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Current economic conditions Summary Table - Key Indicators Overview* Fourth-quarter growth slowed to 0.4%, with lower exports offsetting steady gains in domestic demand. Retail sales were dampened by a new seasonal pattern, as the proliferation of gift cards shifted Christmas sales into January. The slowdown in real GDP in Canada was part of a deceleration in the G7, with the notable exception of the US (where growth was steady at about 1%). Output fell outright in Germany, Japan and Italy. As in Canada, much of the weakness in Europe came from manufacturing exports wilting under the pressure of exchange rates rising against the US dollar. The loonie reversed course after November, and exports and manufacturing prices have already begun to recover. A notable development in the second half of 2004 was the increased willingness of firms to spend their record high profits. Capital spending (including inventories) rose 16% from a year earlier, a marked turnaround from declines earlier in the year. With income growth steady at 13%, this reduced corporate net lending from $87 billion to $75 billion over the last two quarters. Business investment in plant and equipment rose 7% in volume over the last four quarters, its largest advance since the peak of the ICT bubble early in 2000. Sharply lower import prices sparked an 11% increase in spending on machinery and equipment. Outlays for structures levelled off, as the boom in the energy sector offset a continuing slump in building. Firms plan to invest 8.8% more in 2005, according to the survey of investment intentions (which does not break out expected price changes). The projected increase was about equally split between plant and equipment. Firms ended up investing 6.5% more in 2004, twice as much as they had forecast at the start of the year. Just over half of the projected investment increase comes from the energy sector. The oil and gas industry alone plans to raise outlays by $3.4 billion (or 12%). But there was a marked shift in 2004 and 2005 from conventional to non-conventional (tar sands) development. Spending on conventional sources posted modest gains of about 5% (or $1 billion) in both years, while non-conventional developments are expected to jump 39% (or $2.4 billion) this year after a 17% hike in 2004. One interesting difference between conventional and non-conventional oil and gas projects is that almost all of the former is in structures, while the latter is almost evenly divided between structures and machinery and equipment. Yet the bulk of the increase in non-conventional spending in 2004 and 2005 is for structures, to prepare a site in the tar sands. The tar sands were the only source of oil where output increased last year, growing to 41% of all domestic output from 22% ten years earlier. Other significant increases in the energy sector include electric and natural gas utilities and petroleum refineries. No major new pipeline initiatives are planned. All the increased spending on oil and gas will be in Alberta, where the tar sands are located. As well, several large developments off the East Coast have been completed. Non-energy resource industries also plan a $1.7 billion hike in capital spending this year. Together with energy, this raises the contribution of resources to two-thirds of all business investment growth. Metal and non-metallic mining both plan large increases (although less than in 2004). And all forestry-related industries expect large gains, from forestry operations to downstream lumber and pulp and paper mills. Almost all of these increases are for machinery and equipment and not structures, suggesting a drive aimed more at boosting productivity than capacity. The emphasis on productivity over capacity-enhancing investments was evident throughout manufacturing, the sector most vulnerable to losses from the rising Canadian dollar. Manufacturers plan a 15% hike in outlays, all in machinery and equipment. These firms trimmed investment last year (they had planned an increase, before the full extent of the rise in the loonie became known). All of last year’s cuts were concentrated in a 20% drop in structures. The recent boom in natural resources put increasing demands on our transportation network. It responded by boosting investment plans for 2005 by 10% (or $1 billion), notably in rail and water, which carry the bulk of commodities. Elsewhere, the financial sector and telecommunications plan to further raise investment. Most other industries were little changed. Significantly, no industry intends to make major cuts to investment: business services and accommodation and food plan only token declines. Labour MarketsEmployment rose 0.2% in February, matching December’s increase after a stall in January. Full-time jobs again led the way. The labour force kept pace, notably adult women, leaving the unemployment rate unchanged at 7.0%. Private sector firms trimmed payrolls, notably in manufacturing and construction after increases in January. Construction still leads year-over-year growth at 9%. Services were buoyed by higher public sector employment. Transportation and trade posted a second straight solid increase. British Columbia continued to lead employment growth, fuelled by its construction sector (up 34% from last February). Spending on housing in BC grew 26% last year, the most of any province. The prairie provinces continued to expand. Ontario recovered most of its January losses, but annual employment growth remained