Canada’s economic growth seen outpacing U.S. as virus containment pays off

By Fergal Smith TORONTO (Reuters) - A staggered reopening from lockdowns, supported by fiscal stimulus, is likely paying off for Canada's economy, with activity forecast to rebound in the current

August 19, 2020

By Fergal Smith

TORONTO (Reuters) – A staggered reopening from lockdowns, supported by fiscal stimulus, is likely paying off for Canada’s economy, with activity forecast to rebound in the current quarter twice as fast as in the United States, its biggest trading partner by far.

Canada’s economy is set to grow at an annualized rate of 36% in the third quarter, compared to 20% for the United States, the average forecasts of Canada’s six largest banks showed. That reflects some catch-up for Canada after an estimated deeper slump in the second quarter, but also greater success at controlling the spread of the coronavirus pandemic.

The number of daily new cases in Canada has slowed to less than 400, using a 7-day moving average, from about 1,800 at its peak in May, according to Canada’s Public Health Agency. A spike in U.S. infections last month led to some states making a U-turn on reopening their economies.

Helped by a surge in employment, surging housing sales and gains in credit card spending, Canadian economic activity recovered in July to about 95% of pre-pandemic levels, BMO Capital Markets estimated.

Signs of a fast start to economic recovery could be welcomed by credit rating agencies, after Canada was stripped in June of one of its triple-A ratings by Fitch.

It could also be welcome news for Prime Minister Justin Trudeau’s Liberal government after the resignation of the country’s finance minister on Monday amid friction over pandemic aid spending.

“The phased reopening of the Canadian economy, combined with its lower starting point due to stricter public health measures, will mean a more vigorous bounce-back in Canada,” said Matthieu Arseneau, deputy chief economist at National Bank Financial.

Since May, Canada’s provinces have been reopening their economies in stages. To bridge the crisis, Ottawa has announced more than C$300 billion, or about 14% of gross domestic product, in stimulus measures, including wage subsidies and income support.

“The extraordinary amount of fiscal support that has been put in place has laid the foundation for the recovery that we’re starting to see toward the end of Q2 and that we think is continuing in Q3,” said Josh Nye, a senior economist at Royal Bank of Canada.

Complementing fiscal measures, the Bank of Canada has cut interest rates to near zero and begun its first large-scale asset-purchase program. It has expanded its balance sheet as a share of GDP this year by more than the U.S. Federal Reserve and some other major counterparts.

Economists say that further gains for the economy will be challenged by the unknown path the virus could take and a tenuous recovery globally, but especially in the United States, where Canada sends 75% of its exports.

“The recovery is going about as well as anyone could have realistically hoped for a few short months ago,” said Sal Guatieri, a senior economist at BMO Capital Markets.

(Reporting by Fergal Smith, Editing by Steve Scherer and Alistair Bell)