Canadian economic accounts

Real gross domestic product (GDP) increased 0.4% in the fourth quarter, slowing from 0.7% in the third. Exports declined for a second consecutive quarter, while final domestic demand strengthened to 1.1% growth. GDP grew 0.2% in December following a 0.3% increase in November and a flat performance in October.

The goods and services sectors of the economy expanded at similar rates, but within the goods sector manufacturing output was flat. After strong gains in the first two quarters, profit growth slowed to 1.5% in both the third and fourth quarter.

Growth in consumer spending was sustained at 1.0%, and housing investment posted another solid increase (+1.7%). Businesses accelerated investment in machinery and equipment, while growth in non-residential construction activity softened.

Inventory accumulation increased in the fourth quarter, with the build-up concentrated in wholesale and manufacturing, especially for durable goods. Retail inventory accumulation was reduced significantly.

Economy-wide prices, as measured by the GDP chain price index, rose 0.8%. Excluding energy, the increase was 0.5%.

The United States economy grew at an annualized rate of 3.8% in the fourth quarter, in contrast to an annualized growth of 1.7% for Canada.

Exports decline for the second consecutive quarter

Exports slipped 0.9% in the fourth quarter, matching the third quarter decline. Virtually all goods categories decreased, with the exception of industrial goods and materials and automotive products. Exports of machinery and equipment posted another quarterly decline, after strong increases in the first half of the year. Exports of agricultural and fish products fell 3.9%, and forestry products edged down, dampened by the slowing US housing market.

In contrast, exports of services increased 0.8%, led by strong commercial services (+3.3%). Exports of both travel and transportation services fell, after slowing considerably in the third quarter.

Goods and services sectors both advance, but manufacturing flat

A strong Canadian dollar hurt manufacturers, whose output was flat in the fourth quarter but overall goods production still grew 0.5%. Fortunes among the major manufacturing groups were evenly split between winners and losers. Industrial production (the output of factories, mines and utilities) increased 0.4%, with strength in utilities (+2.3%) and in the mining, oil and gas sector (+0.6%). Utilities benefited from increased electricity generation, while the energy sector was spurred by high oil and gas prices. The end of a strike restored output levels of iron mining. The construction industry (+1.2%) boosted the goods sector with strength in residential, engineering and repair activity.

Growth in the services sector was also up 0.5%, with healthy gains posted in wholesaling, and widespread growth across most services industries. The expansion of services production was restrained in the fourth quarter due to a federal public service strike and the NHL lockout that affected the arts, entertainment and recreation sector (-2.4%).

Corporate profits weaken

After posting healthy increases in the first half of 2004, corporate profits weakened in the latter part of the year, increasing only 1.5% in each of the last two quarters. Declining exports restrained manufacturing profits, and earnings weakened among financial corporations. Profits were strong in the transportation industry, but manufacturers had mixed results. Wood, paper and chemical companies fared well, while earnings fell back for petroleum and coal, primary metals, and motor vehicle manufacturing.

Non-financial private corporations' demand for funds softened further in the quarter. Share issues were up in line with share prices, but overall borrowing was down.

Continued strength in plant and equipment investment

Business investment in plant and equipment registered another healthy increase, the strongest this year (+2.2%). However, business investment in buildings and engineering projects remained weak in the fourth quarter (+0.4%).

Business investment in machinery and equipment increased 3.4% in the fourth quarter, after averaging advances of 2.3% in the previous three quarters. Investment in computers and other office equipment, furniture, trucks and industrial machinery were all up from last quarter. Wholesalers of machinery and equipment benefited from lower prices of imported goods.

Massive build-up of inventories

Non-farm businesses increased inventories by $19.2 billion in the fourth quarter, following a large accumulation in the third. The build-up was concentrated in wholesale trade and manufacturing, especially durable goods. This corresponds to strong gains in production volumes for wood products, furniture, fabricated metals and information and communication technology equipment.

In contrast, retail inventory accumulation was significantly lower than the previous quarter, as inventories of motor vehicles were drawn down following a build-up in the previous quarter. The economy-wide inventory-to-sales ratio edged up, leaving sufficient inventories to satisfy 62 days of sales at the current pace.

Sustained growth in consumer spending

Consumer spending increased 1.0% in the fourth quarter, similar to its third quarter increase of 0.9%, but down from the strong growth earlier in the year. Purchases of durable goods slowed to 1.0%, down from its third quarter pace of 1.3%, and purchases of semi-durable goods were flat.

Housing investment still strong

Business investment in residential construction posted another solid increase (+1.7%), its sixth consecutive quarterly gain. Quarterly growth in new housing construction activity has averaged 1.6% throughout 2004, and renovation activity saw healthy increases in the second half of the year. The resale market was weaker, however, and activity of real estate agents and brokers fell 3.3%, hampered by reduced sales of existing homes.

GDP by industry: Highlights for December 2004

In December 2004, GDP grew 0.2% following 0.3% growth in November and a flat performance in October. Growth was mainly on the strength of wholesaling activity, the energy sector, and motor vehicle production. Disappointing retail sales held the reins on economic growth in the final month of 2004.

