Economic commentary provided by Alberta Central Chief Economist Charles St-Arnaud
Today’s release of the GDP for July shows that the economy contracted marginally. However, the details show that the weather was the culprit, not the pandemic. The decline in agriculture, due to the drought in Western Canada, and in utilities, as a result of cooler than the usual temperature in central Canada, subtracted a little more than 0.2 percentage points to grow growth on the month. Nevertheless, the preliminary estimate suggests that growth rebounded in August.
The question for the coming months will be what impact the fourth wave of COVID infection will have on the economy. There are already signs of slowing activity in the client-facing industries. However, the high vaccination rate and contained infection rate in many provinces suggests that the reimposition of stringent restrictions is unlikely, the exception being in Alberta and Saskatchewan.
For Alberta, the GDP for July shows how much of a drag last summer’s drought will be on growth. Continued expansion in the oil and gas industry is likely to offset some of that weaknesses, with the sector having seen a record production value in July. However, real-time economic indicators show a more significant decline in economic activity in the province due to the fourth wave of COVID infections than in the rest of the country, as consumers adapt their behaviours to the situation. This will likely delay the recovery in the province.
The monthly GDP decreased by 0.1% m-o-m in July (+14.6% y-o-y), better than the preliminary estimate. This is the first economic contraction this year that was not due to increased restrictions to slow the spread of COVID-19. Nevertheless, the level of activity is about 1.9% below its pre-pandemic level.
The details show that 13 out of 20 industrial sectors posted gains on the month, with hard-to-distance sectors outperforming as measures to slow the spread of COVID-19 continued to be removed in July. This suggests that only a handful of sectors were responsible for the contraction. With the setback in July, 8 out of 20 industrial sectors have economic activity above pre-pandemic levels: retail trade, information and culture, finance and insurance, real estate, professional, scientific and technical services, education, health care, and public administration.
Statistics Canada’s preliminary estimate for August puts the rise in economic activity at +0.7% m-o-m. Such an increase will provide some momentum going in the second half of the year and suggest growth in the third quarter could reach 3.8% q-o-q ar.
The goods-producing side of the economy was the main source of weakness in July and contracted by 1.4% m-o-m, mainly due to a drop in activity in agriculture (-5.5% m-o-m) due to the drought conditions in western provinces. There were also declines in construction (-0.9% m-o-m) and manufacturing (-1.1% m-o-m) and utilities (-4.9% m-o-m). The drop in utilities was the result of weaker electricity demand due to cooler than usual weather in the central part of the country. Those declines were marginally offset by an increase in natural resources (+0.3% m-o-m), led by the non-conventional oil sector.
The services-producing side of the economy rose 0.4% on the month, as restrictions on activity spurred activity gains in the client-facing sectors. As such, activity surged in accommodation and food services (+12.5% m-o-m) and arts, entertainment and recreation (+8.1% m-o-m). There were also some solid gains in other services (+2.5% m-o-m) and transportation and warehousing (+1.1% m-o-m). However, activity declines in retail trade (-1.1% m-o-m), wholesale trade (-1.9% m-o-m), and management companies and support (-1.6% m-o-m).
For Alberta, there is no specific data in the report. However, we can make an assessment based on activity in some key industries specific to Alberta. The sharp drop in activity in the agricultural sector, driven primarily by the crop production sector, suggests the sector was a big drag on growth on the month. However, some of this weakness was partially offset by a strong increase in the non-conventional oil sector. Overall, It is likely that, on balance, the Alberta economy contracted more than the rest of the country in July.
The views and opinions expressed in this publication are solely and independently those of the author and do not necessarily reflect the views and opinions of any organization or person in any way affiliated with the author including, without limitation, any current or past employers of the author. While reasonable effort was taken to ensure the information and analysis in this publication is accurate, it has been prepared solely for general informational purposes. There are no warranties or representations being provided with respect to the accuracy and completeness of the content in this publication. Nothing in this publication should be construed as providing professional advice on the matters discussed. The author does not assume any liability arising from any form of reliance on this publication.
Alberta Central member credit unions can download a copy of this commentary in the Research Hub here.