11-010-XIB
Canadian Economic Observer
January 2005

Summary Table - Key Indicators

Overview*

The rapid rise in the exchange rate resulted in output stalling in the autumn, much as it did during the initial surge of the loonie early in 2003. Manufacturing exports bore the brunt of the weakness, while households increasingly took the lead in growth. But job growth resumed at year-end, while the dollar retreated from its recent peak.

Factory output in October edged down for a second straight month. With falling prices compounding the squeeze on profit margins, manufacturers continued to compress their workforce. The pressure to raise competitiveness also led to a 20% rise in the volume of imports of machinery and equipment over the past year (also encouraged by lower prices). But other measures of business spending showed a hesitancy in the face of the lurch in the exchange rate: non-residential building remained in a tail-spin, while demand for business services softened in recent months.

Conversely, household spending continued to strengthen even as industry output slowed. Retail sales posted a fifth straight gain in October, and auto sales remained high into November. More jobs and lower gasoline prices augur a good Christmas sales season. Housing starts and sales also strengthened in November. The buoyancy of housing in Canada contrasts with a sharp decline in the US, where interest rates rose again.

Labour Markets

Employment ended the year with a 0.2% gain, after a pause in November. All of the increase was in full-time positions among adults. With the labour force shrinking for the first time since July, this pushed the unemployment rate down from 7.3% to 7.0%, the lowest since May 2001.

The increase in jobs was about equally-split between goods and services. Goods were driven by large gains in the primary sector and small increases for construction. Factory jobs levelled off after four straight declines. The advance in services was widespread. Business services and accommodation and food pulled out of their recent slump. Retail trade fell sharply, perhaps because retailers stepped up Christmas hiring in previous months in response to strong sales.

Regionally, BC captured nearly half the increase in jobs. Its economy has doubled the 2.1% job increase in the rest of Canada since September 2003, led by construction, finance and business services. Over this period, its unemployment rate fell from 8.9% (a full point above Canada’s) to 6.1%, a point below the national total.

Elsewhere, Alberta and Newfoundland posted more jobs, benefiting from higher oil prices. Job growth remained scarce in central Canada. Ontario’s manufacturing base continued to shrink. In Quebec, factory jobs rose (firms are less dependent on exports to the US than Ontario), but this was offset by widespread losses in services.

Leading indicators

The steady slowdown in its growth that began in July culminated with the composite index posting no change in November, the first time it has not risen since May 2003. Most of the weakness originated in the US leading indicator and Canadian manufacturing. Consumer spending remained the major source of growth. Overall, six of the ten components rose in November, the same as in October.

Manufacturers faced a worsening decline in export demand, with the Canadian dollar up sharply just as the world economy slowed. They responded by again cutting their labour needs: the average workweek resumed its slide while the loss of factory jobs accelerated. Shipments continued to rise, but a comparable increase in inventories stopped the shipments-to-stocks ratio from improving for the second month in a row. New orders posted their second-smallest gain in the last 13 months.

The US leading indicator also fell for the second straight month. The components related to household spending led the decline. However, only three of the ten components posted gains, notably investment. But the strength of investment in the US benefits China more than Canada. American imports of capital goods from China have risen by a third so far this year while Canada has seen no growth. In 1990, the US imported six times more capital goods from Canada than China: this has been reversed so far this decade, with China’s exports three times as large as Canada’s.

Housing starts in Canada rebounded in November from their drop in October, rising to their third highest level of the year. Starts are on track for their best year since 1987. Housing starts on the prairies are close to a 25-year high, fuelled by the income growth from the natural resources sector. Quebec and BC also saw gains, although some of their newly-built homes have gone unsold. Existing home sales also recovered in November, hitting record highs in Calgary, Edmonton and Winnipeg. Overall, the 4-month old downward trend in the housing index slowed sharply from 1.7% in October to 0.8% in November.

With housing still strong, furniture and appliances sales advanced 0.8%, the best in five months. Sales of other durable goods continued to firm, with the rising Canadian dollar pushing down import prices. A small gain in the trend of services employment suggests that demand for personal services is also rising.

The stock market recorded a third straight gain. Resource issues again led the way, but consumer stocks also rose.

Output

Real GDP stalled in September and October, the poorest 2-month showing since April and May 2003 (excluding the blackout in Ontario). As in 2003, a sharp slowdown in the underlying trend of the economy accompanying a surge in the exchange rate was compounded by a number of temporary events (SARS and BSE in 2003, labour disputes this autumn).

The rising loonie dampened manufacturing activity over the last two months. Capital goods industries were the weakest sector, as sluggish domestic demand accompanied a loss of import share in the US market. Losses for computers and machinery were particularly marked. Other export industries were mixed, with a rebound for autos and lumber offsetting declines for paper and metals.