Industrial production (the output of Canada's factories, mines, and utilities) was up 0.5%, with all three components increasing with particular strength in the energy sector. Utilities were up 2.9% and oil and gas exploration soared a further 5.3%.

Manufacturing output expanded by 0.3%, recovering from a decline in November. This was driven largely by motor vehicle production, up 1.7% in December. Wholesale activity also benefited from the rise in motor vehicle production, with added strength from increased sales of household goods and petroleum products. The retail sector however fell a further 1.5% in December, due to lower sales of new cars, lower-than-usual Christmas sales and a strike at Quebec liquor stores.

The construction industry grew 0.3%, largely through work on engineering projects. While overall residential housing construction stalled in December, non-residential construction posted a 0.1% increase, halting a downward slide that started in July 2003.

Year-end review

Real gross domestic product advanced 2.8% in 2004, an acceleration from the 2.0% growth in the previous year. Exports rebounded despite remarkable strength in the Canadian dollar, and strong growth in final domestic demand was sustained at 3.8%. Economic growth slowed in the latter half of the year, after picking up momentum in the second quarter.

The Canadian dollar continued to strengthen vis-à-vis the US currency, appreciating 7.7% on top of a 12.1% gain in 2003. While exports increased 4.9%, imports picked up speed, growing a much stronger 8.2%, leading to a significant decline in Canada's trade balance.

Corporate surpluses burgeoned as profits skyrocketed (+17.7%). Businesses took advantage of the strong dollar to invest in machinery and equipment, with purchases surging 9.4% in 2004, in tandem with rising imports.

Industrial production increased 3.2% after a lacklustre 0.7% performance in the previous year. Manufacturers boosted production 3.9% after a flat 2003, with gains spanning a range of categories. Wholesale and retail trade activity posted solid gains, and the finance and insurance industries had a bright year. Mining and oil and gas extraction output grew 2.7%, boosted by increased production of potash, diamonds, coal and certain metals. Oil and gas exploration continued to expand after the surge in 2003, triggered by high energy prices.

Despite strong growth in labour income, personal saving continued to plummet, as growth in spending outstripped income growth. The saving rate fell to the lowest level on record since the 1930s. With sustained robust growth in residential construction, personal sector net borrowing continued to climb.

The combined surplus of all levels of government (on a national accounts basis) swelled to $17 billion in 2004, with the federal surplus accounting for the bulk of this amount.

Exports rebound despite strength in the dollar

Canadian exports climbed 4.9%, reversing the 2.4% drop in 2003. The increase occurred primarily in the first half of the year, with declines in the third and fourth quarters. Imports grew more rapidly (+8.2%), leading to a significant reduction in Canada's trade balance.

Exports of goods grew 5.2%, with automotive products, machinery and equipment and industrial goods and materials contributing most of the increase. Exports of services bounced back from a decline in 2003, growing 2.7%. Travel and transportation services jumped 10.5% and 11.9% respectively, returning to pre-SARS levels.

Manufacturers boost production

Manufacturers' output rose by 3.9% after a flat 2003. Increases spanned virtually all categories, with strong gains in transportation equipment, chemical products and machinery production. The manufacturing of information and communication technologies (ICT) products rebounded (+12.0%) after three consecutive annual declines. Production of industrial chemicals was up sharply, while the pharmaceutical industry had a second year of moderate growth after a period of stellar expansion. Textiles, leather products and clothing were weak spots in manufacturing, as the reduction of trade barriers and fierce competition from Asian producers continued to dampen output.

Businesses invest heavily in machinery and equipment

Business capital spending in machinery and equipment surged 9.4% in 2004, the highest increase since 1999. Imports rose in tandem, as Canadian businesses took advantage of the increased purchasing power of the strong dollar to buy investment goods from outside the country.

Investment in computers and other office equipment soared for the second consecutive year (+19.7%), and telecommunications equipment investment jumped 20% following three annual declines. Industrial machinery, trucks, other transportation equipment and agricultural equipment were also strong.

Business investment in non-residential structures maintained the more modest 1.0% growth of the previous year. Annual growth in machinery and equipment purchases has outstripped non-residential construction investment for the past three years, suggesting that firms are favouring efficiency-enhancing investments over those that expand capacity.

National saving expands

The combined saving of all sectors of the economy expanded 12.3% in 2004, following 15.3% growth in the previous year. The national saving rate (national saving as a proportion of net national income) increased to 8.0%. While households reduced saving and increased borrowing in the face of low interest rates and improved asset values, the saving of corporations and governments swelled to more than offset this drop.

Corporate profits skyrocket

Corporate profits soared in 2004, accelerating to 17.7% growth. Robust gains were posted in the first two quarters, but growth moderated in the latter half of the year. Profits have gained considerable momentum for the past three years, after a drop in 2001.

Undistributed corporate profits climbed nearly 30% in 2004. In addition to robust capital spending and stepped-up inventory accumulation, the corporate sector strengthened its net lending position substantially to a record $81 billion.

