11-010-XIB
Canadian Economic Observer
March 2003

Summary Table - Key Indicators

Overview*

The year-long surge in growth in 2002 waned at year-end, with output eking out only marginal gains in November and December. However, job growth quickly resumed in February. A return to seasonably cold weather after several relatively warm winters increased the volatility in a number of areas like housing, but gave an added boost to the energy sector. Rising energy prices sent the CPI to an 11-year high. The last time energy prices were this high, early in 2001, our current account surplus hit a record high.

Fourth-quarter GDP slowed to a 0.4% gain in volume after three consecutive quarters of growth averaging over 1%. Still, year-over-year growth was little changed at about 4%. The deceleration in the last quarter originated largely in a 2% drop in exports, as autos retrenched. This shaved our current account surplus to a 3-year low of $3.3 billion.

Final domestic demand continued to grow about 1%, powered by further strength in housing and consumer spending. Disposable income gains were steady at 1%, although rising demand for housing and autos forced households to continue to step up net borrowing. Conversely, firms cut back on investment despite improved profitability. Over the past year, profits were up nearly a third, but investment in plant and equipment was little changed. Firms used their financial surplus to pay down debt at an accelerating rate in the second half of the year.

Firms plan no change to investment outlays in 2003, according to the survey of private and public investment, after cutting back sharply over the previous two years. The drop in 2002 reflected reductions in natural resource and high-tech industries. The levelling-off of capital spending plans this year reflects the removal of resources as a source of weakness, but the persistence of hefty cuts in technology.

The ICT sector plans 7.4% less spending on the heels of a 20% cut last year. Computer and electronic products continued to lead this retrenchment, with a 19% drop forecast following a 43% cut in 2002. Computer assembly expects the fastest decline, while spending by communications equipment, at $210 million, is only one-fifth its level in 2000. Non-residential construction in this industry has fallen nearly 90% over the last two years, a testament to its over-capacity. Elsewhere in ICT, broadcasting and telecom services forecast a 6% drop, although this is only one-third of last year’s cut. Both computer systems design and the scientific research industry plan to slash investment sharply, after double-digit rates of decline in 2002. Overall, capital spending by technology-related industries is expected to fall nearly $1 billion, after a $3.3 billion drop the year before.

The levelling-off in investment in the resource sector follows across-the- board cuts in 2002. It is somewhat surprising, however, that this firming does not originate in the energy sector, where prices are near record highs. While the oilpatch does plan to boost spending in conventional areas, the completion of both off-shore developments and new pipelines and less ambitious spending by electric utilities reined in overall energy outlays. Instead, resources were buoyed by large gains (nearly $2 billion) for lumber, paper and aluminum smelting. Higher metal prices also helped to at least stop the cuts to investment in metal mines, but strong demand did not prevent hefty declines by non-metallic mines.

Elsewhere, the investment climate appeared to improve slowly. Retailers plan a 7% boost to capital budgets, largely in the food industry where the trend to building large stores resulted in its accounting for 37% of all investment by retailers. Finance intends to pull out of a post-Y2K tailspin with a small gain, while the autos industry tightened its belt as profitability was squeezed. Most other industries plan little change, except the public sector. All levels of government boosted capital budgets, led by municipalities. Health and education can be expected to follow suit, after the recent infusion of funding.

Labour Markets

Job growth quickly resumed with a 0.4% gain in February after a pause in January interrupted an unbroken string of gains in 2002. The increase was evenly-split between full-time and part-time positions, and was concentrated among youths. A resumption of strong labour force growth, also after a one-month stall, kept the unemployment rate steady at 7.4%.

Manufacturing jobs expanded by almost 1%, recovering from a setback to start the year. Construction dipped for a second straight month, after stellar gains last year, as housing was hampered by severe winter weather. The sharp climb in commodity prices continued to boost natural resource industries, although this was not a large gain in absolute terms because of the capital-intensive nature of these operations. Services were buoyed by continued strength in the public sector and steady gains in finance and real estate.

Regionally, BC led job growth, keeping its year-over-year growth above the national average of 3.4%. The largest gains were in the primary sector and manufacturing, and BC was the only region to experience an unusually mild winter. Ontario added to January’s increase, joining BC as the only province with above-average growth. Losses in services prevented Alberta from building on the strength in energy demand.

Leading indicators

In January, the growth of the composite leading index returned to the 0.1% gain in November, after a brief upturn to 0.3% in December. Six of the 10 components fell, four more than in December and the most in over a year; previously in 2002, growth this slow largely reflected hefty losses in the stock market. The slowdown in January reflects renewed drops in the stock market but also a drop in housing and slower business demand.

