Household debt and low oil prices will cause Canada’s economy to lag behind U.S: TD strategist
The worst may be over for Canada’s economy, but the nation’s more cautious approach to reopening means a slower rebound than in the U.S.
Real-time data such as online job postings, restaurant bookings and mobility tracking show economic green shoots in Canada after nearly three months of COVID-19 restrictions. However, the data also suggest its economy is “about two to three weeks behind” its largest trading partner, said Frances Donald, chief economist at Manulife Investment Management Ltd.
The divergence can be explained in part by regional differences and which parts of each country the virus hit hardest. Canada’s COVID-19 hot zones -- Ontario and Quebec -- are also its economic growth engines. The two provinces, which account for nearly 60 per cent of national output, have seen 95 per cent of its virus deaths.
Restrictions on a number of sectors in Toronto and Montreal remain in place. In Toronto, for instance, restaurants still aren’t allowed to serve diners on outdoor patios and shopping malls are closed except for shops with exterior doors.
In the U.S., New York City has been shattered by COVID-19, enduring one of the longest shutdowns. But some of the largest U.S. state economies have been spared the worst. California has fewer virus deaths so far than Quebec, and Texas has fewer than Ontario.
Economists at National Bank Financial have been using alternative data to track Canada’s recovery versus the U.S. and other countries. Both restaurant reservations and Google mobility data show Canadian activity is still further from pre-pandemic levels than in the U.S.
That suggests a more severe downturn in Canada, according to NBF deputy chief economist Matthieu Arseneau. Part of that may be driven by Canadians’ obedience to COVID-19 restrictions. Polling data show Canadians were more likely to practice social distancing and had higher trust in public health officials than their U.S. counterparts.
“Canada is a much smaller economy and has more consistency of policy than what we might see on state-by-state level in the U.S.,” Donald said by phone from Toronto.
Economists in a Bloomberg survey predict Canada’s economy will shrink by 7.1 per cent in 2020 versus a 5.7 per cent decline in the U.S.
To be sure, consumer spending patterns and job hiring seem to have stabilized from their April lows. Credit-card transaction data from Royal Bank of Canada, Toronto-Dominion Bank and Bank of Nova Scotia indicate spending improved toward the end of last month. A consumer tracker from RBC shows discretionary purchases are coming back -- spending on dining out and merchants selling apparel and jewelry continued to recover in May.
Online job posting data from Indeed Canada also suggest the worst is over, in line with government data showing employment started to recover in May. Economists expect the labour market to continue its slow recovery in June and into the summer months.
“One potential reason for the milder decline in the U.S. is that Canadians in general have been expecting business restrictions to remain in place longer than Americans,” Indeed Canada economist Brendon Bernard said by email. “At the same time, Canada has seen a pick-up in new job postings in recent weeks.”
The slower, more deferential approach to reopening north of the border could, however, have a silver lining.
“We’re a bit more cautious so that might suggest a slower, later bounce back in the economy but maybe a lower risk of a second wave than in parts of the U.S.,” Scotiabank economist Derek Holt said.