Gross domestic product plunged by an annualized 38.7% in the three months through June, adding to an 8.2% drop in the first quarter, Statistics Canada said Friday in Ottawa. But household disposable income surged on the back of state transfers, much of which has yet to be spent.

The data suggest Prime Minister Justin Trudeau’s aggressive spending has more than offset the impact of the recession on family finances, making the biggest contribution to a quick recovery and limiting potential long-term damage. Whether it’s enough to bring the economy back to normal remains an open question.

The second quarter will go down as by far the worst ever. But the collapse mostly reflects losses during one month — April — the nadir of the pandemic. Monthly GDP data supports the view that a sharp recovery is underway, with growth of 6.5% in June, a record, and 3% in July.

“The speed of the rebound seems out of sync with the confidence exuded by policy makers that it couldn’t happen this fast,” Derek Holt, an economist at Bank of Nova Scotia, said in a report to investors. “It is, but stay tuned.”

Government transfers rose 88% non-annualized in the quarter, the largest jump on record. Almost a third of household income, an unprecedented share, was from government transfers. That, along with a sharp pullback in household spending, pushed the savings rate to 28%, the highest ever. That mirrors data from the U.S., where incomes surged early in the pandemic because of federal relief checks.

The improvement in household balance sheets contributed to strong GDP showings beginning in May, and should support consumer spending going into the second half, Jocelyn Paquet and Kyle Dahms, economists at National Bank Financial, said in a report to investors.

“Monthly figures published up to now are hinting at a +41.1% annualized rebound” in the third quarter, they wrote. “But the pace of this recovery remains highly uncertain and dependent on the evolution of the pandemic both at home and abroad.”

But for now, the outlook is better. Oil prices have recovered, the country’s housing market is booming again amid historically low interest rates, and the federal government has pledged to keep the fiscal taps open into the recovery period — keeping disposable income elevated.

What Bloomberg’s Economists Say
“Our tracking of high-frequency and alternative data signals the easy gains after the re-opening of the economy have largely been realized. We don’t expect to see a complete recovery in activity until at least late 2021, and anticipate an even longer road ahead for the labor market.” –Andrew Husby

Another reason for optimism: Canada has also avoided a new wave of cases like the one that continues to hamper the expansion south of the border.

With July’s estimate of a 3% increase, Canada’s economy is now at 94% of February’s levels, or put another way, has recouped around two-thirds of lost output from the height of the pandemic

Still, Canada’s economy isn’t expected to fully make up the losses until 2022. Labor data next week will show to what extent workers are transitioning away from government support and back into paid employment.

“The concern has long been that still exceptional softness in labor markets (the unemployment rate was still in double-digits at 10.9% in July) would outlast exceptional policy supports,” Nathan Janzen, an economist at RBC Capital Markets, said in a report to investors.

The Canadian dollar pared gains on the report, and was trading 0.2% higher at C$1.3105 against its U.S. counterpart at 11:06 a.m. Toronto time.

The second quarter was truly bad, with historic declines across the board. Household consumption plunged by an annualized 43%, housing investment was down 48%, and non-residential business capital spending was down 57%.

Exports and imports plummeted by more than half. The drop in imports was larger than the collapse in exports, which means the trade sector actually contributed positively to growth in the second quarter.

The second quarter contraction is worse than the U.S. and Germany, but better than other parts of Europe like the U.K., Italy and Spain.

Friday’s data show that Canadians are eating, drinking and smoking more than they did pre-pandemic, but largely spending less on other things. Transportation services are down 81% from the end of last year, while expenditures outside the country fell 90%. Purchases on clothing, accommodation and restaurants have also seen big hits.

Despite the grim numbers in the rear-view mirror, economists are starting to raise 2020 Canadian forecasts. Bank of Montreal Chief Economist Doug Porter said his team will be revising upward its full-year GDP forecast for the first time in four months on the better-than-expected rebound.