The recent 3-month rally of the Toronto stock market came to an end in January, repeating the slumps that began the new year in each of the previous two years. Real estate and consumer stocks lost ground as household spending sputtered at the start of the new year.

The housing index tumbled 2.3% largely due to lower housing starts in Eastern and Western Canada. Starts in central Canada remained strong, however, despite a return to seasonal cold after several years of mild winters. Spending on durable goods was mixed, with rising sales of housing-related items and slower auto sales.

Business demand weakened both for manufactured goods and services. The drop in services was concentrated in the West, where non-residential building permits also eased from their peak in the middle of last year. New orders fell in response to widespread weakness export demand, with a majority of industries registering declines. Still, the average workweek remained close to its post-World War II peak, a sign of optimism among manufacturers. This was reflected in the upbeat outlook for production in the first quarter that firms expressed in the January business conditions survey.

At the same time, the climate for exports was boosted by the first gain in the US leading indicator since June 2002, erasing the gap between it and the Canadian index for the first time in nearly two years. Financial market conditions continued to improve and housing rose sharply. Employment in the US posted its largest increase since November 2000.

Output

The monthly measure of real GDP grew by 0.1% in December, completing its slowest three-month period of the year. Sharp cuts to auto assemblies continued to depress goods-producing industries. Growth was buoyed by robust gains for housing and a turnaround in natural resources. The year-end slump in financial markets helped to stop growth in services for the first time in 2002.

Manufacturers trimmed output another 0.3%, extending the string of losses since to August. Over that period, motor vehicle output has fallen 15%, a sharp reversal from the 22% gain previously in 2002. The slump had predictable negative impacts on the wide range of feeder industries to autos. The slowdown in autos also spilled over into weak demand for goods-handling industries, notably truck transport and wholesale trade. By year-end, the auto firms appeared to have finally re-aligned output with sales, as assemblies turned up in January.

Residential construction remained the most dynamic sector of the economy, with building up for the eighth straight month. The 16% gain for the year was the best since 1987. There were positive spin-off effects for a wide range of related industries, notably non-metallic minerals and furniture and appliances.

The primary sector appeared to be pulling out of a prolonged slump, responding to an upturn in commodity prices. Output posted its best back-to-back gains since mid-1999. Metal mines led each of these increases. Energy output already began to accelerate, before prices soared in the new year. Agriculture and forestry also picked up as prices improved.

Financial activity contracted again, with the 1.1% drop in December the sharpest of five straight declines. Demand fell markedly for both banking services and securities brokers. Most other services posted solid gains in demand. This was especially true for consumer services, notably retailers and food services. Business services saw demand grow steadily. The public sector posted its smallest gain in six months.

Household Demand

Retail demand grew 0.6% in volume in December, capping a year of solid 5% growth. Auto sales led the way, as they have all year. Overall, a record 1.7 million vehicles were sold last year, led by imported trucks as several overseas producers entered the lucrative SUV market. However, a brief attempt to wean consumers off a steady diet of 0% finance resulted in a sharp drop in sales in January.

Riding the coattails of the booming house market, furniture and appliance sales jumped another 1.8% in December. For the year, sales rose 10%, surpassed only by demand for computers. Clothing retailers closed out a year of solid growth with an increase in December equivalent to its 5% annual increase. However, December’s gain for both computers and clothing was largely the result of deep pre-Christmas discounts. Demand for non-durable goods was hampered by rising gasoline prices and a 7% drop in tobacco sales last year after governments hiked taxes.

Housing began the new year on an uneven footing. New starts fell 9% to their lowest level in over a year. The coldest winter in years appears partly to blame, just as last year’s record mild winter gave a substantial boost to construction. This is supported by continuing strong house sales. The existing market in January added to its fourth-quarter gains, with almost all major cities contributing. New home sales also remained strong, leading to another drop in the inventory of unsold homes.

Merchandise trade

Trade flows in December were a microcosm for the year, with exports edging down and imports eking out a gain. Faltering US demand was the main factor in slack exports. Imports from the US were even weaker, down nearly 4%, but this was offset by double-digit increases from overseas countries. The overall trade surplus in goods was little changed in December, leaving the annual total at a 3-year low of $54.2 billion as exports dipped 0.6% while imports rose 1.6%. The lower surplus for goods largely accounted for the slip in the overall current account surplus from $30 billion to $17 billion; as well, the investment income balance deteriorated, partly reflecting a weaker rate of return on investments in the sluggish US economy than in Canada.

