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Forward Guidance: Better Times ahead after Spring Wave Dented Canada’s GDP Recovery

Even as optimism builds alongside rising vaccination rates, backward-looking Canadian economic growth data will continue to reveal the bruising impact of containment measures during the spring wave of COVID-19. Statistics Canada’s preliminary estimate was for a 0.8% drop in April GDP—the first decline in a year—as restrictions and supply chain disruptions weighed on manufacturing output, particularly in the motor vehicle sector. We expect a slightly smaller 0.6% drop to be reported next week, and anticipate activity in May to be at a standstill compared to April levels. Early data for June, however, looks significantly better as provincial governments move forward with reopening plans. Supply chain disruptions have shown some signs of easing, and even oil & gas drilling activity has bounced back alongside higher oil prices.

Indeed, the United States—which largely avoided a spring virus wave this year—may provide a glimpse of what the early stages of Canada’s reopening will look like. The US economy is poised to post a 10%+ (annualized) GDP growth rate in Q2 versus just 2% by our count in Canada, led by a recovery in spending on household services that have been in many cases unavailable for much of the prior year. Early data for Canada is flagging similar strength, but from a later starting point in early June. The sustainability of any reopening of the ‘high-contact’ service sector still depends heavily on vaccine distribution keeping a lid on virus spread. On that front, the pace of daily vaccines administered has continued to pick up—a development that’s likely to continue in the near-term given the dramatic increase in deliveries over the last week.

Week ahead data watch:

  • US Payroll survey will likely show another large employment gain (570k) with much of the hiring coming from gains in the hard hit leisure and hospitality sector.
  • Canada’s Trade surplus will likely narrow to $0.1B in May as supply chain disruptions weigh down auto production exports. We’re expecting June to look decidedly better as activity resumes.
  • Less than 2% of screened Canadians have recently tested positive for COVID and active cases continue to decline. Canada’s progress at containing the virus spread continues to be reinforced by it’s vaccination campaign, more than 75% of eligbilible persons recieveing the first and over 25% fully innoculated.

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