11-010-XIB
Canadian Economic Observer
April 2006

Summary Table - Key Indicators

Overview*

Output continued to expand steadily in January, despite mild weather crimping demand for the fast-growing energy sector. Job growth picked up in February and March, pushing the unemployment rate to a new 30-year low.

The Toronto stock market set another new record in March, surpassing the previous high set in January. While energy stocks continued to increase, growth was led by metals. Prices on commodity markets approached or reached record highs for copper, nickel and zinc, while gold hit a 25-year and silver a 22-year peak. Strong industrial demand from Asia has driven these increases. Meanwhile, crude oil returned to $66 (US) a barrel, after the mild winter temporarily sent prices lower.

Strong labour and stock markets helped household spending start the new year on a good note. Retail sales rose almost 1% in volume, while demand was firm for most services and housing starts and sales rose at the start of the year. Some of the increase in retail sales reflected the redemption of gift cards after Christmas. Still, sales have been rising for the last four months.

Alberta and BC increasingly dominated economic growth early in 2006. Retail sales rose 2.4% in both provinces, and accounted for half the national gain in the past year. All of the surprising strength of housing starts in January and February originated in a 19% gain in Alberta and BC.

The buoyancy of household demand reflects the booming labour market in the west. Two-thirds of the 101,000 jobs added in the first three months of the year were in Alberta and BC.

The structural shift of the economy to Alberta and BC was exercising an increasing pull on the population. According to the labour force survey, the populations of Alberta and BC have grown 2.9% and 1.8% in the past year. Ontario and Quebec both had gains of 1.7%. But the six smaller provinces found it increasingly difficult to retain people as they sought better opportunities elsewhere, with an overall gain of only 0.1% in the past 12 months and an outright decline so far in 2006.

Labour Markets

Employment picked-up to 0.3% between February and March, raising year-over-year growth to 2.1%, the most since mid-2004. Almost all of the increase was in full-time positions, continuing a year-long trend. While the labour force was boosted by a sharp influx of youths, the unemployment rate still dipped from 6.4% to 6.3%, the lowest on record back to 1976.

Firms added 72,000 employees last month. Natural resources again saw the fastest growth, up 3%. Construction levelled off, but remains tied with resources for the largest gains in the past 12 months (at 8.6%). A wide range of services expanded, notably recreation and transportation. Health care drove an increase in the public sector. Manufacturing remained a notably exception to growth, shedding another 12,000 workers.

Alberta and BC continued to lead job growth: in the past 12 months, they were the only provinces to surpass the national average (up 4.0% and 3.7%, respectively). And all of their increase continued to be full-time jobs, one reflection of the tight labour markets in both provinces (BC’s unemployment rate fell to a record low of 4.4%). Natural resources and construction continued to fuel growth in Alberta, as these industries increasingly drew resources from other sectors. BC’s gain was led by a wide range of services and construction.

Central Canada continued to lose factory jobs. Unlike Quebec, however, Ontario more than compensated with gains in construction and services (notably in finance). As a result, unemployment edged up to 8.5% in Quebec while easing to 6.1% in Ontario. Employment was little changed in the six smaller provinces.

Leading indicators

The leading index grew by 0.2% in February after downward-revised gains of 0.3% in January and 0.4% in December. The February easing partly reflected a slowdown in the housing and stock markets after unusually sharp gains in January. Overall, seven of the ten components increased, one was unchanged and two declined.

Household spending remanded mixed. Housing slowed from a sharp upturn in January when unseasonably warm weather gave a boost to housing starts. Furniture and appliance demand remained a pillar of strength, but spending on other durable goods stayed sluggish, notably for autos which have been weak ever since discount programs expired last autumn.

The US leading indicator grew by 0.4%, its largest advance in over a year. The US economy appears to be strengthening after real GDP growth slowed from the third quarter (+1.0%) to the fourth quarter (+0.4%), largely due to a number of irregular factors.

Manufacturers continued to grapple with a number of conflicting factors. The underlying trend of demand remains positive, largely thanks to strong business investment in Canada and exports to the US. This was reflected in rising new orders and shipments. But margins remained under pressure from rising energy costs and the exchange rate. Firms continued to slash the workweek and jobs in a bid to boost productivity.

Output

The volume of GDP rose 0.2% in January, its fourth straight month of solid growth. One of the warmest Januarys ever led to a 2.7% drop in energy output, which had risen 6% between March and December in response to higher prices and demand. Besides reducing the need for heating, the warm weather also hampered drilling activity, which tumbled 12% as rigs could not be moved over soft ground (drilling activity had already stalled in the previous three months, partly as equipment was diverted to help repair hurricane damage to Gulf Coast operations).

The warm weather did stimulate some other sectors. Home-building in North America was unexpectedly high, and this was reflected in solid gains in construction as well as lumber and non-metallic minerals. Other areas simply responded to strong demand, notably computers and electronic products and primary metals (notably aluminum, where output rose for the twelfth month in a row, a cumulative 23%). Overall, manufacturing output rose just 0.1%, dampened by cuts in the auto sector.

Strong business and consumer demand kept most services growing in January. Telecommunications again led the way, while finance was boosted by large gains in trading of securities and real estate. Retailing and accommodation and food both grew about 1%, as the warm weather encouraged shoppers to venture out. Business services grew steadily, driven by demand in western Canada.

Household Demand

Retail sales volume grew 1% in January, its fourth consecutive increase. A number of factors pushed sales up early in the new year, including gift cards and the warm weather. But these factors only accentuated a well-established upward trend built on strong growth in jobs and real incomes.

