11-010-XIB
Canadian Economic Observer
February 2005

Summary Table - Key Indicators

Overview*

Output and jobs slowed at the turn of the year. Employment in January was unchanged for the second time in three months, bracketing a 0.2% gain in December. Output edged up 0.2% in November after two months of little change.

Despite the recent slowdown, economic growth held up remarkably well in the second half of the year. Job growth matched the first half’s 0.7% increase, while GDP almost matched its 1.6% first-half pace. Manufacturers reined in both output and jobs after the dollar began its rapid ascent at mid-year. But other industries picked up the slack, notably mining, construction and trade. And the worst may be past for manufacturers, as a retreat in the Canadian dollar from its 12-year high in December was followed by an upturn in prices for manufactured goods and a levelling-off of employment in December and January.

Exports fell for a fifth straight month in November. The prices Canada receives for its exports have fallen steadily since June. The total drop was 5%, as double-digit declines for food, forestry and auto products were only partly offset by continuing high prices for energy and metals. As well, the latter two exports were hampered by strikes and supply disruptions.

The weakness in exports has been offset by gains in domestic spending. Despite a small setback in November, retail sales have strengthened significantly since June as consumers took advantage of low interest rates and bargain prices. Import prices for consumer goods have fallen 10% in the last six months, helping to moderate consumer prices. Firms also stepped up their purchases of imported machinery and equipment as prices declined. Business fund-raising accelerated sharply at year end, a possible indication of stronger investment plans for 2005.

The slowdown in Canada’s growth at year end contrasts with solid gains in the US, where real GDP rose nearly 1% in the fourth quarter to cap its best year since 1999 (the peak of the ICT bubble). This is even more remarkable in light of the rapid deterioration of the US trade balance. Business investment again led the way, while consumer spending growth was steady. These fourth-quarter gains may have been temporarily boosted by the expiry of tax incentives for investment at year end and Microsoft’s special dividend pay-out of nearly $100 billion.

Labour Markets

Employment was steady to start the new year, holding on to its 0.2% advance in December. Gains for adults offset losses for youths. The labour force was little changed, leaving the unemployment rate at 7.0%.

The private sector continued to expand, but this was offset by job cuts of 48,000 in the public sector. All the major provinces (BC, Alberta, Ontario and Quebec) trimmed public sector employees. Unlike the other three provinces, however, there was little growth in Ontario’s private sector, resulting in a sharp drop in total employment.

BC, Alberta and Quebec all posted job growth of about 2% over the past year. Growth in BC was heavily concentrated in construction (+26%), while Alberta was about evenly split between natural resources and construction. Growth in Quebec came from manufacturing and services (notably trade and finance). Ontario lagged all regions, with less than 1% year-over-year job growth. The stagnation of its large manufacturing base also weighed down goods-handling industries.

Leading indicators

The composite index turned up by 0.2% in December, after a slowdown every month since June culminated in no change in November. Six of the ten components rose in December, two more than in November. Manufacturing and services reinforced the steady growth of household demand, while the stock market strengthened further.

Household demand posted its strongest and most widespread gains in over two years, led by the booming housing market as well as steadily falling import prices and rising incomes. Furniture and appliance sales grew 0.9%, its largest gain in six months, raising annual growth to 10%. Sales of other durable goods advanced 1.1%, driven by autos. This rebound helped fuel the increase of 50,000 retail and wholesale jobs since last August, equivalent to about half of overall growth.

The housing index continued to hover near its 30-year high set in July, with only a small decline in housing starts and existing home sales. The housing market in BC remained the strongest in the country: housing starts rose again in response to falling vacancy rates over the past year in Victoria (from 1.1% to 0.6%) and Vancouver (from 2.0% to 1.3%). Vacancy rates rose in most other regions, notably in Ontario cities such as Ottawa (to 3.9%), Thunder Bay (5.0%) and Windsor (8.8%).

Manufacturing responded to the gains in domestic demand. New orders jumped 1% in volume, their largest increase in six months. The ratio of shipments to stocks levelled off after a drop in the previous month. The average workweek rose for the first time since May, while factory jobs firmed after four straight declines. Business services received a boost from large projects being planned in transportation and utilities.

The US leading indicator posted a third straight drop, but the rate of decline moderated. The stock market was up sharply, but unlike Canada growth in consumer stocks was lacklustre. Housing starts in November fell to their lowest level in over a year. Instead, the industrial sector moved to the forefront.

Output

Real GDP grew by 0.2% in November after virtually no gains in the previous two months. Higher energy output boosted mining, while services grew 0.3% thanks to finance, wholesaling and telecommunications.

Energy output received a lift from both oil and gas production and increased exploration and development as oil prices breached the US$ 50 per barrel level for the first time ever. Metal mining also continued to rebound, although this reflected mostly the continued recovery of iron ore from strikes rather than a response to high prices.

