11-010-XIB
Canadian Economic Observer
January 2008

Summary table - key indicators

Overview*

The initial performance of the economy with an exchange rate above parity with the US dollar was positive. Output growth was steady in October, while employment rose 0.8% in the fourth quarter despite a softening in December.

Output growth was driven by wholesale and retail trade, both of which appear to have benefited from lower import prices as the loonie appreciated. Import prices tumbled 5% in October, bringing their drop so far this year to over 11%.

Conversely, the soaring loonie has not hampered either export volumes or manufacturing early in the fourth quarter. Both increased in October, after weakening over the summer. The exchange rate has crimped prices and earnings of manufacturing exports.

Since January 2007, year-over-year growth in real GDP has accelerated from 1.8% to 2.8%. All industries expanded, except the primary sector (where incomes still remain high thanks to buoyant prices for oil, metals and grains). Wholesale trade was the fastest growing industry, up 9%, reflecting an 11% gain in the volume of imports. Retailers were next at 6%, followed by construction and a slew of personal and business services between 3% and 4%. Manufacturing was up 1.2%, a major reversal from a drop of nearly 4% at the turn of the year. Capital goods and autos led this turnaround, while the clothing and forestry-related sectors continued to post hefty losses.

Despite the buoyancy of output and employment early in the fourth quarter, there were signs that the economy could slow entering the new year. The composite leading index decelerated in the last two months, mostly due to weak US demand for manufactured goods. This slack was offset by continued buoyant gains in consumer spending and housing in Canada.

Labour markets

Employment dipped 0.1% in December, after three straight large gains totalling 1%. Hours worked fell more due to a large winter storm in eastern Canada. With an offsetting decrease in the labour force, the unemployment rate was unchanged at 5.9%.

Goods-producing industries continued to shed jobs. Manufacturing fell another 33,000, bringing their loss for the year to 6.2%. Agriculture also posted a drop of 23,000. These losses were partly offset by sharp gains for natural resources and construction.

Services grew marginally, leaving employment up 3.3% from a year-earlier. The goods-handling industries in trade and transportation led the monthly increase, following their recent gains in GDP. The public sector also expanded, while finance and business services were sluggish.

Ontario and Quebec, the most affected by heavy snow, posted the largest drop in employment. Ontario was hampered by losses in manufacturing, which offset increases in trade and transportation. Conversely, Quebec’s weakness was in services, which offset a small rebound in manufacturing. Still, factories in Quebec cut jobs faster than Ontario over the last 12 months, notably in clothing and forestry products. Alberta’s labour market remained the strongest in Canada, with an increase in December leaving employment 4.3% ahead of December 2006. Natural resources and trade led these gains. While BC’s construction industry continued to boom, this was offset by losses in health and education and manufacturing in December.

Leading indicators

The composite leading index was unchanged for a second straight month in November, after October was revised down from a preliminary estimate of 0.1% growth. These were the first months without growth since July 2001. Ongoing weakness in export demand for manufactured goods was reinforced by a drop in the stock market in mid-November. Consumers remained the major source of growth, reflecting strong labour market conditions.

Consumer spending continued to expand, led by furniture and appliance sales. Purchases of most other durable goods also increased, except for a drop in auto sales. The decline of the housing index began to moderate. Existing home sales pulled out of a 3-month slump, while housing starts stabilized thanks to more ground-breaking on single-family homes. Services employment was supported by gains in both the personal and business components.

Two of the three manufacturing components posted decreases. New orders fell the most, as declines for autos and lumber offset continued strength in capital goods. The ratio of shipments to inventories edged down. While shipments posted their second gain in three months, inventories rose faster. The average workweek in factories stabilized over the summer.

The US leading indicator turned down by 0.2%. This index has fallen or been unchanged in eight of the last nine months. While this has been a poor index of growth in the US economy (real GDP grew at an annual rate of 5% in the third quarter), it has reflected the slump in US demand for our exports. Still, total exports have risen so far in 2007 due to higher commodity shipments overseas, which outweighed lower exports to the US.