Manufacturers rebounded strongly from a turbulent 2003, benefiting from hefty global demand and robust commodity prices. Wholesalers and retailers posted solid gains as profit margin rates continued to increase throughout the year, perhaps due to lower import costs associated with a strong dollar. Wholesalers of machinery and equipment and building materials fared particularly well. Production in the wholesale trade sector increased 6.2%, while retail activity posted a 3.9% gain.

Higher prices benefited revenues for the mining and oil and gas extraction industry, which stepped up production by 2.7%. Support activities for these industries increased 3.6% on top of strong gains in 2003. Banks and insurance companies enjoyed strong revenue gains, and the finance and insurance industry boosted activity by 4.8%.

On the down side, despite increased export volumes of automotive products, profits of auto manufacturers slipped significantly in the face of lower domestic sales, which have remained sluggish despite financing incentives offered by dealers and manufacturers.

Government surplus continues to rise

The combined government surplus of the federal, provincial and municipal governments more than doubled in 2004 (on a national accounts basis) to $17 billion. The federal level accounted for the bulk of this amount, as growth in revenues outpaced spending. Direct taxes from all levels increased 8.3%, with strong growth (+16.6%) in the portion coming from corporations and government business entreprises, parallel to rising profits. Personal income taxes increased 5.8%. Government current outlays moderated to 3.3% growth.

Federal government borrowing declined, with federal bond liabilities dropping sharply, reflecting the expanding surplus. Borrowing by other levels of government was up, particularly for the provinces, and a rise in long-term debt was slightly offset by a fall in short-term debt.

Personal saving falls further

Personal saving continued to plummet in 2004, shrinking 70%. Personal income rose 4.1%, while outlays posted a stronger 4.9% increase (in nominal terms). Personal saving has been trending downward since the early 1990s, and recent declines have reduced it to one-tenth of its 2001 level. At 0.4%, the 2004 saving rate was the lowest on record since the 1930s.

Consumer spending grew 3.5% in real terms, with spending on semi-durable goods increasing strongly. Low interest rates continued to stimulate purchases of durable goods and housing investment remained robust, advancing 8.6% in 2004.

Household borrowing soared to a record $53 billion, and the ratio of household debt to personal disposable income climbed to 105.8% by the fourth quarter. Household borrowing was led by continued demand for mortgage credit, and consumer credit borrowing remained high. Since interest rates are low, credit is more affordable to consumers, and despite strong growth in household debt, servicing charges have not increased in relation to income.

Detailed analysis and tables

More detailed analysis on today's releases from the national accounts, including additional charts and tables, can be found online in the fourth quarter 2004 issue of Canadian Economic Accounts Quarterly Review, Vol. 3, no. 4 (13-010-XIE, free). From the Our products and services page, under Browse our Internet publications, choose Free, then National accounts.

Products, services and contact information

Gross domestic product by industry

Available on CANSIM: tables 379-0017 to 379-0022.

Definitions, data sources and methods: survey numbers, including related surveys, 1301 and 1302.

The December 2004 issue of Gross Domestic Product by Industry, Vol. 18, no. 12 (15-001-XIE, $12/$118) is now available. A print-on-demand version is available at a different price.

For general information or to order data, contact Yolande Chantigny (1-800-887-IMAD; imad@statcan.gc.ca). To enquire about the concepts, methods or data quality of this release, contact Bernard Lefrançois (613-951-3622; imad@statcan.gc.ca), Industry Measures and Analysis Division.

National economic and financial accounts

Available on CANSIM: tables 378-0001, 378-0002, 380-0001 to 380-0017, 380-0019 to 380-0035, 380-0056, 380-0059 and 382-0006.

Definitions, data sources and methods: survey numbers, including related surveys, 1804, 1901 and 2602.

The fourth quarter 2004 issue of National Income and Expenditure Accounts, Quarterly Estimates (13-001-XIB, $36/$117) will soon be available. A print-on-demand version is available at a different price.

Detailed printed tables of unadjusted and seasonally adjusted quarterly income and expenditure accounts (13-001-PPB, $54/$193), financial flow accounts (13-014-PPB, $54/$193) and estimates of labour income (13F0016XPB, $22/$70), including supplementary analytical tables and charts are now available.

At 8:30 am on release day, the complete seasonally adjusted quarterly income and expenditure accounts, financial flow accounts, and monthly estimates of labour income data sets can be obtained on computer diskette. The diskettes (13-001-DDB, $134/$535; 13-014-DDB, $321/$1284; and 13F0016DDB, $134/$535) can also be purchased at a lower cost seven business days after the official release date (13-001-XDB, $27/$107; 13-014-XDB, $65/$257; and 13F0016XDB, $27/$107). To purchase any of these products, contact Client Services (613-951-3810; iead-info-dcrd@statcan.gc.ca), Income and Expenditure Accounts Division.

For more information, or to enquire about the concepts, methods or data quality of this release, contact the information officer (613-951-3640), Income and Expenditure Accounts Division.