The 0.3% dip in monthly exports originated in a fourth straight retreat in the auto sector, due to extended Christmas shutdowns at assembly plants. This brought the cumulative drop since August to 14%. Machinery and equipment exports also weakened for the second month in a row, led by weakness in the telecom sector and computers.

Resource exports picked up across the board, aided by a turnaround in commodity prices. Industrial goods led the way with a 5% gain, with widespread increases among metals. Energy products were boosted by higher prices for oil and gas, a precursor to their explosive surge in the new year. Forestry was given a lift by lumber, as US housing starts hit a 16-year high. Grain exports began to stabilize after drought-related losses all summer, but food remains the only sector where exports are below the level of a year earlier.

Surging auto demand continued to buoy overall imports, notably vehicles from overseas, as sales peaked in December. Strong retail sales also kept imports of other consumer goods close to the record levels set in October and November.

Business demand for imported machinery and equipment continued to yo-yo around a flat trend, falling 3.5% in December to give back all of the gains the month before. Telecom and computers were particularly weak, nearing their lows in what already was a weak year: in 2002, they fell 14% and 12% respectively, their second straight annual declines. A temporary dip in December for oil prices dampened our bill for imports.

Prices

The consumer price index jumped 1.0% between December and January, boosting the annual rate of inflation to an 11-year high of 4.5%. Higher oil and gas prices were reinforced by the lapsing of Ontario’s rebate for the cost of electricity.

Excluding energy, prices edged up only 0.1% in the month. Buying a car cost less as weak sales spurred a quick return to rebates. Clothing retailers slashed prices, after a drop in 2002 that was unique among the eight major components of the CPI. A rising exchange rate will further push down the cost of imported clothing.

Fuelled by energy, commodity prices skyrocketed in February to their highest level since early in 2001 when the electricity crisis in California sent energy prices soaring. The Bank of Canada index for energy prices stood at 151 in February, within striking distance of the all-time record of 175 set in January 2001. Oil prices had already risen because of a growing war premium as the US stepped up pressure to attack Iraq, but another cold snap at month end sent oil and gas prices to a 12-year high as inventories dwindled. Most non-energy prices also strengthened in the month, notably metals, as US industrial activity picked up.

The increase in our exchange rate is already having an effect on prices. Manufacturing prices rose 0.3% between December and January, led by resource-based products; however, the increase would have been 0.7% without the appreciation of the Canada/US exchange rate.

Financial markets

The Canadian dollar continued to rally, edging above 67 cents (US) for the first time in two years. The dollar began to rise from its low of near 63 cents late last year: in November and December, a persistent interest rate differential of about 150 basis points in favour of Canada began to attract an inflow of money market flows, according to Balance of Payments data.

The stock market continued to edge down so far this year, after a brief rally at the end of 2002. The Toronto market was cushioned by further gains in energy stocks. This was offset by widespread selling, notably of information technology and basic consumer stocks.

Apart from the rally in the dollar, there was little change in most financial aggregates. Short-term business credit levelled off in January after four straight declines. Conversely, holdings of non-money market mutual funds declined for a second straight month after rising steadily through most of last year.

Regional economy

A slump in Ontario’s auto sector led the decline in Canadian shipments and exports in December. However, layoffs were down and production was up in January, boding well for a recovery at the start of the new year. While manufacturing slowed, household demand was mixed: retail sales recovered in December from their November low but housing starts continued to decline in January, down one-third from their peak in the previous year when an exceptionally mild winter encouraged building activity.

Household demand was also mixed in Quebec. But unlike in Ontario, retail sales in December were weak, with their third loss in four months. According to the Conference Board, household confidence here did not recover as much as elsewhere in Canada. However, housing starts defied the downward trend in the other provinces, with a rise of more than 10%. The strength of investment spending was another counterweight, with construction materials helping to boost overall shipments in December. Meanwhile, with the cold weather, shipments of petroleum products rose to their highest level for the year.

The economy continued to strengthen in the West on the back of prices and demand for resources, especially energy. Energy remained Canada’s leading export for a second straight year in 2002 and accounted for more than half of Alberta’s total. With winter getting off to an especially cold start in central and eastern North America, energy exports soared in December to almost double their level a year earlier. This brought them close to the peaks reached at the start of 2001 when Western Canada helped meet the crisis in California, which was forced by electricity shortages to impose rotating outages. Shipments in November and December continued to make up for their October losses, notably in all industries related to household demand. The improvement in the economy was not as broad in British Columbia, where retail sales ended a series of four increases, the first such string since the spring of 2000. Consumer confidence also lagged behind the rest of Canada in January.