The primary sector received a boost from the boom in energy and the settlement of a strike in iron ore. The latter also stimulated water transport, but most other goods-handling industries were sluggish. Construction activity fell, with non-residential building posting its seventh straight monthly drop of a least 1%.

Services did well to eke out a 0.1% gain despite labour disputes in the federal government and the NHL. Instead, consumers shifted their spending to gambling, travelling and retail goods. Business services remained weak after a dip in September, perhaps as firms re-evaluated spending plans in light of the exchange rate.

Household Demand

Retail sales volume rose 1% in October as consumer spending increased for the fifth straight month. Higher auto sales contributed about two-thirds of the advance. Auto sales in November retained about half of this increase, despite the end of major incentives to purchase.

The gain in non-automotive sales was led by other durable goods. Computers and electronics remained the focal point of consumer interest, while furniture and appliances levelled off after strong advances over the summer. Consumers trimmed consumption of clothing and gasoline in the face of large price hikes in October, helping to set the table for price cuts in November.

Housing starts snapped out of a 2-month slump with a 7% gain in November. All of the increase originated in multiple units, which had accounted for most of the weakness over the preceding two months. The apartment vacancy rate rose to 2.8% in the annual survey taken every October, up from 2.2% in 2003 and the low of 1.1% in 2001. New home sales continued to hit new highs in November, although the brisk pace of new construction also kept the number of vacant units rising slowly as well. Existing home sales also picked up, led by Toronto and Alberta.

Merchandise trade

Exports fell for a fourth consecutive month in October, with all of the 1.1% drop originating in lower shipments to the US. With imports rising 1%, the trade surplus narrowed again, to $4.4 billion compared with its recent high of $7.3 billion in June.

The rising Canadian dollar continued to dampen external trade, flows, pushing down both export and import prices by over 1% in October. Export prices were nearly 3% below their early-summer high, with declines for manufactured goods, lumber and food products outweighing the jump in energy prices. Import prices fell even more, off 4%, due to across-the-board declines for manufactured goods.

Natural resources were behind the drop in export earnings. Lumber was hit particularly hard by lower prices as the US market slowed. Metals also saw prices retreat. Energy did not rise despite higher prices, as the volume of gas shipped to the US fell.

Exports of manufactured goods recovered slightly from their recent losses. Machinery and equipment was boosted by higher aircraft shipments, while trucks lifted the auto sector. Consumer goods slipped for the fourth straight month.

Import volume jumped 2%, partly in response to another drop in prices. Machinery and equipment purchases rose 3% in volume, and 20% in the past year (the most since the height of the ICT boom in 2002). Aircraft and computers led the increase. Imports of consumer goods also rose strongly, led by electronic goods. Energy imports hit new highs as oil prices soared. Autos were the one import sector to weaken, as the pick-up in auto sales largely excluded models built overseas.

Prices

The consumer price index rose 0.3% between October and November after a 0.4% increase the month before. These were the largest back-to-back gains since the spring surge in gasoline prices, and lifted the annual inflation rate to 2.4%. Excluding energy, inflation was stable at 1.6%.

There was a marked shift in the sectors where prices rose or fell. Led by higher auto prices, durable goods led the monthly hike in prices. The increase for autos reflected the expiry of financial incentives offered over the summer, returning prices essentially to where they had been the previous November. Durable goods prices had fallen every month since May, and most non-automotive prices continued to drop in November. Conversely, gasoline prices tumbled 5% to reverse the previous month’s increase, but remained 18% above last year. Prices fell in every province except PEI, where they are legislated: over the past year, PEI posted the largest increase in gasoline prices, up 27%. Another moderating factor was lower prices for clothing, as retailers partly reversed early autumn increases.

Commodity prices rebounded in December. Energy prices firmed after a large drop as oil retreated from its record high the month before, while a cold snap boosted natural gas. Prices for industrial goods picked up, led by metals, which approached their highs for the year.

Financial markets

The Canadian dollar backed off its recent high of nearly 85 cents (US), ending the year near 82 cents. The dip accompanied another hike in US short-term rates, which was not matched by Canada. Longer-term bond and mortgage rates continued to fall slowly.

The stock market rose another 2%, its fourth straight solid advance. Growth was increasingly concentrated in consumer stocks, a confidence borne out by the recent strength in retail sales. Metals and energy held on to the large gains posted in November. The recent increase in both stock and bond prices accompanied a sharp rise in corporate fund-raising on these markets in November.

The rising exchange rate was the major factor behind the slowdown in the growth of net national worth in the third quarter. The higher dollar reduced the value of assets denominated in foreign currencies, pushing up our net external debt. Domestic wealth grew steadily. Corporations and governments continued to use their surpluses to pay down debt. Rising house prices further boosted household wealth.

