Quarterly Economic and Trade Report – Q2 2021

Highlights

• The pace of the global economic recovery remained relatively strong in Q2, growing at an annualized rate of 5.6% quarter-over-quarter. However, some global growth forecasts have been revised down for 2021 due to the continued spread of the Delta variant. Year-to-date global trade volumes expanded 13.8% in the first half of 2021 compared to the same period last year.
• In Canada, annualized real GDP growth in the second quarter was -1.1%, mainly due to two factors: less ownership transfer fees generated from fewer housing sales, and lower export volumes. This falls well short of the market expectation of a 2.4% expansion.
• Canadian exports advanced 0.7% in Q2, as higher exports of resource products were partially offset by lower exports of motor vehicles and parts and aircraft and other transportation equipment.
• Commercial services is the only component of services trade that is now well above pre-pandemic levels, travel and transportation have not yet begun their recovery. By the end of the first half of 2021, total services exports were 19.3% below the pre-pandemic level in Q4 2019, and total services imports were 30.6% lower.  

Table 1: Highlights - second quarter 2021

Notes:

*GDP is quarterly changes at annualized rates. "YTD %" is the year-to-date change compared to the same period in the previous year.

Source: Oxford Economics, Netherland Bureau for Economic Analysis, Statistics Canada.

Global Covid-19 cases and vaccination roll-out

COVID-19 update

• The two most vaccinated continents, Europe and North America, also have the highest daily new confirmed cases per capita.
• The emergence of Delta and other variants is believed to be the cause of the once-again increasing case numbers.

Vaccination

• While the vaccination campaign delivered strong results in Europe and North America through much of the second quarter, vaccine hesitancy has slowed the progress, particularly in North America.
• More recently, vaccination rates in the United States have started to increase as people become more concerned with the Delta variant.
• The vaccination rate in South America, Asia, and Oceania remain far below the rate in North America and Europe. However, these regions have seen much improvement in recent months.
• Africa continues to have a particularly low vaccination rate as vaccine access has yet to improve.

Daily new confirmed cases of COVID-19 per million

Share of people who are fully vaccinated against COVID-19

Growth has resumed in many of the top economies

After a weak first quarter, the pace of growth picked up in both advanced and emerging economies during the second quarter. Advanced economies led global growth, with strong fiscal supports and vaccinations well underway.

Among advanced economies, the U.S. has led the way on stronger private consumption (+2.8%); however, while consumption of goods has surged, overall consumption growth remains constrained by the services category which remained 3.3% below pre-pandemic (2019 Q4) levels. Many services involve face-to-face interactions, making their recovery dependent on vaccination rates, restrictions, and general comfort with being in close proximity to one another.

The spreading delta variant combined with diminishing effects of government stimulus is likely to slow the rate of growth going forward; however, the momentum of higher than average growth is likely to continue into 2022. The strength of the economic outlook is rooted in sound private sector demand and continued fiscal support.

After a disappointing—though not disastrous—first half of 2021, China is expected to have a strong second half and finish the year with GDP growth of 8.4%, supported by strong global demand for Chinese exports. Further COVID-related restrictions is the primary down-side risk.

Most European countries had strong second quarters; however, Europe has had some of the largest economic contractions during the pandemic and has yet to recover to the pre-pandemic levels. Thus, the momentum in growth is likely to continue into Q3 and the rest of the year as the European economies continue on the path to recovery.

GDP growth, top economies
(quarterly % change, annualized)

World trade volumes and industrial production momentum slows

World merchandise trade volume growth has recently decelerated from the rapid pace seen in the last year.

World trade volumes in the first half of 2021 were 13.8% higher than they were during the same period a year ago. However, this was almost entirely driven by strong growth in the second half of 2020 and the first quarter this year. World merchandise trade only edged up 1.3% in Q2. While trade volume growth was meagre, trade prices surged to a 4.1% increase quarter-over-quarter. Put together, the value of trade increased 5.5% in the second quarter.

Industrial production volumes edged down 0.2% in Q2. Similar to merchandise trade volumes, the big picture recovery is still going well—industrial production was up 11.0% in the first half of 2021 compared to the first half of 2020. The slight decrease in the second quarter can largely be attributed to China whose industrial production decreased 3.1% quarter-over-quarter in Q2. The drop in Chinese industrial production is largely due to the re-introduced containment measures for COVID-19. If those measures come off in Q3, expect China's industrial production to surge; if they remain in place, it could be another weak quarter.

World merchandise trade and industrial production volume
(Index 2019 = 100)

A Strong Global Economic Recovery is expected in 2021

Global economic forecasts remain high in 2021, despite the slight reduction by Oxford Economics due to the spread of the Delta variant. They have in fact cut their 2021 forecast by a modest 0.3 percentage points to 5.9%, and have forecasted that a catch up will occur by increasing the 2022 forecast by 0.2 percentage points to 4.8%. Oxford estimates that global GDP surpassed its pre-crisis high sometime in the second quarter of 2021.