International economies

In the United States, industrial demand picked up in January, fuelled by autos and more signs of a pick-up in business investment. However, January sales of autos and housing were tempered by low consumer confidence and severe weather. As well, auto sales slowed further in February to the second-lowest pace in nearly five years, as rising gas prices ate into demand for large SUVs.

Retail sales fell 1% in January, giving back half of the ground gained in December (which was revised from 1.2% to 2% growth). Slower auto sales led the decline, as consumers had the same negative reaction to the lowering of incentives to purchase as in Canada. However, there was little strength in sales outside of food and gasoline stores (receipts at the latter were swollen 19% from their level of a year ago by higher prices). In particular, demand for furniture, appliances and electronics fell back to the same level as last January, one measure of the slowdown in housing (although outlays for building materials rebounded). House sales tumbled 15% in January, although starts remained above December’s level, which was the best in 2002. The reluctance of households to buy big-ticket items was consistent with a 19% drop in the Conference Board index of consumer confidence, the third straight retreat, leaving it at a 10-year low. Both the assessments of current and future conditions weakened.

Led by autos, overall industrial output rose 0.7% in January, recouping most of its fourth-quarter decline. Apart from autos, there was little change in production in the last two months, leaving it 0.1% below the level of January 2002. Defense industries remained the most consistent source of growth, with a monthly gain of 1.6%, after quarterly advances averaging over 3% in the second half of 2002. A return to more normal temperatures in January after an unseasonably warm December sent demand for utilities soaring 4%.

Output of non-automotive consumer goods remained sluggish, after three straight declines at the end of last year, as losses in clothing spread to furniture and appliances. Business equipment firmed, as communications equipment stabilized after steady declines last year. The slowdown in housing braked demand for construction materials. New orders improved in January, led by a surge in demand for defence goods and communications equipment. However, another poor month of sales in February led auto firms to lower second-quarter production plans.

The effects of the rising value of the euro began to show in the euro-zone countries, with falling exports dampening both consumer and business confidence, along with concern about a war in Iraq. Retail sales tumbled 1.1% in December, after a 0.7% drop in November. The pace of production recovered slightly in November. Industrial production increased 1% after no change in the previous two months. Durable consumer goods led the rise, followed closely by capital goods. Although the external trade surplus narrowed in December, the surplus for the year was 102 billion euros, more than double its level in 2001, due mainly to a 4% decrease in imports as exports gained only 1%. The unemployment rate edged up to 8.6% in January, while the annual inflation rate of inflation eased in the new year to 2.2% from 2.3% in December.

The French economy stagnated in the fourth quarter of the year as companies trimmed inventories and the strong euro reduced exports. Real GDP rose 0.2% in the quarter, its slowest pace since the end of 2001, and was up 1.2% for the year as a whole. Industrial production fell 1.7% in December, reversing its gains of the previous two months. Consumer spending dropped in November and December. Businesses remained optimistic, however, boosting investment plans by 7% for 2003. The external trade surplus widened in December despite slowing exports, as imports slid 5% in the month.

German GDP remained static in the fourth quarter as higher investment offset a slowdown in exports. Exports stalled after growing 3% in the previous quarter. Still, Germany continued to post the largest external trade surplus in the euro-zone in December, with imports retreating faster than exports. Consumers curtailed their spending by 4% in the last two months of the year, the most in Europe. Confidence has been weak as unemployment continues to climb. Prices were stable, leaving the annual rate of inflation unchanged at 1.1% in the new year.

Britain’s economy showed further signs of slowing at year-end with losses in manufacturing, consumer spending and the housing market. Manufacturing remained in a deep slump with orders below average in January for the 60th month in a row. Retail sales fell 1% as consumers further reined in spending. Housing prices, which had been rising at annual rates of 15%, began to slow despite dropping mortgage rates. Still, the annual inflation rate of 1.3% in January was one of the lowest in the euro-zone and the 5.1% unemployment rate remained the lowest of the G7 economies.

Japan’s economy grew for a fourth consecutive quarter at year-end, with real GDP up 0.5% led by robust consumer and business spending and a revived overseas demand for exports. For all of 2002, output grew 0.3%. Capital spending rose 1% in the quarter, although investment plans have been trimmed by almost 8% in the current fiscal year. Exports were boosted by autos which hit a nine-year high in 2002. Consumer confidence fell for the fifth straight month in January as the unemployment rate matched its record high of 5.5% in December.

Domestic demand picked up in the south-east Asian nations, helping to offset further slowdowns in exports. Singapore’s economy expanded by 2.2% in 2002, regaining most of the ground lost in its 2% contraction a year earlier. Output was up 1.5% in Brazil in 2002, as exports were boosted by a 35% devaluation in its currency against the US dollar.

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

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