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11-010-XIB
Canadian Economic Observer
February 2006

Current economic conditions

Summary Table - Key Indicators

Overview*

The new year began with high commodity prices again the dominant force as they have been since 2003. The stock market was propelled to a new record high by double-digit gains in mining and energy stocks. The vim in mining reflected the highest prices ever for copper and zinc, while gold, aluminum, nickel, potash and uranium also remained at high levels. Meanwhile, energy prices remained close to their peak, with increases for crude oil partly offsetting lower natural gas prices due to record warm January weather in North America. The boom in commodities helped send the Canadian dollar to a 14-year high of almost 88 cents.

The rise in prices for our commodity exports and the drop in import costs from a rising dollar imply further increases in Canada’s terms of trade. This will encourage November’s divergence in output growth between domestic demand and non-resource exports to widen. Household demand rose steadily, partly as gasoline prices eased and jobs rose, while business investment remained strong.

Conversely, exports retreated after large gains over the summer. Some of the decline reflects natural gas returning to more normal levels as US supplies recovered from storm damage. Forestry-related industries also saw exports fall. The higher dollar will further push manufacturers to boost productivity, even after another sharp drop in factory jobs in January.

Labour Markets

Employment started the new year with a 0.2% gain, matching its average increase in the previous three months. All of the advance was concentrated in adult women. A widespread increase in the labour force nudged the unemployment rate up to 6.6%.

The public sector and natural resources accounted for the bulk of job growth, and were up 4.6% and 7.4% respectively from a year-ago. Demand for business services also remained strong. Construction jobs were little changed despite the third mildest January ever, while factory jobs fell steeply after levelling off in the fourth quarter.

Alberta led the gain in jobs, buoyed by resources and construction, lowering its unemployment rate to 3.5%. Tight labour market conditions led to another sharp shift from part-time to full-time jobs in both Alberta and BC. Ontario bore the brunt of the loss of factory jobs. Still, it managed an overall employment gain of 0.2% due to increases in business and public services.

Income growth also should receive a boost from job growth shifting to occupations with hourly wages above the $19.66 average. Compared with January 2005, job growth was led by management (+113,000), natural sciences (+32,000) and social science and government (+134,000), the three highest paying occupations. Conversely, job losses occurred only in sales and services (-43,000) as well as processing and manufacturing (-120,000), occupations with the lowest average hourly wages at $13 and $17, respectively.

Leading indicators

The leading indicator turned up, posting a solid 0.5% gain in December after growth slowed to 0.4% in October and 0.3% in November. Investment demand continued to stimulate manufacturing, while the stock market hit a record high. Two components of household demand fell, the same as in November.

New orders recorded their fourth straight increase. This demand was partly met by lower inventories, raising the ratio of shipments to stocks for the second time in three months. Investment goods continued to lead the way. Business investment accelerated in the third quarter, and non-residential building permits augur continuing strength as they remained well ahead of the previous year’s pace. Alberta posted the largest cumulative gain among the provinces.

The stock market set new records, propelled by energy and mining stocks where prices remained strong. The stock market contributed 0.1 percentage points to overall growth; without it, the composite index would have risen 0.4%, up from 0.2% in November.

The two components that fell came from the household sector. A rebound in auto sales was not enough to raise the trend of durable goods sales, which fell for a second straight month. The housing index retreated for the third month in a row, with the drop in housing starts accelerating while existing home sales backed off from their record highs. Even the services component slowed in December. Consumer confidence slipped in December, particularly in central Canada, after recovering in November and October.

Only furniture and appliance sales continued to sparkle, up 1.1%. The rising dollar has helped lower prices of household appliances, whose cost has fallen steadily to their lowest level in 20 years, even as the overall CPI nearly doubled over these two decades. These goods increasingly came from China, which supplied about a third of our imports of these products in 2005 (and two-thirds of the growth last year).

The US leading indicator improved by another 0.2%. While growth has broadened since last August, most of the increase was driven by falling claims for unemployment insurance, which have returned to their level before Hurricane Katrina hit.

Output

Monthly real GDP rose 0.2% in November, matching October’s gain and leaving year-over-year growth unchanged at 3% for the fourth straight month. Services led the way, while manufacturers and resources lowered output after increases the month before.

Forestry led the retrenchment in resources, falling 12% in just the last two months in response to a wave of mill closures as both pulp and paper demand fell. Despite cuts in metals, mining output remained firm, buttressed by gains in potash and continuing high activity in the oilpatch.

The cuts in resource output reverberated downstream, helping explain the dip in manufacturing output, notably paper and metals. As well, auto assemblies gave back half of October’s increase in response to lower fourth-quarter sales in the US. Some bright spots included high-tech goods as well as clothing, which in recent months has almost recouped all of its losses early in 2005.

Services received a boost from the end of the BC teachers’ strike. Consumer demand remained strong, notably for retail goods. Travel-related services continued to strengthen thanks to more visitors from overseas. Transportation and wholesaling were curbed by the slowdown in international trade.