Output

Real GDP rose 0.2% in October, its sixth straight increase. Wholesaling continued to lead growth, up 1.5% for its sixth advance in a row. Some of the gain reflected the recent surge of imports of consumer and business goods (the loonie hit a record high during October). Some other goods-handling industries benefited from these gains, notably water and air transport. But overall transportation shrank, as high energy prices discouraged surface transportation and pipeline deliveries fell.

Most other services posted steady growth. Financial activity remained buoyant, notably at banks. Consumer spending rose across the board – retailing, recreation, accommodation and food, and personal services. Government and business services also posted steady gains.

Manufacturing output rebounded almost 1% after back-to-back declines. Durable goods led the recovery, notably the auto industry. But output has been consistently strong recently in several other industries, notably aerospace and shipbuilding. Conversely, output of non-durables fell for a third straight month. This reflected steady losses in clothing and pulp and paper, as well as increased maintenance at oil refineries.

While construction output rose for the sixth straight month, growth slowed to just 0.1%. Homebuilding posted its largest drop in over a year, with starts returning to more normal levels after a burst of projects in September. Non-residential projects grew steadily.

The primary sector trimmed output across the board. Energy production fell the most, reflecting hefty cuts in natural gas, where prices remained weak. Low prices also discouraged forestry output, while the volatile mining industry turned down. These weak industries co-exist with commodities that have profited the most from booming prices, including oil, metals and non-metallic mining.

Household demand

Lower prices helped to push up the volume of retail sales by 0.5% in October. Retailers discounted prices by 0.4%, their second large drop in the past three months. Sales volume rose fastest for those durable goods whose prices fell the most.

Auto and furniture and appliance sales both rose over 1%. Trucks led the increase in autos, surging over 5% as prices were cut 4% (more than offsetting the attempt to raise prices for the new model year in September). Car sales fell slightly. Because truck prices are much higher than car prices ($39,109 versus $25,721), the shift in consumer spending from cars to trucks helps explain why spending on autos rose even as unit sales fell slightly.

Spending on other durable goods rose moderately, notably for computers and electronics where prices continued their year-long decline. Clothing purchases fell as the heavy discounting in September came to an end. Mild weather in October reduced home heating bills, freeing up discretionary purchasing power.

Housing starts rose to an annual rate of 228,000 units in November. Ground-breaking on single-family homes jumped 13%, more than recouping declines in the previous two months. Starts of multiple units returned to more normal levels after an unusually large number of new projects began in September. Existing home sales in November rose for a second straight month, leaving sales easily within reach of shattering their record high set in 2005.

Merchandise trade

Strong volume increases for exports and imports were offset by price declines as the Canadian dollar continued to gather strength in October. Overall, exports slipped 0.5% while imports fell back 2%, widening the trade deficit to $3.3 billion.

A 1.9% gain in export volumes, led by machinery, autos and a rare gain in forestry, was offset by a slightly larger drop in prices. The decline in import prices was more pronounced, falling 4.6% to counteract the 2.7% rise in volumes. Machinery and autos, accompanied by other consumer goods explained the growth in import volumes.

Imports of machinery and equipment eked out a 0.3% gain, the only sector to do so, with a strong gain in volumes overpowering lower prices. Machinery and equipment volumes rose 3% to a new monthly record in October. Exports of machinery and equipment also expanded on the strength of aerospace.

Both values and volumes for exports and imports for January to October 2007 were higher than the same months in 2006. This speaks to the strength of export values in early 2007, followed by a gradual downward trend for the remainder of the year. Most of the drop originated in prices as volumes stabilized at a high level.

Values and volumes for all import and export sectors are also up year-to-date, with the exception of auto and forestry exports. Exports of industrial goods and agricultural goods have made extensive gains over the year as prices have hit record highs. Year-to-date, industrial good exports were 14% higher than 2006, while agricultural receipts were 11% above 2006.