Manufacturing and construction were unchanged after declines the month before. Weak exports continued to dampen factory output, notably autos and lumber. 19% of manufacturers in January 2005 said inventories were too high, their most negative evaluation since mid-2003. But reports of shortages were the lowest in a year. Higher house-building triggered increased output of non-metallic minerals, notably concrete and cement. Another in a long string of declines in non-residential building pulled down overall construction, although rising permits point to a turnaround in its year-long slump.

The drop in international trade slowed transportation. Still, wholesalers posted an impressive gain, led by machinery and equipment. Business demand was mixed: increased borrowing and fund-raising by firms helped boost finance, but demand for business services remained sluggish. Increases in the public sector were offset by modest declines across the board for consumer services.

Household Demand

Retail sales volume fell by 0.4% in November, its first decline in six months. Most of the drop originated in slower auto sales, with weakness persisting into December, and a strike at liquor stores in Quebec. But large retailers reported good Christmas sales.

Non-auto sales edged up 0.1% in November. Hefty price discounts lured consumers into buying more clothing and computers, after declines the month before. This was offset by a drop in furniture and appliance sales.

The housing market slowed at year end. Starts retreated slightly to 234,400 units (at annual rates), still better than last year’s average. All of the drop was in multiple units, as ground-breaking on single-family homes held firm. New home sales also slowed. This helped to rein in the year-over-year rate of increase for new home prices to 5.3%, down from its high of 6.2% in June. Existing home sales also dipped at year end, continuing a slow descent that began in the summer.

Merchandise trade

The surging Canadian dollar continued to dampen cross-border trade. Exports fell for a fifth straight month, as both prices and the volume of shipments declined. Imports also retreated since June, mostly because of a drop in prices over this period. The weakness in imports continued in November, when the dollar hit a 12-year high. This left the trade surplus little changed in the month.

Export earnings fell 3% in November, all due to a drop in prices. Since June, export prices have fallen 5%: double-digit declines for food, forestry and autos were partly offset by higher energy and metal prices. This pattern continued in November, with steady losses for forestry products and autos partly offset by metals and crude oil (which hit a record high).

Imports have been even more affected by the dollar’s impact on prices, which have fallen steadily over the last six months. With a 3% drop in November alone, prices are down 8% since their peak in May. Lower prices were concentrated in machinery and equipment, consumer goods and autos, which make up nearly two-thirds of Canada’s imports.

Monthly imports were down by 4% in November. The drop was evident across the board, as prices fell for all major import categories. The volume of imports remained strong, led by another gain for consumer goods (up 10% since June). Machinery and equipment also stayed robust.

Prices

The CPI was unchanged between November and December, lowering year-over-year inflation to 2.1%. Energy prices moderated for a second straight month, and have been on a downward trend since the summer. Retailers also discounted clothing prices in an attempt to revive demand. These declines were offset by a sharp increase in vegetable prices and fewer rebates for auto purchases. Prices for most other durables resumed their downward trend.

Commodity prices in January were steady for a third straight month after backing off from their record high in October. A cold snap in the Northeast US helped send oil prices back above US$ 50 a barrel. Prices for manufactured goods rose 0.3% in December after three consecutive declines totalling 3%. Most of the increase was for exporters, as a lower Canada/US exchange rate alone boosted prices by 0.6%.

Financial markets

The Canadian dollar held steady around 81 cents (US) in January, after retreating to this level in December from a 12-year high of 85 cents in November. Short-term mortgage rates were unchanged after a drop the month before, while bond yields edged down.

Investors continued to shift out of money markets as yields stayed low. The stock market started the new year with a 0.5% dip after three straight monthly increases. Metals lost some of their recent lustre, although energy stocks continued to strengthen.

Business fund-raising accelerated sharply at year end, despite their record financial surpluses. New equities rose over $3 billion in December, the best month in over 2 years. Bank loans to business also jumped $3 billion in November, the largest of the increases that began in the summer, after nearly a year of steady declines.

Regional economy

The Ontario economy remains in a slump. Housing starts declined in December for the fifth time in six months, leaving Ontario the only region to have posted a decrease in 2004. Retail sales in November were down for the second time in three months, and their growth so far this year has been below the national average. Exports regained the ground they lost in October, but were down 16% from their high in June, just before the dollar began rising again. With exports and domestic demand slowing, manufacturing shipments continued the slide that began in August. Autos again led the drop in November, with the paper industry also retreating. Shipments of metals was one bright spot, recovering from a rare decline in October.

Quebec continued to contrast with Ontario, as domestic demand remained strong. Housing starts in December were at their third highest level (49,400 units) in a year that was the best of the past decade. Retail sales were up an additional 0.5% on the heels of a 5-month high of 1.3% growth in October. Still, Quebec was unable to add to October’s rise in manufacturing shipments, with the volatile aeronautics sector declining after a recovery earlier in the year.

Overall, exports performed better in Quebec than in Ontario, posting half the latter’s rate of decline since June. This was largely a result of the relative stability enjoyed by some major resources that account for a larger percentage of products manufactured in Quebec than Ontario. Autos, machinery, plastics and chemicals, which are more concentrated in Ontario, all posted strong declines.

