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Canadian Q2 GDP Growth Plunge--Rebounds Since April
Dr Sherry Cooper • September 1, 2020
Canadian Economy Took a Record Nosedive in Q2
Canadian real GDP plunged 11.5% in the second quarter, or -38.7% at an annualized rate, the worst quarterly decline on record (see chart below). This followed an 8.2% plunge in Q1. The worst of the contraction occurred early in the quarter as the lockdown in March and April wreaked havoc on activity. Since then, the economy has shown surprisingly strong signs of recovery.
StatsCan revealed today that GDP rose 6.5% in June following the 4.8% rise in May and an estimated 3.0% growth in July. Even so, Canada's recovery is expected to be bumpy and long. No doubt, not all businesses and sectors will expand in sync, and not all jobs will be recovered.
One of the brightest spots in the recovery has been housing, where activity surged in July, reflective of record-low mortgage rates and pent-up demand. Apparently, many homebound Canadians are reassessing their housing needs. Demand for increased space, especially in the suburbs or exurbs, has been robust.
Virtually every sector of the economy was battered in Q2. Household spending dived 43% while business investment collapsed at a 57% annual rate. Virus containment weighed on both, with a fall in oil prices exacerbating the decline in oil & gas investment. Net exports were the only sector that added to economic activity, but only because imports fell more than exports as housebound consumers and shuttered businesses had little need for imported products.
On a year-over-year basis, the monthly rise in June and July will leave GDP down a much milder 5%, but still worse than the -4.7% drop during the financial crisis. The surge in June--itself a record bounce--reflects the gradual re-opening of the economy, with retail, wholesale and manufacturing leading the way. Retail trade jumped 22.3% in June, surpassing its pre-pandemic level of activity. Motor vehicle dealers contributed most to growth.
Following a 17.3% jump in May, the construction sector rose 9.4% in June as a continued easing of emergency restrictions across the country contributed to the return to nearly normal levels of activity at construction sites. Residential construction grew 7.1% as increases in multi-unit dwellings construction and home alterations and improvements more than offset lower single-unit construction. Non-residential construction rose 11.0%, surpassing the pre-pandemic level of activity, as all three components were up.
Real estate and rental and leasing grew 2.5% in June. Activity at the offices of real estate agents and brokers jumped 65.2% in the month, following a 56.4% increase in May, as home resale activity in all major urban centres saw double-digit increases. The output of real estate agents and brokers was about 7% below February's pre-pandemic level, but other data show it was up sharply in July, hitting new record highs.
Government Provided A Much-Needed Cushion
Household disposable income surged last quarter despite the pandemic thanks to government income support (see chart below). The rise in income, coupled with the massive decline in consumer spending as well as the deferral of mortgage payments for many triggered a surge in the savings rate. The household saving rate jumped to 28.2% from 7.6% in the prior quarter. Savings rates, of course, are generally higher for higher income brackets.
Bottom Line
The plunge in economic activity in the second quarter--though awful--was not as deep as the Bank of Canada expected (-43%) in its most recent Monetary Policy Report. As well, the rebound since the end of April has been stronger than expected, especially in the housing sector. To be sure, labour market conditions are still very soft with the jobless rate at 10.9% in July, but the new programs announced last week by the federal government to replace CERB will help ease the transition for people still looking for work.
A possible resurgence in the virus remains a risk unless an effective vaccine can be distributed. The economy will operate below capacity into the next year, but perhaps not as drastically below capacity as previously feared.
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Did you know there’s a program that allows you to use your RRSP to help come up with your downpayment to buy a home? It’s called the Home Buyer’s Plan (or HBP for short), and it’s made possible by the government of Canada. While the program is pretty straightforward, there are a few things you need to know. Your first home (with some exceptions) To qualify, you need to be buying your first home. However, when you look into the fine print, you find that technically, you must not have owned a home in the last four years or have lived in a house that your spouse owned in the previous four years. Another exception is for those with a disability or those helping someone with a disability. In this case, you can withdraw from an RRSP for a home purchase at any time. You have to pay back the RRSP You have 15 years to pay back the RRSP, and you start the second year after the withdrawal. While you won’t pay any tax on this particular withdrawal, it does come with some conditions. You’ll have to pay back the total amount you withdrew over 15 years. The CRA will send you an HBP Statement of Account every year to advise how much you owe the RRSP that year. Your repayments will not count as contributions as you’ve already received the tax break from those funds. Access to funds The funds you withdraw from the RRSP must have been there for at least 90 days. You can still technically withdraw the money from your RRSP and use it for your down-payment, but it won’t be tax-deductible and won’t be part of the HBP. You can access up to $35,000 individually or $70,00 per couple through the HBP. Please connect anytime if you’d like to know more about the HBP and how it could work for you as you plan your downpayment. It would be a pleasure to work with you.
If you’re new to the home buying process, it’s easy to get confused by some of the terms used. The purpose of this article is to clear up any confusion between the deposit and downpayment. What is a deposit? The deposit is the money included with a purchase contract as a sign of good faith when you offer to purchase a property. It’s the “consideration” that helps make up the contract and binds you to the agreement. Typically, you include a certified cheque or a bank draft that your real estate brokerage holds while negotiations are finalized when you offer to purchase a property. If your offer is accepted, your deposit is held in your Realtor’s trust account. If your offer is accepted and you commit to buying the property, your deposit is transferred to the lawyer’s trust account and included in your downpayment. If you aren’t able to reach an agreement, the deposit is refunded to you. However, if you commit to buying the property and don’t complete the transaction, your deposit could be forfeit to the seller. Your deposit goes ahead of the downpayment but makes up part of the downpayment. The amount you put forward as a deposit when negotiating the terms of a purchase contract is arbitrary, meaning there is no predefined or standard amount. Instead, it’s best to discuss this with your real estate professional as your deposit can be a negotiating factor in and of itself. A larger deposit may give you a better chance of having your offer accepted in a competitive situation. It also puts you on the hook for more if something changes down the line and you cannot complete the purchase. What is a downpayment? Your downpayment refers to the initial payment you make when buying a property through mortgage financing. In Canada, the minimum downpayment amount is 5%, as lenders can only lend up to 95% of the property’s value. Securing mortgage financing with anything less than 20% down is only made possible through mortgage default insurance. You can source your downpayment from your resources, the sale of a property, an RRSP, a gift from a family member, or borrowed funds. Example scenario Let’s say that you are looking to purchase a property worth $400k. You’re planning on making a downpayment of 10% or $40k. When you make the initial offer to buy the property, you put forward $10k as a deposit your real estate brokerage holds in their trust account. If everything checks out with the home inspection and you’re satisfied with financing, you can remove all conditions. Your $10k deposit is transferred to the lawyer’s trust account, where will add the remaining $30k for the downpayment. With your $40k downpayment made, once you sign the mortgage documents and cover the legal and closing costs, the lender will forward the remaining 90% in the form of a mortgage registered to your title, and you have officially purchased the property! If you have any questions about the difference between the deposit and the downpayment or any other mortgage terms, please connect anytime. It would be a pleasure to work with you.
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