Canada's economy shrank at a record pace in the second quarter but by the end of the period showed signs of a rapid recovery from the pandemic trauma that forced businesses to close and put millions out of work.

At the same time, Prime Minister Justin Trudeau's government ran up a Can$120 billion (US$90 billion) budget deficit dolling out emergency aid to Canadians, compared to a shortfall of Can$85 million during the same period last year.

The economy contracted 11.5 percent, or at an annualized pace of 38.7 percent, in the three months ending June 30, the government statistical agency said Friday.

Declines were recorded across the board amid a nationwide lockdown including in consumer spending, business investment, trade and tourism -- in line with analyst forecasts, following a 2.1 percent (8.2 percent annualized) contraction of Canada's gross domestic product (GDP) in the first quarter.

After steep declines at the height of the COVID-19 outbreak in April and May, however, GDP surged 6.5 percent in June.

And preliminary data for July forecast a three percent rise in GDP. Economists said this suggests the worst is over for the Canadian economy.

"It was a quarter to forget for Canada's economy," commented CIBC analyst Royce Mendes in a research note.

The drop in GDP, he said, was of "a magnitude never before seen... and was likely the worst performance since the Great Depression."

But, he added, "things were looking up by the end of the second quarter" with "solid momentum" continuing into July.

Mendes also noted that Canadians' disposable income actually grew in the period as emergency government support more than offset a drag from a jump in unemployment.

That drove the household savings rate up to 28 percent, from seven percent, "potentially leaving some extra cash for spending in upcoming periods," he said.

Canadian Prime Minister Justin Trudeau faces a major challenge after Covid-19 took a hefty toll on the economy, which fell 38.7 percent in the second quarter
Canadian Prime Minister Justin Trudeau faces a major challenge after Covid-19 took a hefty toll on the economy, which fell 38.7 percent in the second quarter AFP / Lars Hagberg

Derek Holt, head of Scotiabank Economics, noted that more than half of the three million Canadians who lost their jobs at the start of the pandemic, pushing up the unemployment rate to a peak of 13.9 percent in May, have since gone back to work as restrictions eased.

"Canada's economy may be rebounding even faster than expected into Q3," Holt said. "Canadian GDP is quickly recovering (from) the pandemic hit... which cautions against the policy narrative that years of pain lie ahead."

But senior TD economist Brian DePratto warned, "Many sectors are going to continue struggling in the absence of a vaccine."

"We may be through the worst of it, but it is still a long road to normal."

The finance department said government revenues were down Can$32.0 billion, or 37.9 percent, in the second quarter, while expenses -- including wage subsidies, business incentives and direct aid -- climbed by Can$90.3 billion, or 116.5 percent.

Trudeau last week announced an extension of the emergency aid to the end of September, when he said he would seek parliament's support for massive new social and environmental spending to pull Canada out of an economic slump.

If all three main opposition parties balk and vote against the proposals, however, Trudeau's minority liberal government would fall, triggering snap elections.

According to Statistics Canada, household spending fell 13.1 percent in the second quarter due to substantial job losses and few opportunities to spend as most stores and restaurants were closed and travel and tourism was restricted by the closure of the border.