Regional economy

The Ontario economy began the fourth quarter on almost as weak a note as it ended the third quarter. In particular, exports continued to decline in October, falling below the previous year’s level for the first time since February. Apart from the Atlantic region, only in Ontario did housing starts fall in November, the fourth dip in five months. Retail sales continued to see-saw, rebounding after a drop in September. However, non-residential building permits were up, led by the commercial sector. Reflecting weak export demand and mixed domestic demand, manufacturing shipments registered their first back-to-back losses since October and November 2003, with autos leading the decline. Construction goods were another source of weakness. Textiles also continued to decline. Even metals, one of the few sectors to advance in September, posted a decrease.

In the rest of Canada, the picture was brighter. Quebec contrasted the most with Ontario, showing broad-based improvement. Domestic demand showed impressive strength, following the growth of labour income in September, the biggest since July 2003. Housing remained buoyant, with housing starts surging to 50,700 units in November, their second best month in more than a decade. Sales of existing homes stayed at their October level, which was down sharply compared to September and August. Retail sales registered the strongest of six straight increases. Even exports firmed up slightly, with aircraft putting an end to its losses from the summer and machinery rising slightly. Quebec was the only region in Canada to register an increase in manufacturing shipments. Forestry was one sector which weakened.

In the West, the economy was little changed. Household demand, which led the nation at the end of the summer, remained strong. On the Prairies, retail sales climbed 1.8% on the heels of a 0.9% gain in September. British Columbia also continued to post strong sales growth. In both regions, housing starts were up sharply. Exports, which led growth earlier in the year, remained mixed. They were largely responsible for the largest decrease in shipments in British Columbia since October 2003, especially to forestry products. Shipments were essentially unchanged on the Prairies.

International economies

In the United States, growth continued to shift from household demand to the industrial sector. However, this did not stop the trade deficit from hitting another record high, fuelled by oil prices.

Retail sales rose only 0.1% in November after a 0.8% gain in October. Auto sales fell in both months, while the growth of non-auto sales eased to 0.5%. The housing market retreated from its recent peak. New home sales fell 12% in November to their second-lowest level of the year. The drop was concentrated in a 53% loss for the most expensive homes (costing over $300,000). Housing starts dipped 13% in November to 1.8 million units, the lowest level in over year. All regions posted double-digit declines. One good sign for housing was that houses authorized by permits but not yet started hit a new high.

Industrial production rose 0.3% after a 0.6% gain in October. Growth was dominated by business equipment, running 10% ahead of last year’s level, and new orders for capital goods remained strong. But output of consumer goods stalled, with auto assemblies falling.

The trade deficit for goods and services widened from $51 billion in September to $55.5 billion in October. While exports continue to recover slowly, helped by the lower US dollar, imports jumped $5.1 billion, with oil up $2.6 billion and consumer goods $1.6 billion.

Industrial output fell in the euro-zone in October. Declines occurred in every sector, led by energy and consumer durable goods. New orders eked out a slight gain after a large rebound in September. Machinery and equipment orders recovered, while transport equipment retreated once again. Retail sales rebounded after three consecutive monthly decreases. Prices rose 2.2% in November from last year, down slightly from October’s rate as energy prices eased. The euro continued to hit record highs against the dollar in the month and the ECB’s interest rate remained at its historic low of 2%. The unemployment rate was stable at 8.9%.

The external trade surplus narrowed in October as growth in the energy deficit outweighed surpluses for machinery, autos and chemicals. Trade with China continued to expand, with imports up 21% and exports 18%. With trade doubling between 1999 and 2003, China is now second only to the US as the largest trade partner of the EU25.

Industrial production picked up in Germany in October, after being essentially flat the month before. New orders also gained strength, despite some weakening in exports. Consumer spending rebounded, continuing its see-saw pattern of recent months. The external trade surplus narrowed in October as exports were flat and imports inched slightly upwards. Prices were stable, as inflation slowed to an annual rate of 2% in November.

Output retrenched in France in October, coinciding with a retreat in new orders after strong gains the month before. Consumer spending remained the engine of growth, although recent increases in retail sales have moderated. Imports were upbeat in October, while exports continued to wane. The unemployment rate was unchanged at 9.5%.

Japan’s economy weakened again, dampened by downward revisions to consumer spending. Using a new method to eliminate distortions caused by rapidly falling prices of high-tech items, real GDP was essentially flat in the third quarter after a 0.2% decline (compared with the original estimate of 0.3% growth) in the second. Export demand continued to slow and business investment picked up, while imports soared due to high energy prices.

Note

* Based on data available on January 7; all data references are in current dollars unless otherwise stated.