Household Demand

Retail sales volume jumped 1.1% in November, on the heels of a 0.6% gain in October. Due to strong demand for non-automotive goods, these advances more than recouped losses in August and September.

Auto sales were slower to rebound, recovering in October and November about half the ground lost over the previous two months. Demand was flat in December, leaving fourth-quarter sales about where they started the year.

Non-auto sales continued to grow steadily. Falling prices for clothing boosted sales sharply for a second straight month. Sharply lower gasoline prices also spurred demand as well as freeing up discretionary income. Demand for motor fuel was running 2.5% ahead of last year, recovering quickly from the small dip in demand when prices spiked in August and September. Furniture and appliance sales posted a rare monthly decline, as did electronic goods despite more price cuts.

Housing starts firmed at year end, with a 2% gain in December after recovering most of October’s 10% drop in November. Ground-breaking on single-family homes led the recovery, although for all of 2005 starts fell 10%. However, new and existing home sales dipped in December, although the recent softening of demand has done little to slow price increases.

Merchandise trade

Exports slipped in November, snapping a string of eight straight increases. All of the drop originated in natural gas, which had led the recent upturn. Natural gas shipments fell 20%, as domestic supplies in the US began to return online after hurricane damage. Lower gas prices pulled down overall export prices by 2%. With imports unchanged, the monthly trade surplus eased to about $7 billion.

Non-energy exports rose slightly. Autos posted a seventh consecutive modest gain on the back of strong demand for passenger cars. Machinery and equipment rose for a second straight month, led by industrial machinery.

Resource exports were mixed outside of energy. Metals rose sharply, buoyed by sharp gains for iron ore, copper and nickel. But forestry products again saw across-the-board declines in demand. Agricultural goods were saddled with a drop for live cattle, after doubling over the summer when the US border was reopened.

Imports levelled off after trending up slowly most of the year. Autos were the major source of weakness, down 4% as firms tried to reduce their inventories. Machinery and equipment was flat, although it remains 13% ahead of November 2004. Consumer goods were one sector to post measurable gains, partly because lower prices boosted the volume of demand for a wide range of goods.

Prices

The consumer price index edged up 0.2% between November and December, offsetting some of the declines over the previous two months. While energy prices continued to fall, this was outweighed by modest increases for a number of goods. Excluding energy, the annual rate of inflation was steady at 1.4%.

Clothing prices posted the largest monthly increase, but remained below the level of a year earlier. Prices also fell for a wide range of imported goods, notably electronic goods and appliances. The cost of services was raised by higher house prices, which offset declines for travel services.

Commodity prices retreated in January, mostly due to natural gas, which tumbled nearly 50% from its record high in December. Oil prices rose, partly in response to more turmoil in the Middle East. Prices for metals continued to strengthen, with copper and zinc setting new records while gold hit a 25-year high.

The rising Canadian dollar continued to squeeze prices for manufactured goods, accounting for all of their 0.3% drop in December. Rising metals prices offset some of this decrease. For all of 2005, the rising loonie trimmed the price increase for industrial goods in half, to just 1.5%, even as the cost of raw material inputs jumped 13%.

Financial markets

The Canadian dollar continued to climb, ending January at a 14-year high of nearly 88 cents (US). The trade-weighted loonie was less robust, however, as the US dollar slid against the euro and yen after rallying last year.

The Bank Rate rose another 25 points after a similar hike in December. Rising short-term rates slowed the exodus of investors from money market funds in December. Bond yields recovered from their small dip the month before, helping to raise mortgage rates. Firms paid back debt in December, while issuing more equity.

Investors continued to pour money into the stock market for a third straight month. The Toronto index finished up 6% to a record high. Mining stocks soared 15% in response to record prices for many metals. Energy also posted a double-digit gain as futures markets pointed to an extended period of high oil prices.

Regional economy

Prospects continued to look bright in the West, with its economies boosted by resource exports of all types. Manitoba’s exports registered a solid year-over-year gain of nearly 4% on the strength of electricity and the agri-food sector. With copious rainfall replenishing water reserves, Manitoba’s electricity exports increased again in November as they had throughout the year. As a result, in 2005, Manitoba’s electrical energy exports exceeded its exports of crude oil for the first time since 1998. The province also benefited greatly from the reopening of the border to Canadian beef.

Saskatchewan’s exports held onto their October gain due to rising exports of potash to the US and China and of uranium to the US, France and the UK. Uranium exports almost quadrupled this year, reaching $381 million. Potash exports grew by one-third to $2.5 billion. These figures compare with annual provincial GDP of about $40 billion.

In British Columbia, lumber exports were up year-over-year for the first time since March 2005. There were increased lumber exports both to the US, as it rebuilt from hurricanes, and to Japan, where housing starts surged at year end. Japan, the largest importer of Canadian goods and services after the US, is emerging from years of lethargy.

The boom in manufacturing in the West contrasted with the slack in Central Canada. On the Prairies, shipments registered a fourth consecutive gain and were up 9.4% from December 2004. Apart from petroleum and petrochemicals, the industries that grew the most in November were all related to investment and shipping, such as machinery (33%), transportation equipment (23%), electrical and electronic goods (33%) and non-metallic minerals (21%). Shipments rose for a second consecutive month in British Columbia.

