People wear face masks waiting outside a check-cashing facility in Detroit on April 25, 2020.
Shannon Stapleton/Reuters
The U.S. economy contracted in the first quarter at its sharpest pace since the Great Recession as stringent measures to slow the spread of the novel coronavirus almost shut down the country, ending the longest expansion in U.S. history.
The drop in gross domestic product, or GDP, reported by the U.S. Commerce Department on Wednesday reflected a plunge in economic activity in the last two weeks of March, which saw millions of Americans seeking unemployment benefits. The rapid decline in GDP reinforced analysts’ predictions that the economy was already in a deep recession and left economists bracing for a record slump in output in the second quarter.
“If the economy fell this hard in the first quarter, with less than a month of pandemic lockdown for most states, don’t ask how far it will crater in the second quarter because it is going to be a complete disaster,” said Chris Rupkey, chief economist at MUFG in New York.
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GDP declined at a 4.8-per-cent annualized rate last quarter, weighed down by a collapse in spending on health care as dentists’ offices closed and hospitals delayed elective surgeries and non-emergency visits to focus on patients suffering from COVID-19, the potentially lethal respiratory illness caused by the virus.
That was the steepest pace of contraction in GDP since the fourth quarter of 2008. Households also drastically cut back on purchases of motor vehicles, furniture, clothing and footwear. Receipts for transportation, hotel accommodation and restaurant services also plunged.
Businesses further tightened their purse strings and liquidated inventory, helping to overshadow positive news from a shrinking import bill, the housing market and more spending by the government. Economists polled by Reuters had forecast GDP falling at a 4-per-cent rate last quarter. The economy, which grew at a 2.1-per-cent rate in the fourth quarter, was in its 11th year of expansion, the longest on record.
The Commerce Department’s Bureau of Economic Analysis (BEA) said while it could not quantify the full effects of the pandemic, COVID-19 had partly contributed to the decline in GDP in the first quarter. The BEA said “stay-at-home” orders in March had “led to rapid changes in demand, as businesses and schools switched to remote work or cancelled operations, and consumers cancelled, restricted or redirected their spending.”
Many factories and non-essential businesses such as restaurants and other social venues were shuttered or operated below capacity amid nationwide lockdowns to control the spread of COVID-19. The sharp contraction in GDP, together with record unemployment, could pile pressure on states and local governments to reopen their economies.
It also deprives President Donald Trump of a success story to campaign around as he seeks re-election in November, and could ramp up criticism of the White House’s initial slow response to the pandemic. Confirmed U.S. COVID-19 infections have topped one million, according to a Johns Hopkins University tally.
Stocks on Wall Street shrugged off the GDP report and were trading higher after Gilead Sciences said its experimental antiviral drug met the main goal of a trial testing it in COVID-19 patients. The American dollar fell against a basket of currencies, while U.S. Treasury prices rose.
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The U.S. Congress has approved a fiscal package of about US$3-trillion and the Federal Reserve has cut interest rates to near zero and greatly expanded its role as banker of last resort, but economists say these measures are inadequate. Fed officials were wrapping up a two-day policy meeting on Wednesday.
DIFFICULT ROAD AHEAD
Economists also did not believe that reopening regional economies, as some states are now doing, would quickly return the broader economy to pre-pandemic levels, which they said would take years. Reopening the economy also involves the risk of a second wave of infections and further lockdowns.
Economists expect an even sharper contraction in GDP in the second quarter, with estimates for a drop as large as a 40-per-cent pace. They believe the economy entered recession in the second half of March when the social distancing measures took effect.
The National Bureau of Economic Research, the private research institute regarded as the arbiter of U.S. recessions, does not define a recession as two consecutive quarters of decline in real GDP, as is the rule of thumb in many countries. Instead, it looks for a drop in activity, spread across the economy and lasting more than a few months.
“The next few months will be extremely difficult for the U.S. economy, with a historic contraction in GDP in the second quarter,” said Gus Faucher, chief economist at PNC Financial in Pittsburgh. “If consumers and workers remain housebound into the third quarter, or if the pandemic fades and then re-emerges, the recession could last throughout 2020.”
Consumer spending, which accounts for more than two-thirds of U.S. economic activity, tumbled at a 7.6-per-cent rate in the first quarter, the sharpest drop since the second quarter of 1980, after growing at a 1.8-per-cent pace in the October-December period. Income at the disposal of households rose at a tepid 0.5-per-cent rate last quarter, slowing from a 1.6-per-cent pace in the fourth quarter. The saving rate surged to 9.6 per cent from 7.6 per cent.
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Imports shrunk at a 15.3-per-cent rate, the largest decline since the second quarter of 2009, leading to a narrower trade deficit, which contributed 1.30 percentage points to GDP last quarter. But that meant no inventory was accumulated, with stocks at businesses decreasing at a US$16.3-billion rate after increasing at a US$13.1-billion pace in the fourth quarter.
Business investment contracted at an 8.6-per-cent rate, the sharpest since the second quarter of 2009. That marked the fourth straight quarterly drop in investment and reflected declines in spending on equipment, particularly transportation.
Spending on non-residential structures such as mining exploration, shafts and wells also tanked. Business investment was already stressed by the Trump administration’s trade war with China, cheaper oil and problems at Boeing.
