11-010-XIB
Canadian Economic Observer
April 2005

Summary Table - Key Indicators

Overview*

Output and employment continued to grow moderately, early in the new year. These steady gains overall masked large shifts for some industries, notably a new seasonal pattern for retail sales due to gift cards. Canada continued to benefit from strong commodity prices, led by metals in February and energy in March. As a result, firms are investing more in these sectors, especially the oil sands, which were already targeted for sharp increases in 2005. Despite the boom in commodity prices, consumer price increases were stable at 2.1% in February and interest rates were unchanged.

But rising prices were becoming more of a concern in the US. Consumer price inflation of 3% (2.4% excluding food and energy) accompanied higher interest rates across the spectrum, while unemployment equalled its post-9/11 low of 5.2%. Economic growth continued to be strong, as record housing starts and ongoing recovery in manufacturing more than offset weak auto sales in the first two months of the year. Auto sales may finally have slowed in response to higher gas prices, with demand falling for the largest vehicles. Conversely, auto sales strengthened in Canada early in the new year.

One interesting development at the start of the new year was the absence of a surge in imports of clothing and textiles after quotas on Chinese imports were removed. In fact, the volume of these fell in January while import prices edged up. China did ship considerably more to the US and the EU. Industrial prices also suggest no surge in supply, as domestic firms were able to raise prices for textiles and clothing in the first two months of the year. Finally, employment in textiles and clothing was higher in February than in December (not seasonally adjusted) while output was stable in January.

Labour Markets

Employment was unchanged in March, completing an anaemic quarter of just 0.2% growth. Hours worked were checked by the substitution of part-time for full-time jobs. Still, the unemployment rate dipped to 6.9% as youths led a withdrawal from the labour force.

The primary sector reduced payrolls for the second straight month to their lowest level since last September. Resources, construction and manufacturing have all cut jobs since the start of the year despite higher prices. Business services also contracted so far this year, especially in central Canada. Accommodation and food posted mounting losses partly as the strong dollar curbed travel from the US. The strength in household demand helped trade and finance post steady gains. The public sector again expanded in March.

The regional pattern of jobs was the reverse of the start of the year. Growth in the prairies and BC slowed, especially in the buoyant construction sector. Ontario continued to recover from a sharp drop in January, despite more losses in its manufacturing base. Quebec was helped by further gains in manufacturing, the only region where factory jobs have grown in the past year.

US job growth slowed in March after pulling out of a prolonged slump over the previous year. While narrowing the gap with Canada, the US employment rate remains lower (at 62.4% versus 62.6%).

Leading indicators

The composite index was unchanged in February, after a 0.1% gain between December and January. A slowdown in the auto sector led to a fourth component turning down, one more than in January. Another component (the US leading indicator) was unchanged, as it was the previous month. The stock market remained by far the strongest source of growth, and investment spending plans improved.

Durable goods sales turned down due to autos. By January, autos sales in Canada were nearly 20% below their peak level of December 2002. Soaring gasoline prices helped depress demand, especially for North American-built trucks, vans and SUVs.

Two manufacturing-related components posted the largest drops, also triggered by weakness in autos. The average workweek shrank. Transportation equipment was the only durable good industry where the average workweek was shorter than a year ago (falling from 40.0 to 37.7 hours). The ratio of shipments to stocks posted a second straight decline, as inventories piled up. The auto sector again was the weakest, notably motor vehicle parts.

Conversely, new factory orders accelerated, reflecting strength in investment, construction and metals. Investment intentions for 2005 rose 8.8%, after outlays accelerated in 2004. The stock market trend reflected the improved business outlook, with its largest increase since February 2004.

With housing starting the new year on a good note, furniture and appliance sales continued to trend upwards. Helped by warmer weather, housing starts on the prairies matched growth in BC. However, they did not fully recover all of their January losses in Ontario and Quebec. Overall, the housing index was unchanged.

The US leading indicator was flat for a second consecutive month after three straight declines. Stock market prices rose, while business investment increasingly took the lead from consumer-related spending.

Output

Real GDP maintained its upward momentum with a 0.2% gain in January, the third straight such increase. Resources and construction were hampered by poor weather in some parts of the country, after leading growth in much of 2004. But consumer spending and manufacturing picked up the slack.

Manufacturing output grew 0.6% on top of a 0.4% rebound the month before, a clear sign that it is recovering from its second-half slump when the dollar rose. Capital goods industries led the way, consistent with an acceleration in business investment intentions. Demand was particularly strong for construction and mining machinery, up 21% from a year ago. Strong demand for carrying resources sent output of heavy trucks soaring. Aircraft and ICT goods also rebounded.

The recovery in manufacturing occurred despite more weakness in the auto industry. Assemblies were flat in January, and slow sales in the US suggest continued sluggishness. Gains in textiles offset losses in clothing in the first month of global free trade.