The July IMF forecast is similar to the Oxford forecast, 6.0% in 2021 and 4.9% for 2022. While their forecast is unchanged from April, they have increased the forecast for developed economies and revised down their forecast for developing economies for a net-zero effect. The Bank of Canada is more bullish on the economy this year—their July Monetary Policy Report is forecasting global GDP to grow at 6.9% in 2021, and 4.4% in 2022.

Economic forecasting is more of an art rather than a science at the best of times; but during the pandemic, all of the forecasts are reliant on assumptions regarding the expected path of the virus—something that has proven exceptionally difficult and certainly not in the regular job description for most macroeconomists. If the pandemic results in more lockdowns in major economies this fall and winter, the global economy will likely fall short of the forecasts. On the other hand, if vaccination rates exceed expectations and prove to be effective against new variants, the global economy could recover at a faster pace.

On the upside, as households in advanced economies begin to spend some of the additional savings built up throughout the pandemic, and consume more services in particular, this could push near-term growth higher.

Global forecasted GDP growth
(annual % change)

Canadian economy struggles in 2nd quarter

The Canadian economy struggled in the second quarter, contracting 1.1% (seasonally adjusted at annual rates). This was well below the market expectations of a 2.4% expansion. There are two primary reasons for the contraction: a slowdown in the resale housing market, and a decrease in exports. The housing market slowdown resulted in a 17.7% decline in ownership transfer costs (i.e. the fees generated from buying and selling housing). The decrease in ownership transfer costs ($7.0 billion), which is a component of GDP, was greater than the total decrease to GDP ($6.0 billion). This decrease was expected—although perhaps not to this extent—after the Canadian housing market reached record high prices and sales earlier this year and have since started to recede. The decrease in exports has been visible in the trade data for months and is largely attributable to weak auto exports due to the semiconductor shortage.

However, beneath the headline number there were signs of optimism. Business investment in machinery and equipment (24.9%, annualized), non-residential structures (5.1%), and intellectual property products (3.3%) all increased in the quarter. Household disposable income rose 9.2% in the second quarter and the household savings rate was 14.2%, the fifth consecutive quarter it has been in double digits. While consumer spending was flat (0.2%), there was a shift away from consumption on goods (-7.0%) towards consuming more services (7.3%).

The unemployment rate briefly ticked up in the quarter as the third wave of the pandemic caused further lockdowns before getting back on track at the end of the quarter and into July. As of July, Canada's employment level was 246,000 jobs below the February 2019 level. Almost two-thirds of these jobs not yet regained were previously held by females.

Canadian GDP and unemployment rate

Some emerging bright spots for Canadian industries in the second quarter

The easing of public health restrictions initiated in June helped many of the service industries in the last month of the second quarter. While output in industries that have high person-to-person contact were still far below their February 2020 levels, both Q2 and the June data showed that these industries started to turn around. Arts, entertainment and recreation is 49.8% below pre-pandemic levels, but grew 2.6% in the quarter, and 6.4% month-over-month in June. Likewise, accommodation and food services, which is 28.0% below the pre-pandemic level, grew 3.7% in the quarter and an exceptional 15.0% in June.

On the other side, retail trade was not able to overcome the initial slow months of the second quarter as public health restrictions kept many brick and mortar stores closed or at limited operation. However, retail trade rose 4.0% in June as 8 of the 12 subsectors increased—with the continued easing of restrictions in the third quarter, retail trade should continue to climb moving forward.

Manufacturing decreased 1.0% in the second quarter; however, over 80% of the decrease can be explained by a decrease in transportation equipment manufacturing—largely caused by the global semiconductor shortage. On a positive note, machinery manufacturing increased 4.8% in the second quarter, reaching $16.6 billion—a level not seen since the third quarter of 2019.

GDP at basic prices by industry for Q2
(Quarterly percentage change)

Higher resource prices supported Exports in Q2

After a strong increase in the first quarter of 2021, the growth in Canadian goods and services exports slowed down to 0.7% in Q2. Goods exports recorded the slowest quarterly rate of growth since the onset of the pandemic in Canada back in Q2 2020; it advanced by only 0.6%, nudged into positive territory mainly from price gains. Elevated lumber prices due to strong demand pushed forestry products to experience the largest gains out of all export sectors. Exports of other resource products such as metals and minerals and energy also increased. However, these gains were partially offset by large contractions in exports of motor vehicles and parts (as the sector struggled with the ongoing shortage of semiconductors) and aircraft and other transportation equipment. While goods exports had subdued Q2 growth, year-to-date exports were up 24.2% during the first half of 2021 compared to the same period in the year prior. On the other hand, although commercial and transportation services exports grew in the most recent quarter, services exports remained well below pre-pandemic levels. Moreover, as a result of higher export prices, Canada's terms-of-trade increased by 4.2% in Q2 2021.