less than half the national average due to losses in its manufacturing base and business services. Jobs fell in Quebec and the Atlantic provinces. Leading indicatorsThe composite leading indicator continued to firm in January, up 0.2% after a 0.3% gain in December followed no growth in November. Growth was distributed in the same manner as in December, with steady gains by household spending supported by manufacturing and services. Seven components rose in January, one more than in December, while the rate of decline of the US leading indicator continued to moderate. Durable goods sales continued to spearhead the growth in household spending. Encouraged by lower prices, demand posted a fourth straight increase. For all of 2004, durable goods prices fell for the fifth straight year: last year’s 1.6% drop was the largest on record back to 1962, led by lower import prices. Spending was particularly strong for recreational goods and computers (where prices tumbled almost 20% last year). Furniture and appliance demand rose 0.5%, also encouraged by falling prices. Sales have trended up every month since early in 2000. These gains help explain why trade jobs led overall employment gains late in 2004 and into January. The housing index dipped 2.2% in January, partly as housing starts in Western Canada were hampered by unusually cold weather. Housing starts also were hurt by severe weather in January 2004, but quickly recovered thereafter. Existing home sales edged up 0.2% in January, a reflection of the rising trend of housing demand. The US leading indicator fell for the fourth month in a row, although at a slower rate than in the previous two months. The stock market gained strength. The consumer-related components improved after strong gains in disposable incomes, and consumer confidence hit a 6-month high. Our exports to the US rose in December, snapping five months of decline. Manufacturing in Canada responded to the widespread improvement in demand. New orders rose slightly, while the ratio of shipments to stocks of finished goods was flat for a second straight month. The average workweek also posted a second consecutive increase, their first since early in 2000, while factory employment rose at its fastest clip since November 2003. OutputMonthly GDP grew 0.2% in December, on top of a 0.3% gain the month before. Goods-producing industries strengthened across the board in both months, after no growth in the autumn. These gains spilled over into goods-handling industries. The energy sector led growth for a second straight month. Drilling for oil and gas continued to rise rapidly, while cold weather boosted demand for utilities. Metal mining posted a third straight gain, led by iron ore where global demand was driven by China’s steel consumption. Construction was boosted by a turnaround in non-residential building after eight straight declines. Manufacturing output rebounded in November and December. The November increase was resource-based, while December’s was driven by autos. Higher exports boosted demand for wholesalers and transportation. Consumer spending was mixed. While retailers booked poor Christmas sales, spending rose sharply for services. Gambling, accommodation and food led these gains. Even performing arts and sports began to recover from the losses due to the hockey lock-out, as consumers spent their recreation dollars on other activities. Household DemandHousehold demand remained a significant source of growth in the fourth quarter. Consumer spending rose 1%, although retailers in Canada saw slower growth since part of the increase reflected Canadians travelling more overseas. Meanwhile, the housing market remained strong although cold weather dampened starts in January. The personal saving rate edged down to zero in the fourth quarter. While many factors affect quarterly changes in savings, the drop to zero emphasizes the very small impact of the hockey lock-out for the macroeconomy. While it did have an important impact on a small number of industries (sports arenas and bars, for example), consumers overall found other goods and services to buy. Retail sales volume fell 1.5% in December, its second straight drop after five consecutive increases. The retreat was felt about equally by auto and non-auto retailers. Auto sales continued to slide in January, hitting their lowest level since January 2004 as consumers balked at recent price hikes. A number of factors contributed to the drop in non-automotive demand. The labour dispute in Quebec’s liquor stores dampened sales. Gifts cards have become more popular in recent years, and these are not counted in sales until redeemed, usually after Christmas. This change in seasonal patterns may partly explain why sales have fallen in five of the last six Novembers and Decembers, often followed by brisk demand early in the new year. Preliminary data from large retailers, who issue the bulk of these certificates, show sales in January more than recouped December’s loss. Some sectors were able to boost sales, usually with price discounts. This was particularly true for computers and clothing, where sales volume rose 2% and 1% respectively. Housing starts greeted the new year by falling 14% to their lowest level since January 2004, which also was unseasonably cold. Two-thirds of the drop was in multiple units, since large construction projects are the most susceptible to being shut down by poor weather. House sales remained firm in January, pointing to a likely recovery of starts when the weather improves. Existing