Construction and resource output fell slightly. Building was hindered the most, especially high-rise and non-residential where high winds alone can close sites. Drilling for oil and gas also slowed, while a fire hampered output in the tar sands. Iron ore remained a bright spot in mining as prices soared due to Chinese demand for steel.

Apart from retailing, services reported a slow month. Goods-handling industries saw little change in trade flows. Non-retail consumer spending edged down across the board, perhaps because it is less affected by gift cards (which are dominated by large retailers). Business services and government posted modest gains.

Household Demand

Retail sales volume jumped 2.3% in January, and another large gain for February seems assured by a 10% jump in unit auto sales. As well, retail sales in February in the Atlantic region should recover after severe storms in January. The strong performance of consumer spending early this year marks a return to the strong upward trend of the second half of 2004 that was interrupted by weak Christmas sales.

In retrospect, much of the 1.3% downturn in December sales appears to reflect the increasing popularity of gift cards. These cards were sold in large volume before Christmas, but they are not reflected in retail sales until they are redeemed, in this case after Christmas when shoppers are bargain hunting. Two-thirds of large retailers offer gift cards, up from a half in 2003, reflecting their growing popularity with consumers.

Demand strengthened across the board. Computers and electronic goods continued to lead the way, as they had throughout last year. Furniture and appliances continued to benefit from strong housing demand. Auto sales started the new year with back-to-back gains, led by the truck category, despite high gas prices.

Housing rebounded from a dip in January. Housing starts rose 5%, led by a 16% jump for multiple units, which were the most affected by the weakness the month before. Ground-breaking on single-family units edged down for the second straight month, helping to prevent an increase in unsold vacant units. Existing home sales rose 3%, driven by the booming market in Alberta and a recovery from storms in Atlantic Canada.

Merchandise trade

Import demand rose for a second straight month, recovering its previous high set last July. Exports gave back over half of their December increase, returning to the slow decline that characterized most of the second half of 2004. As a result, the trade surplus tumbled to a 2-year low of $4 billion. Most of the drop reflected increasing trade deficits with the EU and Japan.

Imports rose nearly 2%. About half of the increase originated in alcohol imported from Europe, as Quebec liquor stores restocked after a strike. Machinery and equipment demand continued to strengthen, notably machinery. Fewer auto parts needed for factory use were offset by increased demand for passenger cars. Surprisingly, consumer goods were the only area to decline.

Exports retreated 1.6%, entirely due to energy prices backing off before setting new highs later. All other sectors of export demand posted modest gains. Industrial goods remained the strongest, reflecting sharp gains for copper and other non-ferrous metals. The boom in US housing helped forestry pull out of a 7-month tailspin. Manufactured goods posted modest gains, helped by a recovery in prices as the loonie subsided.

Prices

The CPI rose 0.2% between January and February, leaving the annual inflation rate at 2.1% after a slight drop the month before. The rising cost of filling up at the pump led the increase, with even higher gasoline prices to come after crude oil hit a record high in March. Clothing prices also rose: the price of imported clothing actually edged up in January, despite fears of a flood of cheap imports from China when quotas expired.

The prices of durable goods continued to decline steadily. Auto makers stepped up incentives in a successful effort to boost sales. And the cost of computers and electronics continued to trend downwards.

Commodity prices in March continued to rise at nearly a double-digit rate. Energy rebounded from a slight dip the month before. Metals levelled off after spearheading the February increase.

Rising commodity prices and a lower exchange rate boosted industrial prices in February. The 1.1% monthly increase, on top of 0.7% recovery in the previous two months, means manufacturers have recovered two-thirds of the drop in prices when the dollar appreciated between May and November 2004. The bulk of February’s increase was due to higher prices on global markets for oil, forestry and metal products: only one-quarter was due to a lower exchange rate.

Persistent increases in commodity prices helped boost inflation in the US. Import prices rose 6% in the year ending in February, almost all due to a 30% jump in oil. Faced with rising inflation and strong growth, the Fed raised interest rates for the seventh time in a year, to their pre-9/11 level.

Financial markets

The Toronto stock market retreated 1% after jumping 5% in February. Mining and energy issues levelled off after double-digit gains the month before. Energy and metals have accounted for all of the market’s gains since the new year, with a majority of other stocks falling over that period.

Unlike the US, there was little change in interest rates in Canada. Long-term government bonds were steady, while short-term rates have been inert so far this year. Despite the rise in US rates, the Canadian dollar appreciated slowly during the month.

Corporate short-term borrowing levelled off in January and February (+0.5%), after a 2.2% increase in the fourth quarter when inventories piled up. Firms also issued over $2 billion of new equity when stock prices jumped in February.