However, oil and gas exports fell slightly throughout Western Canada with prices dropping in November, but this barely cut into the one-quarter increase for the year to date, which amounted to approximately $10 billion for Alberta alone.

In Quebec, the drop in oil prices affected shipments from refineries, which largely explained the decline in manufacturing shipments. Half of these losses were offset by other resources, especially primary metals with the Alouette site in Sept-Iles coming online. Metals account for more than one-third of the increase in shipments since December 2004. The other two-thirds is attributable to transportation equipment. This year, aeronautics registered its first export increase since their peak in 2001. The increase was led by wide-body aircraft (especially commercial and business aircraft) and flight simulators. More than 80% of the Canadian aeronautics industry is concentrated in Quebec, which was the fifth largest exporter worldwide in 2001, behind the UK, Germany, France and the US. Retails sales performed surprising well, despite a sharp increase in work stoppages in November and December.

In Ontario, manufacturing weakened again, with shipments fluctuating throughout the year because of highs and lows in the auto sector. However, household demand held strong, following two quarters of rising labour income. Employment increased in most services during the same period. Retail sales advanced a hefty 1.2% after rebounding 1% in October. Subsequently, in December, Ontario registered a 4.4% increase in housing starts on the heels of the 36.9% advance in November, when Ontario posted Canada’s largest increase in housing starts. The vacancy rate fell in most large urban centres for the first time in this decade.

International economies

In the United States, fourth-quarter growth slowed to 0.3%, its lowest in 3 years. Most of the slowdown from 1% growth earlier in the year originated in auto sales, which slumped after incentives were scaled-back and gas prices soared. This was aggravated by one-time events such as a sharp drop in defense spending and a surge of imports, partly due to hurricane damage to domestic energy supplies.

A cooling of the housing market also contributed to slower growth at year-end. Housing starts fell 9% in December, falling below 2 million units for the first time since March. Existing home sales fell for a third straight month, to their slowest pace in two years. Retail sales continued to recover, with a 0.7% gain in December matching November’s rebound. Autos continued to recover gradually. Consumer confidence rose in January due to the strong labour market, and has recovered all of its losses in the fall. Payroll growth remained buoyant in January, a month of record warm temperatures. Unemployment fell to 4.7%, its lowest since 2001.

Industrial production rose 0.6% in December, nearly matching November’s increase as oil and gas production continued to come back on line in the Gulf. Manufacturing production was hampered by fewer auto assemblies. But new orders strengthened, especially for investment goods throughout the fourth quarter.

Growth rebounded in the euro-zone in November, with industrial production gaining 1.3% to more than recoup its losses in the previous two months. Across-the-board gains were led by energy, which pulled out of a four-month slump to surge 3.6%. New orders were also upbeat, rising 4.9%, propelled by strength in transport and electrical equipment. Consumers remained hesitant to spend, with retail sales stagnant at year end. The external trade deficit continued to mount as growing surpluses for machinery, vehicles and chemicals could not offset the widening energy deficit. The December unemployment rate crept up to 8.4%, while the annual rate of inflation eased to 2.2%.

Real GDP in Germany rose by 1.1% for the whole of 2005, unchanged from its pace the year before. Business confidence was upbeat as exports were the main engine of growth, rising 6.2%, while business investment gained 4%, its fastest pace since 2000. Consumer spending remained weak, with retail sales down a further 1.4% in December, after a similar fall the month before. The unemployment rate rose to 9.5%, further depressing fragile consumer confidence.

French industrial production rebounded in November, rising 3.1% to more than recoup its fall the month before. New orders soared in the month, on the strength of a surge in transport equipment. Retail sales pulled out of their two-month slump, while inflation was unchanged at an annual rate of 1.8% in December.

Italian industrial production eked out a small gain in November, after two months of sharp declines. New orders continued to strengthen in tune with rising business confidence. Consumer demand remained fragile, however, with retail sales flat at year end.

Industrial production recovered slightly in Britain in November, although it was not enough to offset its previous fall. Rising imports and a decline in exports widened the November trade deficit. The oil balance remained in deficit for the fifth consecutive month, the longest stretch since the 1980s. Retail sales recovered in December and inflation eased to a 2% annual rate.

Japanese industrial production rose 1.4% in December, its fifth straight gain and the longest period of growth since 1999. Exports remained the driving force, however, as household spending fell in November for the third month in a row. Deflation persisted with consumer prices down a further 0.1% year-over-year in December.

China’s real GDP grew 9.8% in 2005, boosted by strong export growth and high foreign investment. According to China’s customs administration, the trade surplus tripled in the year to $102 billion (US) as exports grew 28%, powered by shipments of electronics and textiles. Imports rose 18%, pushing total trade to $1.4 trillion (US), making China the world’s third largest trading nation, behind the US and Germany.


Note

* Based on data available on February 10; all data references are in current dollars unless otherwise stated.



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