Short-term data shows economic activity rising, but industry still in shock

15 July 2020 Consulting.ca

Short-term data suggests that economic activity in Canada is increasing after an April collapse, according to RSM Canada’s most recent “Real Economy” report, which was released yesterday. However, Canada’s industrial sector remains in a devastated state.

As provinces slowly reopen, high-frequency alternative data sources – such as consumer sentiment, traffic congestion, restaurant bookings, and oil and gas rig counts – point to increasing economic activity. The measure is represented in the “real economy index” in the graph below, which gives a more current picture of economic conditions than lagging measures such as employment figures and expenditure-based GDP estimates.

According to consulting firm RSM, the index increased to its highest level since the end of March, reaching 42 as of July 5. Increasing traffic congestion and public transportation use suggest relatively strong job gains in major urban centres, according to the report.

Despite this, the surge of cases in the US and the delayed restart of Ontario means that the real economy index could plateau or decline.

High frequency data indices and employment

Since March 1, employment levels dropped from 19.2 million to 16.5 million, and saw a slight rebound of 0.3 million jobs in May.

The financial markets index, pictured above, measures the strength of various financial markets combined with the value of the Canadian dollar. The decrease of only 10 points from March shows the effectiveness of monetary policy which prevented a wider financial crisis, as well as the basic decoupling of financial markets from the real economic picture.

Oxford University’s lockdown index, meanwhile, is a subjective value of the degree of lockdown measures in place, ranging from 0 to 100.

Canada real GDP by expenditure and manufacturing shipments

The RSM report also highlighted that Canada’s industrial sector has been hit hard by supply and demand shocks, as the coronavirus has spread to all parts of the globe. Canada saw a 35% drop in exports and a 30% drop in imports, showing both slower external demand and domestic consumption.

The industrial sector was already weakened by a manufacturing recession resulting from the US trade war which preceded the pandemic outbreak. Industry’s contribution to GDP dropped by 6% in March, while new orders fell by 40% in April. Both measures are similar to Great Recession levels.

RSM notes that the drop in manufacturing output caused by the pandemic will have long-term negative consequences for GDP and global wealth, regardless of the nature of any subsequent recovery. It is now simply a question of how deep and how long the damage will be.

With households cutting back their expenditures, the central bank will have to also contend with deflationary pressures from large demand drops. The government, of course, will be expected to inject huge quantities of stimulus spending in order to maintain an adequate level of investor and consumer confidence.

"The pandemic has certainly dealt a tough blow to Canada's industrial sector – an area already struggling back in 2019 as a result of the ongoing trade war between the U.S. and China," said Joe Brusuelas, chief economist with RSM US. "Despite some promising short-term economic indicators, and the Bank of Canada's steps to accommodate stimulus measures, it's imperative that the authorities make prudent investments to keep industrial recovery moving in the right direction and look to boost trade efforts as much as possible."


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