home sales recovered some of the ground lost in December. New home sales edged up enough to reduce the inventory of unsold homes for the first time in four months. Merchandise tradeThe current account surplus fell from $8.4 billion to $6.3 billion in the fourth quarter. The drop originated about equally in a falling surplus for goods and a rising deficit for investment income (mostly as profits earned abroad fell $1 billion). Canadians used their trade surplus to repatriate foreign direct investment for the second time in the last three quarters, while buying a record amount of foreign bonds (mostly in the US). Exports and imports in December rose to their highest levels since the summer. A partial reversal of the Canadian dollar’s recent surge to a 12-year high in November helped trade flows recover. Export earnings rebounded 2.6%, with nearly half due to higher prices. Energy, autos and industrial goods all posted increases of about 5%. Energy demand was boosted by cold weather south of the border. Industrial goods were raised by higher prices for metals. Despite the December recovery, auto exports remained below their average for the year, a reflection of US auto sales. Most other exports fell slightly. Machinery and equipment was pulled down by lower aircraft shipments. Forestry products were hurt by lower US demand, although US housing starts recovered over the winter. Import demand rebounded 4% from its revised 2.8% dip in November. The increase in imports was evident in all goods except food. Auto and consumer goods imports increased about 4% despite slow Christmas sales. Machinery and equipment bounced back from a drop in November, led by industrial machinery and computers. PricesInflation slowed to 0.8%, according to the chain price index for quarterly GDP. Export prices fell for the first time this year. Prices paid by Canadians were little changed, as sharply lower import prices offset increases in the construction sector. The consumer price index dipped 0.1% between December and January. The cost of durable and semi-durable goods continued to trend downwards. The drop in durables was led by autos, reversing their recent price hike, and computers. Semi-durables were pulled down by clothing, in the first month of the removal of import quotas. Other goods were stable, with a rare January decrease for food (only the second in 20 years, as US crops recovered from poor weather) offsetting an increase for gasoline. Prices for manufactured goods recovered for a second straight month, helped by a lower exchange rate. The 0.5% increase in January bettered the 0.2% gain in December. The impact of a lower dollar was reinforced by higher world prices for oil, metal and forestry products. Commodity prices continued to strengthen in February. Industrial materials took the lead from energy, up 11% since August. Nickel prices hit their highest level in a year to lead across the board gains for metals. A truckers strike in BC helped boost lumber. Energy prices remained high, with a cold snap in the US helping push crude oil back above $50 (US) a barrel. Oil prices retreated in December from their record high set in November, but have risen steadily in 2005. Financial marketsThe stock market returned to its winning ways, rising 5% in February after a small dip the month before. Once again, energy and mining set the pace as prices strengthened on commodity markets. Energy stocks jumped 12% after a 5% gain the month before, and are up over one-third in the past year. Metal mining was even stronger, soaring 22% after a 2-month lull. Most other sectors posted modest gains. Households continued to borrow at a rapid pace in the fourth quarter, especially for mortgages. Conversely, fund-raising by firms slowed to $36 billion (annualized), half the pace at the start of 2004. A small upturn in short-term loans (to finance inventories) was outweighed by a drop for new stock and, especially, bond issues. Interest rates were essentially unchanged in Canada, while US long-term rates eased even as the Fed again raised short-term rates. The exchange rate fell slipped below 81 cents (US) for most of the month. Regional economiesThe economy remained buoyant in Western Canada, especially British Columbia, where demand shifted to construction. Non-residential building permits jumped nearly 150% in November as a result of manufacturing plant and social service building projects, and were up another 10% in December. This made 2004 the best year for BC’s non-residential permits in three years, not far behind the record high set in 2001. Exports also surged 10% last year, with a 50% increase ($0.5 billion) to China. Households, which led national growth by the end of summer, continued to slowdown. Retail sales growth in the fourth quarter was slightly slower than in other parts of the country, and housing starts slumped 20% in January. On the Prairies, household demand softened late in the year, though it remained well ahead of the rest of Canada. Shipments declined, led by weakness in cattle and grain. The US border remained closed to most beef exports. The growing season had started well, but a series of frosts caused problems for the 2004 grain harvest. Petroleum shipments were slightly off their record high set in November. Domestic demand remained firm in Quebec. Despite a decrease in January, housing starts stayed more than 20% above last year’s level. A 3.7% drop in retail sales in December was mainly due to the strike at liquor stores. Manufacturing shipments rebounded