Regional economies

Ontario’s economy improved. Housing starts in February recovered 5.5% after falling every month since last September. Retail sales rose 2.3%, its largest gain since February 2004 after declines in three of the last four months. Similarly, manufacturers reversed several months of weak shipments with a 3.3% gain, their largest since early 2004. The growth of shipments largely reflected improved export demand, where growth resumed two months after the dollar subsided. Exports rose 8.8% from a year-ago, led by large gains for commodities such as metal and paper products as well as machinery and transportation equipment. However, autos (Ontario’s largest export) did not advance in the past year.

As in Ontario, manufacturing shipments in Quebec jumped 4.5% due to widespread gains, especially aerospace. Clothing posted a drop as several small factories closed. Domestic demand for clothing remained strong, as imports fell about 5% from January 2004 despite the end of quotas while retail sales in Canada rose 0.2% (even as prices fell 0.8%). Exports improved in January, up 11% from the start of 2004. The 3.7% drop in December retail sales due to the strike at liquor stores was offset by a 4.7% increase in January.

The economy remained strong in western Canada, with the prairies setting the pace. Retail sales recovered from declines late in 2004, while housing starts also turned up. This improvement followed a 2% increase in fourth-quarter labour income, twice the national average. Shipments rose less than in eastern Canada. Food products remained a source of weakness, reflecting losses in both grains and meat products. Shipments of oil fell slightly from their record high in November, partly due to a fire in the tar sands.

Households in BC continued to catch their breath after driving national growth since the end of summer. Non-residential building permits retreated from their record high. But housing starts rose as temperatures increased. Construction and business services accounted for most of the growth in jobs in 2004 and into 2005.

International economies

In the United States, household demand was increasingly split between gains for housing and losses for autos. Housing starts rose 0.5% in February to break their 20-year record set just the previous month. January would have been even higher but for poor weather in the Northeast and Midwest, and a 20% rebound in these regions drove the gain in February.

Meanwhile, retail sales started the year on a poor note, up 0.4% in February after only a 0.7% gain in January, barely keeping ahead on inflation. While demand for housing-related items and clothing remained strong, auto sales recovered only one-third of the ground they lost to start the year.

The strength of non-automotive demand reflects the continued buoyancy of jobs and incomes. Excluding Microsoft’s huge dividend pay out in December, personal income growth in January (0.5%) was almost unchanged from December. Meanwhile, labour income in January rose 5.8% from a year earlier, the most in four years as job growth picked up in recent months.

The voracious appetite of consumers helped raise the trade deficit from $55.7 billion in December to $58.3 billion in January. Exports stalled while imports increased (despite a $1 billion drop for oil), mostly consumer goods. About one-quarter of the increase for consumer goods was clothing and textiles, with shipments from China growing after the end of quotas. The price of imported oil averaged $35 in January, its lowest since July.

Industrial production rose 0.3% in February, after slightly upwardly revised gains in the previous three months. Consumer goods led the advance, although the surge in auto output appears not to be supported by demand. More house-building supported more gains in construction materials, while the trend for business equipment remained the strongest of any sector. Warm weather was reflected in a second straight sharp decline in demand for utilities. New orders for durables remained strong, with increases for capital goods offsetting weakness in autos.

Industrial output in the euro-zone grew 0.5% in January, as demand for capital and durable consumer goods offset a decline in energy. New orders retreated after four months of growth, due to a fall in the volatile transport equipment sector. The external trade deficit widened as the energy shortfall continued to offset surpluses in machinery, autos and chemicals. Inflation jumped to an annual rate of 2.1% in February, fuelled by rising energy prices. The unemployment rate inched up to 8.9% from 8.8% to start the year.

After robust growth to end 2004, France geared down in the new year. Retail sales retreated 1.3% in February, giving back part of January’s gain. Industrial production rose just 0.2% in January, dampened by declines in autos and energy output. New orders also retrenched after a surge in December. The trade deficit continued to widen as higher energy prices boosted imports, while the unemployment rate rose to 9.8% in February.

Germany picked up speed in January, with exports gaining 6.1% despite the continued strength of the euro. Industrial production rose 3.2% following a slight rise in December. Consumer spending remained hesitant in the wake of labour market reforms. In March, the government announced a large corporate tax cut, bringing the effective rate below that of France and Italy.

Revised GDP data in Japan showed the economy growing 0.1% in the final quarter of 2004 rather than declining by a similar amount. Industrial production powered forward in January, up 2.5% from December, aided by a strong boost in auto output. A pickup in incomes helped fuel consumer spending, while demand for imports remained robust, particularly from China and the US.

China’s trade surplus soared to $11 billion (US) in the first two months of the year as exports grew 36% from a year earlier, particularly for textiles and clothing to the US and the EU in the wake of the lifting of trade quotas. Traditionally, China runs trade deficits to start the year when factories import raw materials and commodities for conversion to finished goods that will later be exported. Trade was also brisk in Brazil, which racked up a record surplus in 2004, spurred by global demand for commodities.

Note

* Based on data available on April 8; all data references are in current dollars unless otherwise stated.