Vibrant manufacturing activity in the West showed no signs of letting up. Shipments were up 2.7% for the Prairies and 1.2% in BC, reflecting another rise in exports. The Prairies led the way with a one-third increase, driven by energy prices and volumes. Higher shipments were also reflected in a strong increase in construction-related goods. Non-residential building permits shot up by 150% in BC in November, due to manufacturing projects and social service buildings. However, household demand, which had dominated the national trend in late summer, took a breather, with housing starts and retail sales levelling off.

International economies

The first estimate of United States fourth-quarter GDP showed a 0.8% gain (although this could be revised up as a result of an under-estimation of exports to Canada). Overall growth for 2004 was 4.4%, essentially matching 1997 and 1999 for the best year since 1984.

Business investment again led the increase, with outlays for equipment and software up nearly 4%. A surge in investment in the second half of the year may partly reflect the expiry of accelerated write-downs of capital at year-end.

Consumer spending posted a solid gain of over 1%. Personal income growth accelerated sharply thanks to a $99.4 billion (annual rate) special dividend payment by Microsoft. Net exports remained a major drag on GDP, while government spending slowed, especially for defense.

The merchandise trade deficit hit a record high in November, easily surpassing the previous record of $60 billion set the month before. Imports rose despite an easing of oil prices (which accelerated at year end, pulling down overall import prices by 0.2% in November and 1.3% in December). More surprisingly, export earnings fell due to widespread declines. Despite the slide in the US dollar, exports have gained only 5% in the past year (almost all due to prices) while imports rose 21% (one-third of which was higher prices).

Retailers posted a solid 1.2% increase in sales in December, capping a successful year of nearly 9% growth. Autos led the way, while non-auto sales (+0.3%) were stronger than they appeared because receipts at gas stations were depressed by a 4% drop in prices. Demand remained strong for housing-related products. Housing starts rebounded 11% in December, recovering most of the ground lost in November. Starts totalled 1.95 million units for all of 2004, 6% more than in 2003. Existing homes sold at an annual rate of 6.7 million in December, equalling their record-breaking pace for the full year. But new home sales fell again, especially for the most expensive homes.

Consumer purchasing power received a boost from a 0.1% dip in prices in December, lowering the annual inflation rate to 3.3%. The drop reflected not just lower gas prices, but also declines for clothing, food and recreation. Still, inflation in 2004 was the highest in four years due to a 17% jump in energy costs.

Industrial production increased 0.8% in December, closing the books on a year of 4.4% growth, also the best since 1999. Capital goods spearheaded growth as it had all year. Some of this may be at the expense of growth in 2005, which may explain why orders for non-defense capital goods jumped 8% in November before retreating in December. Overall, new orders rose, boosted by another solid gain for autos.

Industrial production continued to fall in the euro-zone, down a further 0.3% in November, led again by capital and durable consumer goods. Some rebound should occur, however, as new orders were boosted by demand for transport equipment. Retail sales were flat in November, despite the approaching holiday season, continuing their weak pattern since the summer. The external trade surplus narrowed due to the widening energy deficit, as exports of machinery, autos and chemicals remained strong. Trade continued to grow with China and Russia, exports to Canada were steady and imports from the US fell. The unemployment rate was stable at 8.9%, while the annual rate of inflation jumped to 2.4% in December, boosted by tobacco and gasoline.

Output was flat in France in November, after declining the month before. New orders recovered, led by transport equipment. High unemployment continued to dampen consumer confidence, although spending received a boost at year end from tax breaks and car rebates. Imports continued to grow as exports faltered, resulting in a record trade deficit in October. Inflation remained below the euro-zone average in December at 2.2%.

German industrial production tumbled in November, down 1.7% after two months of little change. New orders also fell due to weak demand for machinery and equipment. Exports continued to expand, however, despite the rising strength of the euro. Germany remained the world’s largest exporter in 2004 for the second year in a row. Mounting unemployment (9.9% in November) further dampened consumer demand, and retail sales dipped after stagnating since July.

Industrial output increased in Britain for the first time in five months in November (+0.2%), despite continued weakness in consumer demand and exports. The trade deficit continued to widen, remaining the largest in the euro-zone. Inflation stayed at 1.6% in December, while the unemployment rate continued to be one of the lowest in the euro-zone at 4.5%.

Japanese output grew in November for the first time in three months, up 1.5%, although a shortage of steel for carmakers may dampen further gains. Consumer demand remained weak in the wake of ongoing deflation, while unemployment fell to 4.5%, its lowest level in five years. Trade was upbeat despite a slowdown in US demand. For the year, China displaced the US as Japan’s biggest trading partner, aided by Japan’s 13-month ban on American beef imports.

China’s economy grew 9.5% in 2004, its fastest pace since 1996. Fourth-quarter figures were buoyed by a surge in exports, robust consumer spending and business investment. Exports jumped 33% in December year-over-year, raising the trade surplus to a record high. Inflation eased to 2.6% in November, after peaking at 5% earlier in the year. The central bank raised interest rates in October for the first time in a decade.

Note

* Based on data available on February 4; all data references are in current dollars unless otherwise stated.