11-010-XIB
Canadian Economic Observer
January 2007

Summary table - key indicators

Overview*

The economy continued to slow in the fall, with GDP unchanged in October after contracting in September. Manufacturing, notably autos, was the weakest sector, while slower auto sales also dampened retail sales.

Several signs at year end were indicating that the slump in GDP growth would not be prolonged. This was summarized by the sharp improvement in the leading indicator, whose growth in November nearly doubled to a six-month high. While components such as the stock market and consumer services remained strong, there was a significant turnaround in the leading indicator for the US. This has already begun to translate into higher orders for Canada’s manufactured goods. Manufacturers profit margins also received a boost from the loonie, which fell to a 12-month low early in 2007.

The US economy improved on a number of fronts. Retail sales strengthened in November, while an upturn in auto assemblies led a gain in industrial production. Falling energy prices triggered a sharp reduction in both the trade deficit and inflation. Most significantly, the US housing market at least temporarily stabilized, after provoking much of the US slowdown in 2006. Home sales posted back-to-back gains, helping to whittle down the large backlog of unsold homes, as households responded to lower house prices and mortgage rates.

The housing market in Canada also improved, with a second straight increase in both housing starts and sales in November. Household demand was encouraged by a continued buoyant labour market. Employment posted another modest gain in December, with factories increasing payrolls for a second straight month. This is consistent with the data in the leading indicators that suggested manufacturing activity was firming at year-end. The stock market also ended the year with a flourish, hitting another record to cap a fourth straight year of double-digit growth.

Labour markets

Labour market conditions ended the year on a high note, with employment up 0.4% in December and the unemployment rate equalling its record low of 6.1%. The increase in jobs was the most since May, although total hours worked were dampened by a further shift to part-time positions.

Employment growth was widespread. Manufacturing posted back-to-back increases for the first time since October 2004. Warm weather encouraged another rise in construction. Finance and business services capped a year of rapid growth with more gains, while education and health care buoyed public services.

Ontario led the advance in employment for a second straight month. While manufacturing jobs firmed at year-end, growth was led by construction and public services. Quebec and BC both rebounded from a small dip in November, the former due exclusively to services while construction and manufacturing led BC. Alberta ended the year with a slight decline, although jobs remain 6% ahead of last year. The Atlantic provinces were boosted by more growth in services in Nova Scotia and a rebound for natural resources in New Brunswick.

Leading indicators

The stock market hit a record high in November. Unlike recent months, growth diversified away from the energy and mining sectors, with investors leaving income trusts to search for dividend yields. High stock market prices and continued gains in housing prices kept household wealth growing at a healthy pace in the third quarter.

With solid gains in employment and wealth, consumer spending remained robust. Stronger sales of furniture and appliances as well as electronic goods offset slower auto sales. The housing index dipped for an eighth straight month, although higher starts of multiple units helped brake the rate of decline. Construction of multiples was particularly strong in Alberta, where housing is in short supply.

The most encouraging development was an improvement in US demand for manufactured goods. The US leading indicator edged up 0.1%, its first gain since May. This was reflected in an upturn in new orders for Canada’s manufactured goods. However, the turnaround in orders was not yet evident in shipments, where the worsening slump in the lumber and auto industries overtook the ability of firms to cut output. As a result, inventories rose for the first time in over a year, aggravating the drop in the ratio of shipments to inventories. The average workweek in manufacturing rebounded from a dip in October.

Output

A 10% drop in auto assemblies triggered much of the autumn weakness in manufacturing, with declines in an array of feeder industries such as steel, rubber, plastics and metal fabricating. These losses compounded the long-term shrinking trend for the clothing and lumber industries. Some offset was received from gains in refining petroleum and metals as well as increases for capital goods such as machinery and ICT goods.

The primary sector bounced back, led by metal mines and energy. Metal mines recovered from a large strike in September, while a rebound in gas prices gave a lift to energy output. Construction activity edged up, as strong gains in engineering projects offset small declines in home-building.

Services were flat for a second straight month. The slump in manufacturing exports hampered both wholesalers and transportation. Consumer spending also slowed, especially for retail goods and gambling. But financial and business services posted a third straight month of solid gains, reflecting the buoyancy of profits and the stock market. Government spending edged up, as increases for the provinces outweighed more cuts at the federal level.

Household Demand

Outlays for durable goods eased for the second straight month. Auto sales retrenched in both months, following strong demand in the summer just after the GST cut. Auto demand rebounded in November.

Outlays for other durable goods remained robust. Spending on large screen TVs again led the way. A firming housing market underpinned more gains for furniture and appliances.

Both housing sales and starts rose for a second straight month in November. The increase in starts, however, was confined to multiple units. The annual survey of the vacancy rate for apartments found a slight decline last year to 2.6%, mostly due to record low vacancies in Alberta. Construction in Alberta shifted to multiples to meet this demand, as well as a drop in demand for single-family homes after prices soared by nearly 50% in both Calgary and Edmonton.

Merchandise trade

The drop in exports was due to lower shipments to the US. Falling energy prices led the retreat. Lumber exports also slumped due to the weakness in the US housing market. Auto exports were inflated by the re-opening of a truck plant after retooling. As well, exports of manufactured goods received a lift from the lower value of the loonie, which helped boost prices.

Exports of industrial goods rose for the sixth straight month, fuelled by record prices for metals. Exports of metals nearly doubled in the past year, led by copper, nickel and zinc.

Imports edged up 0.4%, despite a 1% drop in prices (mostly energy). Imports of consumer and business goods remained strong. Machinery and equipment imports rose 1.2%, as strong growth for drilling and mining machinery was reinforced by a surge in imports of wind turbines (wind energy capacity in Canada doubled in 2006). Auto imports remained near their low for the year, as the slowdown in production lowered the demand for parts.