Prices

Consumer prices rose 0.4% between October and November, their largest monthly increase since the spring. However, the year-over-year rate of inflation was little changed at 2.5%.

Energy prices, notably gasoline, drove the overall increase. Prices for most other goods were restrained by lower import prices. This was most evident in price cuts for clothing and a number of durable goods.

As well, the stronger loonie has insulated Canadians from the worldwide upsurge in food prices in the past year. Driven by higher prices for grains and corn, food inflation in the euro-zone was 4.3% in November, 5.1% in the UK and 5.4% in the US. In Canada, the cost of groceries was up only 0.6%. Bakery and cereal products led the increase, while the supply management system produced increases for poultry, dairy products and eggs. These increases were offset by drops of 6% and 11% for fresh fruit and vegetables (where imports dominate by November); as recently as June, their prices were rising nearly 5%. There were also small declines for other foods such as coffee, fish and red meat.

The cost of most services continued to climb, especially for owning a home. Prices rose moderately for most other services, ranging from personal and household to financial and communications. Transportation was an exception, reflecting lower air fares.

Prices for manufactured goods posted their first increase after six straight declines. Only 7 of 21 commodities saw prices drop, a reflection that the intense downward pressure on prices from the rising loonie was moderating as the exchange rate began to stabilize around parity with the US dollar.

Commodity prices were little changed in December. Oil prices edged down, giving consumers a temporary respite before surging to a record US$100 a barrel early in the new year. Food prices were inflated by more increases for wheat and corn, while gold was the only metal to shine.

Financial markets

The Canadian dollar closed a tumultuous year just above parity with the US dollar, a gain of 17% from 85.7 cents (US) at the end of 2006. The loonie also rose against all other major currencies, both in December and for the whole year.

Short-term interest rates fell 25 basis points after a similar cut in the Bank Rate. This was the first drop in the Bank Rate since 2004. Longer-term rates edged up, except for government bonds.

Firms continued to have ready access to business credit. Short-term credit rose another 1.1% in November. More bank loans offset continued weakness in the market for commercial paper. As well, net new bond issues surpassed $5 billion for only the second time this year. Still, this did not keep up with the $5.5 billion of equity issues. Household credit demand also grew steadily.

The stock market rebounded 1% in December, after a sharp drop the month before. Energy posted the only significant increase, while metals and consumer stocks stabilized after large declines in November. Financial stocks continued their slide amid higher estimates of exposure to losses in the US subprime mortgage market.

Regional economies

British Columbia’s economy remained tightly harnessed to its strengths in recent months. Shipments in October recorded their strongest gain since April (1.9%), led by metals, machinery, chemical products and paper. The province remained busy in the run up to the Olympic Games. Employment rose 1.1% in November due to construction, transportation and recreation, reflecting ongoing construction of ski resorts and the Olympic village. Continued high demand for housing lifted housing starts in November to their highest level since August 1993. Retail sales continued their gradual increase, up 0.2%.

Strong growth in labour income (2.2%) also contributed to a 0.4% increase in retail sales in the Prairie Provinces, even though prices fell by more than 2% between July and October.

As for BC, manufacturing was also a source of growth in Quebec. After a weak third quarter, shipments rebounded in October, led by the sharpest rise in transportation equipment since March. Quebec’s aerospace industry is in full flight, shipping $1.3 billion more so far this year than in the same period last year, to set a new record. The rebound in this industry is due to major export orders: in October, it moved into first place in provincial exports ahead of aluminium as a result of sales to the US and to the United Arab Emirates. Aerospace imports in October rose from $262 million to $442 million in the past year.

