Virus case growth rising from low level - Capital Economics
Canada Economics

Virus case growth rising from low level

Canada Economics Weekly
Written by Stephen Brown
Cancel X

The renewed rise in Covid-19 case growth is not yet a big cause for concern, but there is clearly a risk that a second wave of infections will cause further economic disruption later this year.

The renewed rise in Covid-19 case growth is not yet a big cause for concern, but there is clearly a risk that a second wave of infections will cause further economic disruption later this year.

The number of new daily cases of Covid-19 continues to compare favourably to the US. In the past seven days, the number of new cases has averaged 12 per million people, compared to 199 south of the border. But new cases are now almost double what they were two weeks ago, and slightly higher than the number of new daily cases per million in either the euro-zone or the UK. (See Chart 1.)

Chart 1: New Daily Covid-19 Cases Per Mn (7-day ave.)

Sources: Johns Hopkins, Capital Economics

The key question is whether this is the start of a more worrying trend, or simply an inevitable but manageable rise in cases as the economy re-opens? We have no particular expertise to judge, but there are some reasons to be optimistic, at least for now. As case growth is rising from a low level, it should be easier to detect and contain outbreaks using the various contact tracing initiatives that have been put in place since the original outbreak. Moreover, the mobility data show that people continue to shun public transit, and new rules that make the wearing of masks mandatory indoors in Ontario, Quebec and Alberta may also help to keep the virus at bay.

Even if this is not yet the start of a pronounced second wave, the chance of one occurring seems likely to rise as the seasons change and people are forced inside again. That could limit the lifting of restrictions or even cause some provinces to re-impose restrictions, and is one reason why we continue to think that activity in many sectors will remain below pre-virus levels well into 2021. (See here.)

Retail sales and inflation jump

One sector that is doing comparatively well is retail. Stats Can confirmed this week that sales rebounded by 19% m/m in May and, while that left them 20% below pre-virus levels, Stats Can also said that its preliminary data pointed to a further 25% surge last month. That would take retail sales 1.8% above their February level. The issue for many retailers, however, is that only grocery and hobby & sporting goods stores are faring comparatively well – in May sales remained below pre-virus levels in all other sectors. (See here.)

Clothing store sales remained furthest below February levels, but appear to have benefitted in June as more stores re-opened. At least, that seemed to be the message from the CPI data, with a rise in clothing inflation from -5.4% to -2.6% helping to drive an unexpectedly strong increase in headline inflation to 0.7%, from May’s -0.4%. Inflation rose for a host of items, which caused an average of the three core inflation measures to edge up to 1.7%. Nonetheless, we continue to think that core inflation will remain below 2% throughout the next few years. (See here.)

Bank’s balance sheet growth to slow

Despite the likelihood that GDP will remain below its pre-virus level for at least another year, and that core inflation will be stuck below 2%, the Bank looks set to reduce the pace of expansion of its balance sheet. The Bank announced this week that it is reducing the proportion of federal bonds and bills, and provincial bills, that it buys at primary auction from 40% to 20%. If we are right that it will continue with its main asset purchase program for at least another 12 months, its balance sheet should still continue to rise. (See here.)

The week ahead

The one major data release next week is GDP for May. Stats Can said alongside the April release that its data pointed to a rise of 3% m/m, but the positive tone of the data since then leads us to expect a rise of 5%.

Data Preview – GDP (May) 08.30 31st Jul.

Forecasts

Previous

Median

Capital Economics

GDP (%m/m)

-11.6%

+5.0%

Rebound got underway in May

We estimate that, after falling by a cumulative 18% from February to April, GDP rebounded by 5% m/m in May.

Admittedly, Stats Can said in the April press release that its preliminary data pointed to a lower rise in GDP of 3% in May. But the activity data released since then seem to paint a more positive picture. Construction investment surged by over 50%, with non-residential construction investment rebounding back to its pre-virus level. We would not be surprised if GDP in some other sectors such as professional services also returned to near pre-virus levels. The remaining activity data were also positive, with, for instance, the 7% m/m rise in manufacturing sales volumes much better than we expected. (See Chart 2.)

One big unknown is the oil sector. Oil and gas extraction GDP fell only modestly in April despite reports of a one million barrel per day drop in output, because producers normally cut production sharply in the spring months amid lower demand as refineries shut down for maintenance. But production appears to have remained low since May, which could cause the seasonally-adjusted oil and gas extraction GDP series to start to decline more meaningfully. Even then, it is hard to see the overall effect of this being more than 1% of GDP in May, so we are confident that the outturn should be stronger than Stats Can first suggested.

Chart 2: Activity Indicators (% m/m)

Sources: Refinitiv, Capital Economics

Economic Diary & Forecasts

Upcoming Events and Data Releases

Date

Release/Indicator/Event

Time EST (BST-5)

Previous*

Median*

CE Forecasts*

Mon 27th

No Significant Data Released

Tue 28th

No Significant Data Released

Wed 29th

No Significant Data Released

Thu 30th

No Significant Data Released

Fri 31st

GDP by Industry (May)

08.30

-11.6%(-17.1%)

+5%(-12%)

Industrial Producer Prices (Jun)

08.30

+1.2%

Raw Material Prices (Jun)

08.30

+16.4%

Selected future data releases and events

4th August

Manufacturing PMI (Jul)

09.30

5th August

International Merchandise Trade (Jun)

08.30

7th August

Unemployment Rate (Jul)

08.30

7th August

Ivey Purchasing Managers Index (Jul)

10.00

*m/m(y/y) unless otherwise stated

Sources: Bloomberg, Capital Economics

Main Economic & Market Forecasts

%q/q ann. (%y/y) unless stated

Q1 2020

Q2 2020

Q3 2020

Q4 2020

Q1 2021

Q2 2021

2020

2021

2022

GDP

-8.2

-40.0

35.0

15.0

5.0

3.0

-6.3

5.5

3.5

CPI Inflation

1.8

-0.2

0.5

0.7

1.2

2.5

0.7

1.9

1.9

Unemployment Rate (%)

6.3

13.0

9.6

8.8

8.5

8.1

9.3

8.0

6.5

Overnight Rate, End Peri’d (%)

0.25

0.25

0.25

0.25

0.25

0.25

1.75

0.25

0.25

10 Yr GoC., End Period (%)

0.71

0.55

0.65

0.75

0.75

0.80

0.75

0.90

1.00

USD/CAD, End Period

0.70

0.73

0.74

0.75

0.75

0.76

0.75

0.80

0.82

Sources: Refinitiv, Capital Economics


Stephen Brown, Senior Canada Economist, stephen.brown@capitaleconomics.com