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Current economic conditions
Growth continued in the new year, with GDP accelerating in January and job growth continuing into March. With export volume hampered by the slowing US economy, growth in Canada was increasingly reliant on housing and energy. Housing starts soared to a 16-year high in February, and only poor weather appeared capable of temporarily dampening demand. The coldest winter in a decade, and fears over mid-East oil supplies, sent oil and gas prices to record highs, boosting export earnings and jobs in the resource sector.
The buoyancy of jobs, especially full-time positions, also buttressed consumer spending. Retail sales were unchanged in January, while auto sales accelerated in February. Higher energy bills have not deterred consumption of other goods. Energy prices were the major factor in raising the increase in the CPI to 4.6%, although they began to retreat after mid-March as temperatures returned to more seasonable norms and the war in Iraq left oilfields mostly undamaged.
Firms remained reluctant to step up investment. Non-residential construction remained flat, outside of the oilpatch, while imports of machinery and equipment fell at the turn of the year. Instead, business remained focused on paying down short-term debt, just as they had in the second half of last year. Another hike to short-term rates and a sustained rise in the Canadian dollar will encourage firms to be cautious, while the stock market remained weak so far this year.
Employment growth continued its first-quarter slowdown, with only a 0.1% gain in March. However, the mix of jobs continued to shift from part-time to full-time positions, up 0.8% in the first quarter, which will sustain income growth. With the labour force stalling, the increase in jobs was enough to shave the unemployment rate to 7.3%, its lowest in a year.
Construction rebounded, as the strong underlying trend of housing demand reasserted itself after two months of unseasonable cold hampered activity. Natural resources continued to lead all industries this year, posting a sixth straight gain as high prices have supported its best performance in years. Growth in services was concentrated in accommodation and food, while the public sector fell slightly after a large gain in February. Manufacturing was the only sector to post a significant drop in jobs, continuing a weakening trend that began in November, which left employment below the level of a year ago (information and recreation services was the only other major industry to post a year-over-year decline).
Still, Ontario continued to dominate job growth, despite its losses in manufacturing, with a wide range of services picking up the slack. Since January, Ontario has accounted for virtually all of Canada’s employment gains, trimming its unemployment rate to 6.5%. Elsewhere, only BC posted a notable increase so far this year, driven by its resource base. While Alberta’s energy sector expanded, this was outweighed by losses in manufacturing and business services.
The increase in jobs in Canada contrasts with more declines in the US, where civilian payrolls fell 108,000 in March to bring the total drop in the last two months to 0.4%. Losses were widespread by industry, with an unknown number due to the call up of 210,000 reservists over the last two months.
The composite leading index in February posted its largest increase in seven months, up 0.3%, driven by renewed vigor in housing-related demand. Overall, five components were up, two more than in January, three fell and two were unchanged. The growth of the leading index was hampered through most of 2002 by a bear market for stocks and a slumping US economy, culminating in no growth in November. It picked up to 0.2% in December as domestic demand strengthened, and its growth in January was revised up from 0.1% to 0.2%.
Housing rebounded strongly in February, after a brief dip the month before, aided by another drop in the number of unsold vacant units. The increase was boosted by the volatile multiple units component which, despite cold weather, nearly doubled to regain their highest level since the late 1970s. Starts of single-family homes recovered almost all of their retreat in January. Renewed vigor in consumer spending was reflected in the growth of services employment spreading to the personal sector. The trend for other durable goods remained negative, however, pulled down by slower auto sales after the expiry of some rebate programs.
Of the three manufacturing components, two trended down: new orders for durable goods and the ratio of shipments to stocks. These largely reflect cuts in the auto and computer and electronic sectors in response to weak exports. Excluding these industries, both components were up, led by gains in construction, energy and business spending. Manufacturing employment rose after losses in December and January, while the average workweek was unchanged (albeit at close to its post-World War II peak).
The US leading indicator began the new year with a 0.1% increase but, unlike Canada, there were only limited gains outside of the financial market components. The increase in building permits was confined to single-family homes where, unlike Canada, demand growth was partly at the expense of multiples. Employment fell another 308,000 in February, bringing its total loss since its peak in March 2001 to almost two million (or 1.4%).
Output snapped out of two months of lethargic growth with a 0.4% gain to start the new year. However, nearly half of this increase was concentrated in electric power and oil and gas, as the coldest winter in a decade sent energy demand to record levels. While on balance the cold gave a boost to output, this was partly offset by its negative impact on sectors where work is done primarily outdoors (home-building, transportation and mining) or requires clients to venture outdoors (notably retailers and restaurants).
Elsewhere, the biggest turnaround was in auto assemblies, which increased for the first time in five months, in the process boosting wholesale trade and trucking. Business and government services were more reliable sources of growth. The finance sector was buoyed by continued strength in home sales and financing. This offset a third straight loss for securities brokers. There was a notable drop in demand for telecom services, the first in nearly a year.