Prices

Prices of durable goods jumped 1%, their largest monthly increase in a year. Autos led the increase, reflecting the end of rebates to clear out last year’s models and price hikes for the new models. Prices for appliances and some electronic goods also edged up, after a long period of decline associated with the rising loonie. Clothing, another area where import prices had fallen sharply, also saw prices rise nearly 1%.

Food prices were boosted by meat and bread, the latter driven by the rising cost of wheat world-wide. Conversely, the upward pressure on housing prices began to ease, notably in Alberta which had fuelled much of the recent increases.

Commodity prices dipped in December. Energy prices led the retreat, notably natural gas where a warm start to winter in North America melted the recent rally in prices. Oil prices ended above US $61 a barrel, completing their fifth straight yearly increase. Metals prices overall remained strong, although copper slid to an 8-month low due to the slump in US auto and housing demand.

Financial markets

The Toronto stock market rose 1.2% to set another record in December, its third consecutive monthly advance. This left the market up 14.5% in 2006, its fourth straight year of double-digit growth. Mining and information technology led the monthly gain, as they had all year, while energy continued to slump as oil and gas prices softened.

The Canadian dollar fell below 87 cents (US) at year-end, its lowest level since the spring. Still, interest rates were little changed across the spectrum.

Regional economies

Quebec’s manufacturers continued to outperform the rest of the country, but consumers were the stingiest in Canada. Manufacturing shipments rose 1.2% in October, boosted by a surge in chemicals. Quebec’s 2.4% year-over-year gain in shipments led the nation. While lumber suffered large losses and oil refinery receipts fell, growth was sustained by primary metals and chemicals.

Conversely, retail sales in Quebec fell over 1% in both September and October, the worst in Canada. Partly, this reflects the slowest labour income growth of any region, up only 2.8% in the year to the third quarter (versus 4% in Ontario, 8% in BC and 9% for the prairies). As well, housing starts fell 12% in November, although their level remained above its average so far in 2006.

Economic conditions in BC were quite similar to Quebec, although labour income growth was stronger in BC. It matched Quebec in posting higher manufacturing shipments, with gains in construction and capital goods offsetting losses in lumber. And despite a dip in monthly housing starts, their level remains near recent highs. Retail sales were steady, compared with declines elsewhere, partly a reflection of a strong labour market. Labour income in construction and mining rose at a double-digit annual rate.

Growth on the prairies moderated in the autumn, after setting a torrid pace most of the year. Retail sales posted back-to-back declines for the first time in over a year. Lower oil prices led to a third straight drop in manufacturing shipments. Housing starts bounced back after four straight declines.

International economies

The trade deficit also appears to have bottomed out. The monthly shortfall fell to $59 billion in October, down $10 billion from the record set in August, led by lower prices for imported oil. But the terms of trade have also risen over the last three months due to higher export prices, notably agricultural products.

Industrial production rose 0.2% in November, its first gain in three months. Manufacturers led the way (despite the widely publicized dip below 50 in the ISM manufacturing index). Auto output rebounded 3.5% after sharp declines in September and October. Output of business equipment remained strong (although shipments were boosted by a rebound for computers and electronics after firms delayed buying new hardware until the new Microsoft Vista operating system was introduced in November). Construction materials remained the weakest sector of output.

Output was flat in the euro-zone in October as declines in energy and capital goods production offset gains elsewhere. New orders fell for the second straight month due to a large drop in transport equipment. Every other sector rebounded from declines the month before. External trade was brisk in October with export demand for chemicals, autos and machinery more than offsetting rising energy imports. The trade surplus with the US continued to increase, while deficits with China and Russia expanded further. Consumer spending recovered from its sudden drop in September, while the unemployment rate eased to 7.7% in November. The annual rate of inflation rose to 1.9%, spurring a rise in interest rates to a five-year high in December.

Industrial production continued to retrench in Germany, falling 1.4% in October, double its drop in the previous month. New orders also posted consecutive declines. Despite the appreciation in the euro, export demand remained strong. Exports rose a further 2.6% in October after surging the month before, putting Germany on track to remain the world’s top exporter of goods for the fourth year in a row. Consumer spending was lacklustre for the second straight month, despite an impending rise in the value-added tax in January. The October unemployment rate fell to 8.2%, the lowest since June 2002. However, much of the job gains have been temporary or low-paid. Inflation inched up to an annual rate of 1.5% in November.

Output remained sluggish in France in October, with industrial production down slightly for the second consecutive month. New orders continued their see-saw pattern, down 0.1% after a 2.3% surge in September. Exports continued to wane, falling 3.6% in October to leave France with the third-largest external trade deficit in the euro-zone. Consumers decided to open their wallets, boosting retail trade in October, even as inflation rose.

British industrial production fell in October after being flat since May. The rapid appreciation of the pound further dampened exports, leading to the largest external trade deficit in the euro-zone. Retail sales recovered in October, although inflation accelerated to 2.7% in November despite a 5-year high in interest rates. The unemployment rate fell unexpectedly for the first time in 18 months in November, down to 5.5%.

Real economic growth in Japan was revised down to 0.2% for the third quarter, its slowest pace since the end of 2004. Business investment rose 1.5%, half its rate in the second quarter, while consumer demand fell 0.9% due to weak incomes. Industrial output continued to trend up in October, while retail sales slowed after a strong summer.

India’s economy grew 9.2% year-over-year in the third quarter, fuelled by a surge in services and manufacturing output. It was the sixth quarter out of the past seven in which GDP growth exceeded 8%, prompting four interest rate hikes so far this year.

Note

* Based on data available on January 5; all data references are in current dollars unless otherwise stated.