COVID causes Canada's economy to contract by 38.7% in Q2, worst since 1961

Summary

• The fight with COVID-19 has dragged Canada’s GDP by 11.5 per cent in second quarter of 2020, a first since 1961

• Household spending saw a record dip of 13.1 percent, although household savings have shot up to 28.2 per cent

• Meanwhile, business investment in this quarter shrank to 16.2 per cent, owing to business closures and low demand

Beaten by the loss of business due to COVID-19, Canada’s real gross domestic product (GDP) saw a record dip at an annualized rate of 38.7 per cent in the second quarter of 2020. This is the sharpest dip the Canadian economy has witnessed since the initiation of the recording quarterly GDP data in 1961.

After recording a decline of 2.1 per cent in the first quarter in 2020, there was a substantial growth of 4.8 per cent in May and 6.5 per cent in June, as per Statistics Canada. However, the GDP at the end of the second quarter reflected a decline of 11.5 per cent.

READ: Impact of COVID-19 on Canadian Insurance Industry

Consumers Unwilling To Spend Too Much

The COVID pandemic, along with the fear for life, has brought along the fear of losing one’s livelihood. That, coupled with actual job losses and closure of non-essential businesses, contributed to consumers being restricted to spending only on necessities and saving for a rainy day. Data shows that household spending dropped to a record 13.1 per cent in the second quarter.

The Canadian government has taken quite a few measures to mitigate the negative impact of the economic crisis on the economy such as providing monetary support to individuals who lost their income due to COVID and introducing the Canadian Emergency Wage Subsidy, which enables employers to keep on paying their employees, etc.

Despite this, compensation of employees contracted by 8.9 per cent this quarter, the sharpest dip so far, although household savings shot up to 28.2 per cent from 7.6 per cent in the first quarter.

Record Low Business Investments

Data shows that business investment in this quarter shrank to 16.2 per cent, a decrease that can be attributed to closure of non-essential businesses, constrictions put in place during lockdown and the general drop in demand in the market.

This above graph and table shows the percentage change in real gross domestic product in the second quarter of 2020, in Canada. (Source: Statistics Canada)

To top this, Canada saw a steep plunge of 18.4 per cent in export and 22.6 per cent in import volumes, thanks to worldwide closed borders, shut factories, etc.

READ: Three Unique Investment Tips to Build Recession-Proof Portfolio in COVID-19 Crisis

What About Canadian Banks?

In a virtual press conference last week, Bank of Canada governor Tiff Macklem assured that central banks have taken many monetary policy actions to support the public in this time of crisis and in an attempt to avoid deflation. He also said that the Bank is recording good rebound numbers as the economy stands on the verge of complete reopening, although adding that even as the lockdown is eased, small businesses may still struggle to get their affairs in order.

The six major Canadian banks posted strong earnings for the latest quarter, beating analysts expectations. All these banks set aside record over $ 6 billion in credit provisions for bad loans as the pandemic stretches on.

READ: How To Procure Small Business Loans In Canada?

What About the Stock Market?

When COVID-19 hit a pandemic status earlier this year, the Canadian government kicked into gear and enforced strict lockdown and containment measures that, while for the greater good, adversely affected businesses and investors. This, in turn, resulted in the S&P/TSX Composite Index to drop by 21.6 per cent in the first quarter.

After Statistics Canada published its report on the second quarter on August 28, the S&P/TSX Composite Index also further slowdown, falling 37.60 points. By August 31, it was down 165 points.

The key Canadian bourse is currently down 2.45 per cent year-to-date.

READ: 4 Hot COVID-19 Stocks From Health Care Sector - WELL Health, Viemed, StageZero & Akumin

Future Outlook

Some of the stipulations put in place to contain the spread of COVID-19 exacerbated the economic status of many countries, including Canada. The United States witnessed a quarterly decline of 9.1 per cent in its GDP. For the United Kingdom, GDP decline was 20.4 per cent, 13.8 per cent for France and 12.4 per cent for Italy.

Now that some of these containment measures in Canada are being eased, business activity is likely to increase as more people venture out of their homes. This will lead to the overall increase in economic activities. Based on this, the federal government expects the GDP to rise in the third quarter of 2020. The central bank had earlier projected that the Canada’s economy will attain its pre-pandemic levels by early 2022.