In Ontario, non‑residential construction continued strong in October with permits remaining close to the $1 billion mark. Its 31.5% increase to date this year, fuelled by office building projects, leads the country, ahead of Alberta’s 24.4% jump. This rebound occurred as the province posted its strongest increase in service sector employment since 2003. Housing also remained close to their highs for the year. Retail sales declined, but as in the other provinces the price of goods fell, which reduced sales in current dollars. The price of goods declined for the fifth straight month in October. These gains continued to be offset by weakness in the forestry sector, evident in both shipments and employment. Forestry employment is down by almost a quarter in the past year.

International economies

In the United States, the housing slump continued, prompting the Federal Reserve to lower its funds rate to 4.25% in December. Housing permits, starts and new home sales were all down in November, offering little indication of a bottoming-out of housing (already nearly 50% below its peak in 2005). Housing permits decreased 1.5% while housing starts fell 3.7%, with a gain in multi-family units failing to offset the larger drop in single family homes. New home sales retreated 9%. Existing home sales were the outlier, rising 0.4% after their free-fall flattened out in October.

The rest of the economy stood in contrast to the ailing housing sector, with household spending, exports and to a lesser extent industrial production all strengthening. Retail sales rose 1.2% in November, following a more muted climb in October. Gains were widespread, with purchases up at clothing, electronics, building supply and grocery stores. Early indicators point to steady spending in December, notably in chain store and auto sales.

Exports continued to thrive, rising 0.9% in October. Leading growth were capital goods, up $1.3 billion on the strength of civilian aircraft. The trade deficit did widen slightly as import growth outpaced export growth for the first month since March, the result of higher-priced energy imports picking up. Year-to-date export gains were widespread among machinery, transportation equipment, agricultural products, notably wheat and soybeans, chemicals and plastics, and pharmaceutical products. Overall, the gains in exports in 2006 and 2007 have offset the loss to GDP from housing almost dollar for dollar.

Industrial production also rose, up 0.3% in November, with manufactured goods managing a 0.4% gain and output of business equipment up 0.9%. Unlike retail sales and exports, which have registered consistent gains, this growth follows a setback in October. Also, new orders for durable goods, which inched up after three consecutive declines, indicate a softening in demand outside of transportation equipment. In a similar vein, employment slowed in December, pushing the unemployment rate to 5.0%.

Industrial production in the euro-zone economy recovered slightly in October. Although energy output dipped, both capital and intermediate goods rebounded. New orders were strong as every major sector except machinery posted gains. The external trade surplus almost doubled as the energy deficit narrowed and the surplus for machinery and autos widened. Exports to the US and Japan remained weak, but continued to expand to Russia, India and China. Increased imports from China, however, further widened that trade deficit. Consumers sharply reined in spending after several months of stagnation as prices continued to climb, hitting an annual rate of 3.1% in November. The unemployment rate eased to 7.2%.

Industrial production fell in Germany after being flat in September. New orders strengthened, however, following several months of weakness, indicating output should recover. Foreign demand continued to boost exports despite the rising euro, while consumers kept their wallets closed, notwithstanding the impending holiday season. Real retail sales fell 3.3% in October, while prices rose at an annual rate of 3.3% in November.

Output picked up in France in October and new orders rose for the first time since July, fuelled by demand for transport equipment. Exports rose marginally, but France still registered the third largest deficit in the euro-zone for the month. Consumer demand was weak as prices continued to climb.

British industrial production rebounded in October, recouping all of its 0.5% loss the month before. Export demand remained dampened by the strong currency, and while imports also waned, the external trade deficit remained the largest in the euro-zone. Consumer spending was flat after several months of sluggishness, prompting the Bank of England to lower interest rates at year-end.

Japan’s real GDP in the third quarter was revised down to 0.4% growth, due to weaker business investment. Housing demand continued to plummet in November, down for the fifth straight month, as tighter regulations continued to reverberate through the sector. Unemployment eased to 3.8% in November.

Note

* Based on data available on January 11; all data references are in current dollars unless otherwise stated.