Canadian economy seen strong in first quarter, but impact of third wave looms

Julie Gordon
·2 min read
A construction crane is seen above Brookfield's Bay Adelaide North in Toronto

By Julie Gordon

OTTAWA (Reuters) -Canada's economy likely grew by 6.5% on an annualized basis in the first quarter, Statistics Canada said on Friday, though economists warned that the current third wave of COVID-19 infections will weigh in the second quarter.

In a preliminary estimate, Statscan said the economy likely grew by 0.9% in March from February. In February, the economy expanded 0.4%, a 10th consecutive monthly gain, on a rebound in retail trade and on the strength of residential construction.

That was slightly below analyst estimates that gross domestic product would grow by 0.5% in February from January.

The gains, as some controls were eased between the second and third waves of COVID-19 virus spread, put Canada's first-quarter GDP growth in line with the U.S., said economists. This despite more restrictions and a slower vaccine rollout.

By March, economic activity was likely only about 1% below pre-pandemic levels, Statscan said. But lockdowns imposed in April to curb a another surge in COVID-19 infections will weigh in the coming months.

"Much if not all of the recent progress in non-essential high-contact services industries will likely be reversed during this third wave," said Royce Mendes, senior economist at CIBC Economics, in a note.

"We'll have to wait and see how much pain will be inflicted by this latest rise," he added.

Still, the strength of February and March, where activity rebounded from restrictions imposed in December to deal with the second wave, show how quickly the economy can bounce back.

"The solid performance of many sectors through the winter suggest that any setback in April will likely be quickly recouped in future months," said Doug Porter, chief economist at BMO Economics, in a note.

The Bank of Canada said last week that it now expects the Canadian economy to grow by 6.5% in 2021 and signaled it could start hiking interest rates as soon as late 2022.

The Canadian dollar held near an earlier 3-year high of 1.2266 per U.S. dollar, or 81.53 U.S. cents, up 0.1% on the day.

(Reporting by Julie Gordon in Ottawa, Additional reporting by David Ljunggren and Fergal Smith; editing by Jason Neely, Steve Orlofsky and Louise Heavens)