Service sector

Opinion: Stable GDP numbers hide welcome signs of service sector recovery

The service sector is back, according to Canadian gross domestic product statistics last week.Graham Hughes/The Canadian Press

Last week’s Canadian gross domestic product statistics, lackluster as they are, do not signal a recovery on the rocks. Growth doesn’t stand still, it evolves – in a very important and encouraging way.

The service sector is back.

Okay, the headlines from Friday’s Statistics Canada report don’t seem to be cheering. Real GDP (ie excluding the effects of inflation) fell 0.1% in July from June, the third decline in four months. The rapid recovery of the economy at the start of the year from the pandemic-induced recession has been replaced by a frustrating sideways drift, with no growth in the spring and well into the summer.

But within those numbers there is growing evidence of an absolutely essential rotation in the recovery. The services side of the economy – the side that has borne the brunt of pandemic shutdowns and restrictions – has taken over from the goods side as the engine of growth.

Services GDP grew at an annualized rate of 6% in June and July combined, while goods GDP fell at a rate of 3.6%. Services-led growth appears to have continued in August: Statscan released a preliminary estimate that GDP grew 0.7% month-on-month, attributing much of the recovery to the accommodation, catering and retail.

A similar trend has appeared in employment data over the past few months. Jobs in the services sector jumped by more than 460,000 from May to August, while employment in the goods sector fell by 50,000.

Whatever the current momentum of the Canadian economy, it comes from the services side.

There is no doubt that for many service sector industries crippled by pandemic-related restrictions, the recovery still has a long, long way to go. Chief Economist of the Canadian Chamber of Commerce Stephen Tapp noted on his Twitter feed On Friday, the arts, entertainment and recreation segment of the economy was still 46% below its pre-pandemic GDP in July. The accommodation and food services sector was still down 21%. Transport decreased by 18%.

Mr Tapp also noted that most of the recovery to date has been largely driven by the government, which has stepped up significantly to fill the economic vacuum created by the pandemic. Public sector real GDP rose 1.8% from its pre-pandemic level in July; the private business sector (which is about four times the size of the public sector) was still down 2.7%.

“The hardest part of the economic recovery continues,” Mr. Tapp said.

But hey, you have to start somewhere. Vaccines and the advent of vaccination passports have opened the door to the rise of a wide range of service businesses – perhaps not quite to the norm, but much closer than we have seen at any time since March 2020.

This is a vital next step for an economy that leaned unusually heavily on the goods-producing side at the start of the recovery. The nature of the pandemic has significantly skewed demand towards goods, straining supply chains, which have had to deal with their own pandemic disruptions. Have you tried shopping for bike parts during the pandemic? How about wood? Or appliances? If so, you know just how weird the property market has become.

A growing outlet for consumer demand on the service side will help normalize some of these pressures. This, in turn, may also herald a shift in the course of inflation, a major economic concern over the past few months.

The inflation rate for goods in Canada in August was 5.8%, reflecting these unusual pressures on supply chains. Services inflation was relatively moderate at 2.7%. A pivot away from goods and towards reopening services will reduce pressure on goods makers, as supply chains increasingly catch up with new consumption patterns. If you’re worried about inflation, the resurgence in services should absolutely reassure you.

On the other hand, it is unclear how quickly or smoothly the labor market will adjust to the resurgence of large swathes of the service economy over the coming months. We regularly hear about severe labor shortages for many service businesses that are reopening, as turnover of staff after months of limited operations proves difficult to say the least. We have yet to see this translate into rising wage pressures, but if it does, it will quickly translate into inflationary pressures. There is certainly a risk that labor bottlenecks will replace supply bottlenecks as our next inflation concern.

And of course, the major qualifier in all of this is the Delta wave of COVID-19. While continued vaccinations and the use of vaccine passports portend better days for service industries, we cannot ignore that there could still be setbacks and the temporary reimposition of restrictions. Future growth will not necessarily be in a straight line.

These are the types of growing pains we will face as the recovery continues to evolve through the rest of this year and into 2022. But the key to that phrase is “growth.” With the service sector coming back to life, this growth story is heading for a healthier and more complete phase.

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