lockdown measures. The final reading actually came in at 11.6%, with the YoY figure landing bang on expectations at 17.1%. While the monthly figure marginally beat expectations, there’s no taking away from the fact that it marked the largest economic contraction on record for Canada. Although, the relative accuracy of the median forecast and the positive advanced May GDP reading, meant that the currency market passed the release by in a risk-off session that would have lapped up a negative surprise.

April marked the first full month of federal lockdown measures, with Western Canada Select crude falling to record lows and WTI even trading in negative territory due to storage concerns. All 20 industrial sectors in the Canadian economy were hampered and the -11.6% reading marked the largest monthly contraction in the economy since records began in 1961.

This was predominantly due to the nature of the economic shock which was largely expected, and we won’t know about the structural damage to the economy until at least the end of Q3, but the April GDP reading provides the base level for which the recovery will now be projected from and the stimulus measures judged against.

The newly appointed Bank of Canada Governor Tiff Macklem stated the economy was in a “deep hole”, leaving many to guess how deep is the hole in relation to a proverbial piece of string. While today’s data release is subject to revisions and likely large ones relative to previous months, at least now we’re given a more concrete answer.

The loonie brushed this release to one side, however, with the negative revision to April’s reading (-7.5% vs previous -7.2%) arguably counteracting the positive surprise in April’s data. Additionally, in line with StatCan’s latest policy of providing advanced indicators, May’s GDP release is set to show the beginnings of the rebound as businesses adjusted to curbside delivery, retail shifted its focus online and the manufacturing sector slowly resumed activity. Preliminary information indicates an approximate 3.0% increase in real GDP in May as per the release statement.

Some further thoughts on the release:

  • Food and beverage store trade fell 14.3% in April following increases in March when Canadians were stockpiling supplies in anticipation for self-isolation. Overall, retail trade fell 22.9% in April following a 9.2% decline in March, with non-store retailers the only ones to report growth in trade with a 17.3% rise. We expect this trend to continue in May as retailers shifted their focus to online sales, while retail trade as a whole won’t pick up until at least June when curbside delivery was more prominent and lockdown measures were scaled back.
  • Mining, quarrying and oil and gas extraction declined 9.4%, with mining ex oil and gas falling 23.0%. Oil and gas extraction itself only fell 1.8% in April despite the decline in Western Canada Select to record lows of $0.13 per barrel at one point and WTI trading into negative territory due to the market overlooking physical delivery and storage constraints. While the hit to oil and gas extraction was much more muted than that seen in the rest of the industry, we argue that the composition of Canada’s oil fields, the contraction in oil extraction will be longer-lasting and with a more protracted recovery. Shut-ins are likely to persist in the Q2 data with potential spill-over into Q3, while the impact to capex and employment intentions will be substantial. Oil companies are likely to focus on repairing damage to their balance sheets as opposed to focusing on re-opening wells and infrastructure investment, leading to a limp recovery in the sector as a whole. It is estimated that re-opening bitumen wells after shut-ins takes around 12-18 months – don’t expect a sharp rebound in the industry just because oil prices have recovered somewhat.
  • Real estate declined 3.5% in April, following a 1.2% decline in March. Activity in real estate offices plunged 57.2% with residential construction falling 22.3%. This is a major concern of the Bank of Canada’s, who reacted accordingly by purchasing C$7.258bn mortgage bonds to date. Housing prices will be a major concern for markets given Canada’s high household debt level, especially with the labour market damage and potential focus of consumers towards de-leveraging.

 

Graph: Canada GDP shows largest monthly contraction in April since records began in 1961 showing just how deep the hole is for Tiff Macklem and the BoC

Graph: USDCAD unfazed as GDP data falls in line with expectations, but trades towards the top of the post-pandemic range

 

Author: Simon Harvey, FX Market Analyst
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