The volume of retail sales was essentially unchanged in January, after a modest gain in the fourth quarter. Demand was split between a sharp drop for durable goods and large gains elsewhere.
Autos led the retreat for durables, as the withdrawal of some incentives to purchase provoked a double-digit drop in sales. However, demand in February recouped these losses, led by the truck and SUV category, despite record high oil prices. Elsewhere, furniture and appliances posted their first drop since last July.
Semi-durable goods started the new year with a 2% gain, sparked by more discounting by clothing retailers. Sharply higher prices did not discourage more consumption of non-durable goods, while a cold winter boosted home heating demand.
Housing starts in February jumped 35% to an annual rate of 246,400 units, their best level since August 1987. The surge was led by multiple units, which nearly doubled after poor weather had led to drops over the previous two months. Ground-breaking on single-family homes only recovered their losses of the month before. This is consistent with slower house sales. New house sales fell for a second straight month, while the market for existing homes was over 10% below the pace set last winter.
Merchandise exports rose 1.3% in January, continuing the gradual recovery that has lifted shipments abroad by 4.5% since last June. However, the increase in exports was confined to energy products and aircraft, sectors where gains after March will be difficult after the outbreak of war in Iraq reduced demand for these products. Import demand was the mirror image of exports, falling 1.3% to slightly below its level in June 2002. As a result, the trade surplus rose to nearly $5 billion in January, led by large gains in exports overseas, as demand in the US stalled.
Rising prices sent oil exports to a record high, while a cold snap in the US boosted both prices and shipments of natural gas to double their level of a year earlier (although still only half their record high set during the California energy crisis in January 2001). The 40% jump in aircraft only offset losses in the previous two months, which had led to layoffs and shutdowns.
Most other sectors of export demand weakened in January. Shipments of vehicles to the US stalled after steady losses over the previous three months. Demand for machinery and equipment apart from aircraft was pulled down by losses for telecom equipment. Non-energy resource products fell across the board, despite firming prices (especially for metals). A slowdown in the US housing market helped to curb lumber shipments. Wheat plunged by nearly one-third to a 13-year low, symptomatic of how the drought has depleted inventories to record low levels.
The dip in imports originated in sharply lower demand for vehicles and capital goods. Passenger car imports alone fell 24% as sales skidded in January (before rallying in February). Machinery and equipment dropped for a second straight month, led by sputtering demand for high-tech goods. A sharp increase in our oil bill buoyed overall imports.
The consumer price index rose by 0.4% between January and February, nudging the year-over-year inflation rate up to 4.6%. Higher energy prices dominated the increase, with the cost of gasoline up 7% after world oil prices surged. The end of two months of heavy discounting by clothing retailers also boosted prices. As well, BC joined the move by several governments last year to raise taxes on tobacco. Price cuts were few, apart from the usual drop for computers, although good crops down south and a stronger dollar helped to lower food prices.
Commodity prices continued to rise in March, although, unlike the previous two months, the increase was confined to energy. Even there, the surge for oil and gas brought about by fears for the security of mid-East supplies and cold weather in North America had begun to dissipate by month-end. Most metals retreated due to growing concern about the strength of the recovery of industrial demand, but remained well above their level at the start of the year.
Prices for manufactured goods rose 0.6%, as the upward pressure on commodities such as gasoline, lumber and metals swamped the downward pressure from a rising exchange rate. This split was evident in the gap between prices of intermediate goods used as inputs (+0.9%) and finished goods (+0.2%), with outright declines for autos and ICT goods.
The Toronto stock market fell by 3.3%, completing a dismal first quarter of unrelenting declines, which largely reversed the three-month rally at the end of 2002. Almost all sectors weakened, with industrials posting a double-digit loss while gold and oil gave back some of their recent gains as the fog of war began to lift. The shift away from stocks was evident in mutual fund flows in February. Non-money market funds fell by over $3 billion, their third straight drop, while money markets posted their largest inflow since last August.
Higher short-term interest rates in March will increase the attractiveness of money markets. The widening gap over US rates further boosted the Canadian dollar, which rose steadily from near 63 cents (US) at the end of 2002 to over 68 cents.
Household and business credit demand in January resumed their recent trends, after briefly switching roles in December. Household credit accelerated to a 0.7% gain, spurred by the strength in housing demand. Conversely, firms returned to reducing short-term debt, after a small gain in December snapped a string of four straight declines. Instead, firms continued to raise funds through stock and bond issues.
A rebound in Ontario’s auto sector boosted shipments and exports in January after dragging them down in December. Manufacturing picked up, as did household demand. In particular, housing starts ended a three-month decline. The increase recorded in Ontario was the strongest in Canada (77%), regaining all the ground lost throughout the year after the peak registered in January 2002. In six Ontario cities (Sudbury, Thunder Bay, Kingston, London, Oshawa, Windsor), the number of vacant newly-built semi-detached units was close to zero in February. The inventory of single-family houses was much larger, especially in Toronto, where it was nearly double the inventory of semi-detached houses.