Most economists have dismissed the idea of a quick and sharp rebound, or V-shaped recovery, arguing that many small businesses will disappear. They also predicted some of the about 26.5 million people who have filed for unemployment benefits since mid-March are unlikely to find jobs.
“The legacy of the crisis and the potential for long-term structural changes mean at best we currently think the lost output in first and second quarter won’t be fully regained until late 2022,” said James Knightley, chief international economist at ING in New York.
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OTTAWA – Statistics Canada says wholesale sales, excluding petroleum, petroleum products, and other hydrocarbons and excluding oilseed and grain, rose 0.4 per cent to $82.7 billion in July.
The increase came as sales in the miscellaneous subsector gained three per cent to reach $10.5 billion in July, helped by strength in the agriculture supplies industry group, which rose 9.2 per cent.
The food, beverage and tobacco subsector added 1.7 per cent to total $15 billion in July.
The personal and household goods subsector fell 2.5 per cent to $12.1 billion.
In volume terms, overall wholesale sales rose 0.5 per cent in July.
Statistics Canada started including oilseed and grain as well as the petroleum and petroleum products subsector as part of wholesale trade last year, but is excluding the data from monthly analysis until there is enough historical data.
This report by The Canadian Press was first published Sept. 13, 2024.
VICTORIA – British Columbia is forecasting a record budget deficit and a rising debt of almost $129 billion less than two weeks before the start of a provincial election campaign where economic stability and future progress are expected to be major issues.
Finance Minister Katrine Conroy, who has announced her retirement and will not seek re-election in the Oct. 19 vote, said Tuesday her final budget update as minister predicts a deficit of $8.9 billion, up $1.1 billion from a forecast she made earlier this year.
Conroy said she acknowledges “challenges” facing B.C., including three consecutive deficit budgets, but expected improved economic growth where the province will start to “turn a corner.”
The $8.9 billion deficit forecast for 2024-2025 is followed by annual deficit projections of $6.7 billion and $6.1 billion in 2026-2027, Conroy said at a news conference outlining the government’s first quarterly financial update.
Conroy said lower corporate income tax and natural resource revenues and the increased cost of fighting wildfires have had some of the largest impacts on the budget.
“I want to acknowledge the economic uncertainties,” she said. “While global inflation is showing signs of easing and we’ve seen cuts to the Bank of Canada interest rates, we know that the challenges are not over.”
Conroy said wildfire response costs are expected to total $886 million this year, more than $650 million higher than originally forecast.
Corporate income tax revenue is forecast to be $638 million lower as a result of federal government updates and natural resource revenues are down $299 million due to lower prices for natural gas, lumber and electricity, she said.
Debt-servicing costs are also forecast to be $344 million higher due to the larger debt balance, the current interest rate and accelerated borrowing to ensure services and capital projects are maintained through the province’s election period, said Conroy.
B.C.’s economic growth is expected to strengthen over the next three years, but the timing of a return to a balanced budget will fall to another minister, said Conroy, who was addressing what likely would be her last news conference as Minister of Finance.
The election is expected to be called on Sept. 21, with the vote set for Oct. 19.
“While we are a strong province, people are facing challenges,” she said. “We have never shied away from taking those challenges head on, because we want to keep British Columbians secure and help them build good lives now and for the long term. With the investments we’re making and the actions we’re taking to support people and build a stronger economy, we’ve started to turn a corner.”
Premier David Eby said before the fiscal forecast was released Tuesday that the New Democrat government remains committed to providing services and supports for people in British Columbia and cuts are not on his agenda.
Eby said people have been hurt by high interest costs and the province is facing budget pressures connected to low resource prices, high wildfire costs and struggling global economies.
The premier said that now is not the time to reduce supports and services for people.
Last month’s year-end report for the 2023-2024 budget saw the province post a budget deficit of $5.035 billion, down from the previous forecast of $5.9 billion.
Eby said he expects government financial priorities to become a major issue during the upcoming election, with the NDP pledging to continue to fund services and the B.C. Conservatives looking to make cuts.
This report by The Canadian Press was first published Sept. 10, 2024.
Note to readers: This is a corrected story. A previous version said the debt would be going up to more than $129 billion. In fact, it will be almost $129 billion.
NANAIMO, B.C. – Former Bank of Canada governor Mark Carney says he’ll be advising the Liberal party to flip some the challenges posed by an increasingly divided and dangerous world into an economic opportunity for Canada.
But he won’t say what his specific advice will be on economic issues that are politically divisive in Canada, like the carbon tax.
He presented his vision for the Liberals’ economic policy at the party’s caucus retreat in Nanaimo, B.C. today, after he agreed to help the party prepare for the next election as chair of a Liberal task force on economic growth.
Carney has been touted as a possible leadership contender to replace Justin Trudeau, who has said he has tried to coax Carney into politics for years.
Carney says if the prime minister asks him to do something he will do it to the best of his ability, but won’t elaborate on whether the new adviser role could lead to him adding his name to a ballot in the next election.
Finance Minister Chrystia Freeland says she has been taking advice from Carney for years, and that his new position won’t infringe on her role.
This report by The Canadian Press was first published Sept. 10, 2024.