Total Canadian imports expanded by 0.6% in Q2 2021. Imports of goods inched up 0.3% in the second quarter, supported by chemical and plastic products and metals and mineral products, on both higher volumes and prices. However, similar to exports, supply chain issues impacted motor vehicles and parts, which led to its significant decline that offset most of the gains in other product sectors. Imports of services grew 2.4% in Q2, as imports in every category grew except for travel. But like exports, services imports remained low compared to historical levels. 

International trade by product
(2021 Q2, quarterly % change)

Exports to major partners continue to grow

The United States was the main driver of the growth in Canadian goods exports. Following a strong double-digit increase in Q1 2021, Canadian goods exports to the United States advanced 1.4% in the second quarter. Year-to-date, goods exports to the United States were up 29.1% compared to the first half of 2020, mainly supported by increased exports of resource products. Although goods imports from the U.S. declined by 1.2% in Q2 2021, overall goods imports in the first half of the year were up 14.9%, year-over-year.

In Q2 2021, goods exports to China grew 1.2% quarter-over-quarter, while goods imports from China contracted by 8.2% due in part to pandemic-related port disruptions in China. Goods exports to European Union members rebounded strongly (+11.5%) after a significant drop in the previous quarter, and goods imports advanced 8.5%.

Goods exports to the rest of the world contracted by 6.0% in the second quarter of 2021, primarily on lower exports to the United Kingdom. Conversely, goods imports from the rest of the world rose 5.7% due to widespread gains from multiple countries.

Goods trade, by major trading partner
(2021 Q2, quarterly % change)

Services trade has yet to recover

While commercial services trade is now well above pre-pandemic levels, travel and transportation services have not yet begun their recovery. On a seasonally adjusted basis, total services exports were 19.3% below the pre-pandemic level by the end of the first half of 2021, and total services imports were 30.6% lower.

As travel restrictions remained in place due to the spread of the Delta variant, Canadian exports of travel services fell 7.5% in Q2 2021, to a new historical low. Similarly, despite a modest gain of 1.1% in the second quarter of 2021, exports of transportation services remained nearly 25% below their pre-pandemic level. On the other hand, two-way trade of commercial services was not heavily impacted by the pandemic as many of these activities can be delivered remotely. As a result, in Q2 2021, commercial services exports and imports stood at 5.3% and 7.1% above their Q4 2019 levels, respectively.

Geographically, bilateral services trade with the United States and the European Union improved in Q2 2021, year-over-year. But services exports to China were 34.3% lower when compared to the same quarter a year ago. Services trade with the rest of the world increased marginally from last year.

Services trade (exports + imports), by category
(percentage change relative to 2019 Q4)

Consumption and exports are expected to lead economic growth in Q3

The Bank of Canada revised Canada's 2021 GDP growth forecast down by 0.5 percentage points in its July Monetary Policy Report, from 6.5% to 6.0%. The Bank also expects economic growth to slow to 4.6% in 2022 and 3.3% in 2023. 

While the pace of recovery has slowed and there are some headwinds, the Canadian economy is expected to continue to grow in the second half of the year. Domestically, as consumer confidence returns to pre-pandemic levels and public health outlook improves due to widespread vaccination, consumption, especially spending on services, is expected to lead economic growth as the economy further reopens. At the same time, recent global developments support export growth in the second half of the year. The massive fiscal stimulus in the U.S. is expected to boost economic activities, consumer spending, and demand for Canadian exports. Also, Canada's travel services exports may finally start to recover as travel restrictions are eventually lifted in the U.S. and other parts of the world.

Although certain downside risks associated with the pandemic have declined with the high rate of vaccination in Canada, some risks remain and new ones have emerged, including: the spread of the Delta variant leading to the potential for renewed restrictions; concerns of microchip shortages spilling over to the next year; prolonged supply-demand imbalances; and elevated inflation around the world leading to tightening of global financial conditions.

Canadian forecasted GDP growth
(annual % change)

Annex: Tables

Table 1: Canadian trade by industry sector ($ millions)

Note: "Q/Q %" is the change from the previous quarter; "YTD %" is the year-to-date (Q1 to recent quarter) cumulative change compared to the same period in the previous year.

Source: Statistics Canada Table 36-10-0019-01 & 36-10-0021-01. Balance of payments basis, seasonally adjusted.

Table 2: Goods trade by trading partner ($ millions)

Note: "Q/Q %" is the change from the previous quarter; "YTD %" is the year-to-date (Q1 to recent quarter) cumulative change compared to the same period in the previous year.

Source: Statistics Canada Table 36-10-0023-01. Balance of payments basis, seasonally adjusted.

Table 3: Services trade by trading partner ($ millions)

Note: "YTD %" is the year-to-date (Q1 to recent quarter) cumulative change compared to the same period in the previous year.

Source: Statistics Canada, Table 36-10-0024-01. Balance of payments basis, seasonally unadjusted.