from a drop in November, as gains in the refinery and aircraft industries offset a decline in clothing due to several factory closures. Ontario continued to lag behind the rest of the country. Household demand kept on sliding. Housing starts in January posted their sixth decrease in seven months. Retail sales fell even faster in December, suffering their third decline in four months. Growth for 2004 as a whole was just 2.8%, the lowest since 2001 and two percentage points less than the national average. Shipments rose marginally in December, almost all due to autos. North American automakers announced production cuts for the spring. Exports were down 16% from their June peak, as the dollar resumed its climb. International economiesIn the United States, there was no let-up in demand for capital goods in January, despite the expiry of accelerated depreciation charges at the end of 2004. Output of capital goods rose 1.1%, and was nearly 10% ahead of its January 2004 level. The increase in business demand kept new orders rising. The gains in capital spending were offset by a drop in consumer spending. Retail sales slipped 0.3%, largely due to slower vehicle sales. Fewer auto assemblies also offset the strength in capital goods output, checking the overall growth of industrial production. As well, US military spending slowed markedly at year-end. Housing remained a bright spot, as starts rose 5% in January to an annualized 2.16 million units, its highest level in 20 years. Unseasonably warm weather may have helped this increase. Existing home sales remained brisk in January at their 7th-highest level ever. The monthly trade deficit edged down from $59.3 billion in November (originally estimated as $60.3 billion) to $56.4 billion. Exports recovered, while lower oil prices offset higher imports of capital goods. But for all of 2004, the trade deficit hit a record $617 billion (or 5.3% of GDP) up from $496 billion in 2003. The largest deficit was with China ($162 billion) followed by the EU, Japan and OPEC. The euro-zone expanded by 0.2% in the final quarter of 2004, matching its third quarter pace but one-third below the first half. Growth was boosted by a revival in consumer spending and business investment, while the trade surplus and industrial output fell. Industrial production rose 0.5% in December, after similar declines in the previous two months. New orders rose, particularly transport and machinery and equipment. The trade surplus narrowed at year end as the energy deficit grew more than rising surpluses for machinery, vehicles and chemicals. Overall, trade expanded with all major partners, excepting imports from the US. The deficits with China, Russia and Norway all widened, but decreased slightly with Japan. The unemployment rate was stable at 8.8%, while the annual rate of inflation in January fell to 1.9% from 2.4%. Output fell 0.2% in Germany, after being flat in the third quarter. Exports remained strong, reviving industrial production and new orders in December. Consumer spending rebounded in January, along with a sudden drop in the annual rate of inflation to 1.6%. Unemployment jumped in the new year, however, as labour market reforms come into effect along with changes to the calculation of the unemployment statistics. Real GDP in Italy contracted 0.3% in the fourth quarter. Industrial production fell again in December, its fourth decline in five months, while consumer demand remained dormant right through the holiday season. Inflation eased in January to an annual rate of 2%. Early in the new year, the government announced reforms of the bankruptcy law and tax incentives for small businesses and to raise research and development. The French economy expanded by 0.8% in the fourth quarter, outpacing the euro-zone region as a whole. Business confidence remained upbeat and industrial production picked up at year end after a surge in new orders, mostly transport equipment. Consumer spending expanded, as lower interest rates buoyed demand for housing. Nonetheless, unemployment reached its highest level in five years in January, rising to 10%, well above the euro-zone’s average of 8.9%. In February, the government announced initiatives to stimulate the creation of low-paid jobs in the domestic services sector. Real GDP in Britain rose 0.7% at year-end. Industrial production recovered in November and December, after falling steadily since the summer. Imports continued to outpace exports in December, leaving Britain once again with the largest external trade deficit in the euro-zone. Retail spending picked up slightly in the new year, aided by low unemployment (4.6%) and inflation (1.6%). Real GDP fell 0.1% in Japan in the fourth quarter, the third straight decline, led by weak consumer demand and a fall in net exports. Nominal growth was helped by an easing of deflation: the GDP deflator fell by 0.3% year over year, compared to a 1.8% drop in the second quarter. Capital investment and new orders strengthened, in tune with rising business profits. The trade surplus narrowed in January, partly reflecting higher commodity prices, particularly of oil. Trade with China continued to accelerate. For 2004, China surpassed the US as Japan’s biggest trading partner with bilateral trade of $214 billion (US). China’s current account surplus rose $25 billion to a record level of $70 billion for 2004. Note* Based on data available on March 11; all data references are in current dollars unless otherwise stated. |
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