Disappointing GDP growth offsets central bank worries, governments are doing too much


Kevin Carmichael: The rebound is too dependent on housing, and few will be comfortable with the recovery until other growth drivers kick in

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The Canadian economy grew at an annual rate of 5.6 percent in the first quarter, a somewhat disappointing reading that will act as a counterweight to fears that the central bank and governments have over-stimulated the recovery.

Certainly, Statistics Canada’s latest gross domestic product (GDP) count is good news compared to projections at the start of the year. At the time, the Bank of Canada and others predicted that the second wave of COVID-19 infections would cause a contraction in the first trimester. But entrepreneurs and households – aided by extraordinary levels of government support – have found ways to adapt to the pandemic. Overall, the recovery is proceeding at an unimaginable pace a year ago.

Nonetheless, the GDP numbers reinforce something that Bank of Canada Governor Tiff Macklem has repeated in almost every public appearance: The trajectory of the economy will be uneven. The rebound so far has been too reliant on housing, and few will be comfortable with the recovery until other growth drivers kick in.


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Most Bay Street forecasters had forecast growth of around seven percent in the first three months of the year. Even the Bank of Canada has taken the lead, as it also forecast 7% growth in its latest quarterly outlook in April. The real numbers show that adaptation can’t accomplish much when important industries have been effectively shut down to reduce the spread of the coronavirus. Separately, Statistics Canada said GDP, as measured by the industry’s output, likely fell 0.8% in April, which would be the first monthly decline in a year.

The Bank of Canada has already reduced its weekly purchases of Government of Canada bonds and said in April that it may choose to increase its benchmark interest rate in the second half of next year, instead to leave extremely low borrowing costs in place for a period of time. into 2023. The slightly weaker path for economic growth will likely slow any further downturns, at least until policymakers know how consumers react as provinces ease health restrictions this summer.

Housing investment continued to fuel the economy during the first quarter, accounting for 8.6% of GDP, matching the previous record set in the third quarter of 1987. Real estate spending jumped 9.4% per year. Compared to the fourth quarter, an astonishing increase considering this occurred during the winter months, when real estate activity generally slows down.

The numbers will fuel concerns that the recovery is too dependent on a real estate rebound which some say has become a bubble in many markets. Excluding the third quarter of last year, when the economy recovered from the epic collapse of the first wave of the pandemic, the increase in real estate investment in the first quarter was the largest since a jump of 11% to the second. quarter 1983.


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Benoit Durocher, economist at Desjardins Group, observed that excluding real estate, the economy grew at an annual rate of only 2.1% in the first quarter. “There is every reason to believe that the negative effects of the third wave will have negative consequences on the Canadian economy,” he said in a note. “It is difficult to do otherwise as the most populous province, Ontario, is in the midst of difficulties.”

There are two reasons to be wary of the economy’s dependence on housing. The first is that too much of the money available for investment is invested in unproductive asset, depriving entrepreneurs and managers of the money they need to grow their businesses and create jobs.

Investment in non-residential goods, machinery and equipment, and intellectual property accounted for 9.3 percent of GDP in the first quarter, the lowest level since the second quarter of 1996. The relative importance of the business investment and residential investment has rarely been so close; the last time the gap between their respective GDP shares was so narrow was in early 1987.

The other reason to worry about housing is that households are going into debt in pursuit of soaring prices. As the Bank of Canada warned last month, borrowers most in demand could be vulnerable to higher interest rates, which will eventually come. But even if households are immune to default, much of their disposable income will be tied up in their homes. This means that future consumption could depend on the willingness of households to take on even more debt.


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We still do not know what weight to give to either of these risks. Business investment naturally declined during the recession, as only the boldest investors deploy capital in times of extreme uncertainty. Spending on machinery and equipment was $ 59.5 billion in the first quarter, down from the fourth quarter and 6% lower than a year earlier. At the same time, spending on intellectual property, an increasingly important asset as the economy goes digital, reached $ 37.7 billion, the highest amount since late 2008.

Ultimately, the economy revolves around consumption, as household spending accounts for almost 60% of GDP in normal times. Wages and salaries rebounded from their collapse last spring, surpassing their previous high by around $ 1.03 trillion. That, combined with the COVID-19 emergency benefits, means most households have a decent amount of money to deploy once economies reopen.

  1. Every day they are at work, salespeople, grocers and others would see with their own eyes that almost everyone has more money to spend than they do.

    Weekly earnings improve steadily for some and increase rapidly for others

  2. The most recent research from the Bank of Canada suggests that the scum in at least some housing markets is now worse than in 2016 and 2017.

    The “excess of exuberance” of housing refers to the frenzy of the market of the 90s

  3. Nothing

    Governor of the Bank of Canada warns that the rapid rise in house prices is “not normal”

  4. Nothing

    Canada’s transition to a knowledge-based economy could suffer if businesses don’t take mental health seriously

Disposable income rose 2.3% after two consecutive quarterly declines, and the household savings rate fell to 13.1% from 5.1% in the first quarter of 2020. This is more than enough to fuel a full recovery from the pandemic, especially if consumers start pouring out all that money, rather than using it to buy homes.

“We should see a rotation of economic activity, shifting from the consumption of housing and durable goods to the service sector, especially high-contact businesses still reeling from the pandemic,” said Sri Thanabalasingam, economist. at the Toronto-Dominion Bank. “It could fuel tremendous growth this summer. “

Financial post

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