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Wednesday, April 14, 2004

The economy: Year-end review


Canada's economic growth slowed considerably in 2003, when major developments in the country revolved around international events, according to a new analysis.

Real gross domestic product advanced 1.7% last year, about half the pace of 3.3% in 2002. Canada and Germany were the only two G7 countries in which economic growth slowed last year. Still, Canada was in the mid-range of G7 growth, after leading the way in 2002.

So far this decade, annual growth in Canada has averaged 2.3%, half the pace of 5.0% at the height of the economic boom between 1998 and 2000.

For Canada, the major economic event last year was the turnaround in the Canadian dollar against the US greenback. The 21.7% increase from 63.39 cents (US) to 77.13 during the year was the largest 12-month movement up or down in Canada's history.

Other events clearly illustrated that increasing global integration, especially in trade and direct investment, also raises Canada's vulnerability to situations over which it has little control. These events include the SARS outbreak, the mid-August power blackout and the war in Iraq, with natural disasters such as Hurricane Juan in Nova Scotia tossed into the mix.

However, there is no statistical evidence that the disasters of 2003 were a significant factor in the economy's slowdown for the year as a whole, although they affected the quarterly distribution of growth.

In another significant development, China became a key player in Canada's trade with the world.

Shocks to the economy not significant factor

There was much discussion during the year over the seemingly biblical series of negative shocks to the economy: the SARS epidemic in Toronto, mad cow disease in Alberta, a strike at Inco, the power blackout in Ontario, a hurricane in Nova Scotia and forest fires in British Columbia. However, every year is marked by similar disasters: drought cost grain farmers in the Prairies billions of dollars of lost output in 2002 and 2001. Time lost to work stoppages hit a five-year high in 2002, while forest fires in Quebec were so intense the sky was hazy as far south as New York City.

The largest persistent impact of any of these events last year appears to have been the loss of tourism in Canada, where output fell by the equivalent of 0.1% of the GDP. However, not all of this can be attributed to SARS. The slide in tourism began after September 11, 2001 and was further compounded by the war in Iraq and the appreciation of the Canadian dollar last year.

The small affect these events have on the GDP reflect the enormous size of Canada's economy today. Compared with annual GDP of $1.2 trillion, even a major event such as the $1 billion (at annual rates) lost to the Inco strike is barely 0.1% of output.

In addition, some of these events had a larger influence on the distribution than the overall level of income. For example, the loss of export markets for cattle producers because of the mad cow scare was partly offset by increased purchasing power for beef consumers as prices fell. It was also partly offset by gains for producers of substitutes, such as poultry and seafood.

International scene: China becoming a key player

Canada's relation with the rest of the world is also changing rapidly, shaped in part by the turnaround in our dollar. Trade in goods across the border has slumped for three straight years, despite explosive growth with China, while the number of travelers to Canada fell for the first time in 15 years.

Foreign direct investment in Canada was the lowest in a decade, dampened by the rising dollar. The rising dollar largely explains the wedge between job losses in manufacturing and more rapid gains elsewhere.

A major development internationally for Canada was the rapid growth in merchandise trade with China, particularly in imports. Canada's imports from China have doubled since 1999, including a 16% increase last year alone.

China accounted for 5.5% of Canada's imports last year, nearly twice the share from Japan or Britain and close to the 7.6% of the other European Union nations. Canada's exports to China in 2003 rebounded 13% after a dip the year before, led by a turnaround in commodity prices. Exports to China have grown by 75% since 1999.

Canada recorded an overall trade deficit of nearly $14 billion with China last year, while the US trade deficit with China hit $124 billion. These deficits with China represented 1.1% of the GDP in both countries.

China accounted for 12% of American imports last year, leapfrogging into second place behind only Canada, which accounted for almost 18%. By last year, China had become a major consumer of commodities-its oil imports, for example, rose to second behind the United States-which has helped to boost prices for Canada's metals and energy exports.

Other indicators: Consumers borrowed to sustain growth

Household spending posted a third straight year of solid growth in 2003. Housing again led the way, although it was unable to match the double-digit increases of the previous two years. Consumer spending increased by a little over 3% in spite of slow growth in income.

With consumer spending growing steadily and housing still booming, households had to find other means to finance their outlays. They did so by running down their savings rate and borrowing more. The savings rate declined from 4.7% to a record low of 2.0%, freeing up $15 billion. Meanwhile, consumers borrowed a record $50 billion, $30 billion in mortgages alone.

The outstanding feature of the corporate sector remained its massive net saving, which rose from $35 billion (itself a record) in 2002 to $57 billion. The increase in the corporate surplus originated in an 18% hike in undistributed corporate profits, and leaves firms well-positioned to continue to raise investment. Business investment in 2003 pulled out of a two-year slump. While small, the increase was led by manufacturers who stepped-up productivity-enhancing investments even as their profits fell.

In the labour market, the most obvious change in employment last year was a slump in manufacturing, its first significant decline since 1993 (a marginal dip in 2001 was related to the crash in the high-tech sector).

Some of the most entrenched trends in the labour market in the 1990s have changed in recent years. Demand for people with university degrees slowed just as supply accelerated. Meanwhile, jobs picked up for other workers, partly because of robust growth in construction and the primary sector, which enjoyed its best year in two decades as commodity prices soared.

As a result, the gap in the unemployment rate for people with and without a university degree shrank to a record low. The convergence of labour market outcomes also was reflected in the smallest gap between blue-collar and white-collar jobs in over a decade.

The unemployment rate for blue-collar workers fell from 8.1% in 2002 to 7.7% last year, while white-collar unemployment rose to 4.5%.

The article, "The economy: Year-end review," will be available in the April 2004 issue of Canadian Economic Observer, Vol. 17, no. 4 (11-010-XIB, $19/$182; 11-010-XPB, $25/$243).

For more information or to get a copy of this study, contact our Media Hotline (613-951-4636) or Philip Cross (613-951-9162;, Current Economic Analysis.

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