Housing starts declined slightly in Quebec, after hitting a 10-year high in January. The strength of demand shifted to retail sales, which in January posted their second increase in two months after labour income registered the strongest growth in Canada in December. Shipments also posted a second consecutive increase, fuelled by strong capital spending. This sector should continue to improve in the coming months, as indicated by the investment intentions published in February. Quebec will be able to count on major projects in 2003, especially in the resource sector (Hydro-Québec near Sept-Iles, in James Bay and on the North Shore, as well as phase 2 of the Alouette aluminum plant and the restoration of two paper mills).
It was in the West that demand posted its broadest gains. Retail sales started the quarter with a bang in both Alberta and British Columbia. Housing starts posted double-digit increases in both these provinces. Non-residential building permits recouped all their losses since the autumn. The west benefited the most from rising commodity prices, especially for energy. Exports of energy jumped in December and increased again in January. Energy is Alberta’s leading export and accounts for roughly a third of that province’s GDP.
The United States current account deficit rose from $126.3 billion in the third quarter to $136.9 billion in the fourth. Most of the increase originated in trade in goods, reflecting in equal parts lower exports and higher imports. Exports were pulled down by slumping demand for autos and capital goods, while imports were inflated by consumer goods and oil. The unrelenting build-up in external debt resulted in the US running a deficit in investment income flows during 2002 for the first time on record back to 1991. (At the end of 2001, bond debt accounted for over half of the $2.3 trillion in net US external liabilities.) The deficit in trade in goods and services narrowed in January, led by a retreat in imports of consumer goods and autos.
Retail sales tumbled 1.7% in February, erasing January’s small gain. Auto sales led the drop, falling 3.4%. But non-auto sales also slipped, by 1%, due to sharp declines for building materials as well as furniture and appliances, as housing demand cooled, and lower clothing purchases. While not part of retail sales, consumers did sharply step up outlays for utilities as temperatures plunged in the Northeast. The Western part of the country, however, enjoyed its warmest winter on record as a result of El Niño in the Pacific. Housing starts tumbled 11% in February after no change in January. Part of the weakness appears related to severe winter weather, as the number of dwellings authorized but not started was 25% above the level during last year’s mild weather. Still, starts also fell to a 4-month low in the western part of the country, where weather was not a hindrance.
Industrial production eked out a 0.1% gain in February, largely on the strength of utilities. The brief rebound in manufacturing output at the start of the year did not continue, with output easing 0.1%. Firms trimmed auto assemblies as sales stumbled. Output of business equipment was checked by continuing restraint for ICT goods. A 5% drop for capital goods, especially computers, was the main factor in a 1.2% drop in new orders (despite a 28% surge for defense goods). The slump in housing due to inclement weather in January and February hampered output of construction supplies.
Real GDP in the euro-zone grew by 0.2% in the final quarter of 2002 and gained 0.8% for the year as a whole. Consumer spending led the rise, while business investment and exports remained stable. Industrial production rebounded in January, led by consumer durable goods and energy (due to unseasonably cold temperatures). Retail spending was strong, boosted by demand for non-durables. Both consumer and business confidence hit six-year lows in March, however, as the US-led war in Iraq combined with rapidly climbing unemployment to dampen sentiment. The unemployment rate hit a 3-year high of 8.7% in February, prompting the European Central Bank to cut its key interest rate in March.
The German economy continued to stagnate. A slight rebound in industrial production in January did not offset the slowdown in the previous month. Unemployment continued its rapid rise, up to a rate of 8.7% in February, further eroding consumer demand. The annual rate of inflation remained the lowest in the euro-zone at 1.3%.
French industrial production rebounded in the new year, up 1.5% after a similar slump at the end of 2002, buoyed by a surge in energy output. Inflation continued to mount, climbing to an annual rate of 2.5% in February.
British inflation surged to its highest annual rate in almost five years in February, rising to 3%, driven by clothing and seasonal food prices, and higher oil costs. Industrial production remained flat in the new year after stagnating at year end. Consumer demand faltered again in February, with retail sales down for the second month in a row, leading to a cut in interest rates in the month.
The Italian economy picked up speed at the end of 2002, with real GDP expanding by 0.4%, up from 0.3% growth in the third quarter. Growth for the year was 0.4%, its lowest annual rate in almost a decade, as the strength of the euro dampened exports. Overall, Italy has been one of the slowest growing economies in all of Europe over the past ten years.
After ending 2002 on a high note, the Japanese economy slowed markedly in the new year. Industrial output fell 1.7% in February due to a slump in exports to the US, particularly for autos, as the yen remained strong against the dollar. The unemployment rate dropped from 5.5% in January to 5.2% in February when many women withdrew from the job market. Consumer prices continued their deflationary spiral, down 0.2% from a year earlier. Higher oil costs, meanwhile, led to the second straight monthly contraction in the trade surplus, as the 12% gain in imports outweighed the 9% rise in exports.
* Based on data available on April 9; all data references are in current dollars unless otherwise stated.