The recent surge in consumer spending was also done with little contribution from autos, which have languished since large sales incentives ended last summer. Instead, consumer interest has shifted to housing-related items, especially TVs, electronics and furniture and appliances. Lower prices also stimulated clothing purchases.

The housing market remained buoyant to date in 2006. Housing starts remained above 240,000 units (at annual rates) in February, holding on to most of January’s large advance. Growth so far this year was led by single-family homes. Still, construction of new homes was not enough to keep up with demand, and the backlog of unsold homes fell to its lowest level in over two years. Existing home sales posted back-to-back gains to start the new year, fuelled by demand in Alberta. New home prices in Edmonton and Calgary rose 21% and 12% in the 12 months ending in January, a measure of the strain in these local markets. The next largest increase in Canada was Halifax (at 6.5%).

Merchandise trade

Exports retreated 3.3% in January, largely due to a drop in shipments of energy to the US. Temperatures in January were the warmest ever in the US for that month. Natural gas bore the bunt of the decline, down 24% due mostly to falling prices.

Non-energy exports edged up, thanks largely to gains for autos and forestry products, two of the laggards in 2005. Passenger car exports led autos, as the US market recently shifted from the light truck category to cars in response to high gas prices. Lumber boosted forestry with a fifth straight increase in the aftermath of hurricane Katrina.

Most other exports were little changed. The first significant gain in a year for wheat buoyed food exports, while industrial goods were boosted by higher shipments of precious metals. Machinery and equipment stalled after a strong end to 2005.

Imports were steady after four months of modest growth, as a 12% drop in energy offset gains for consumer and automotive goods. Consumer goods jumped 4.4%, led by pharmaceutical products from Europe. Business demand for machinery and equipment paused after leading growth last year.

Prices

The consumer price index fell 0.3% between January and February, reversing about half of the jump the month before and slowing the annual rate of inflation from 2.8% to 2.2%. Gasoline prices tumbled 7% to lead the decline. The mild winter also pushed down the cost of natural gas.

Elsewhere, clothing retailers discounted prices heavily for a second straight month. The price of durable goods was lowered by declines for appliances, where imports from China have helped cut prices by 2.3% in the past year. But prices of electronics took a break from their steady drop over the past two years.

Commodity prices recovered slightly in March, after two months of sharp declines for energy. Energy rebounded, led by oil, which rose to $66 (US) a barrel by month end. The free-fall in natural gas prices, which were most affected by the mild winter, came to an end. Prices for metals continued to hit new highs, a measure of the strong underlying trend of Asian demand for commodities. Zinc jumped 37% from the fourth quarter, while copper, nickel and aluminum all rose about 15%.

Industrial prices fell 0.4% in February. Half the drop was due to the rising dollar, and most of the remainder reflected lower petroleum prices. Metals were a notable exception to the downward trend.

Financial markets

The stock market rebounded 3.2% in March, surpassing the record level set in January. Monthly growth was narrowly based in energy and mining. So far this year, stock prices are up 8%, led by an 18% gain in mining and 10% for energy. All other sectors also rose, except utilities. Strong equity prices continued to elicit large new issues.

The Bank Rate was raised 25 basis points to 4.0%, double its level before the current round of increases began late in 2004. Meanwhile, rates in the US have risen from 1% to 5% over the same period. With bond rates steady, this led to a further flattening of the yield curve. The stability of bonds here in Canada contrasts with increases in Europe, Japan and the US to their highest levels in over a year. This gap helped trigger record Canadian purchases of foreign bonds in January.

Despite the recent hike in interest rates, investors continued to favour mutual funds outside of money markets. The Canadian dollar retreated slowly from its high of (US) 88 cents early in March.

Regional economy

The west coast saw the biggest improvement in demand, following large increases in labour income at the end of 2005. Retail sales in BC rose 2.4% in January, their strongest advance in a year, and housing starts jumped by one-quarter in February. Exports slowed, largely due to copper which appears related to the end of strikes in Chile in January. BC’s copper shipments to Japan and Korea returned to more normal levels after strong increases at the end of 2005 (BC is Canada’s largest copper-producing province). Still, the marked increase in industrial production in Japan and Korea in February should benefit the west coast. The health of the Japanese economy in particular has a direct impact on British Columbia exports (see Figure 4).

Shipments continued to increase on the Prairies, posting their twelfth gain in thirteen months mainly on the strength of capital goods. In January, Manitoba registered the most rapid increase in shipments (9.8%), led by transportation equipment, machinery and wood. Shipments of non-metallic minerals—the materials most used in construction along with wood—continued to grow steadily, and are up by a half in one year. The same was true in Saskatchewan for electrical products, which have also advanced by one-half in the past year. In Alberta, shipments held onto their 4.4% gain in December. A drop in food shipments was offset by continuing increases for wood, non-metallic minerals and computer equipment. Household demand was also strong in this province: retail sales surged with the payment of the $400 prosperity cheques, while housing starts approached historic highs.

Services and resources continued to propel growth in Quebec. Refineries again boosted manufacturing shipments, and they exceeded the value of gasoline shipments in Ontario for the first time. The tourism industry and office towers planned in the Montréal area caused monthly building permits to jump 12%, and 40% year-over-year. Retail sales rose 0.8%. Not surprisingly, these sectors have dominated employment growth since last fall. It is also in these sectors that construction investment has increased the most in the 2000s, compared to the rest of Canada. Investment plans continued to grow for 2006, with three large construction projects nearing completion: Faubourg Boisbriand, Quartiers Dix30 in Brossard and the Lac Mirabel recreational-tourism and commercial complexes.

Ontario continued to lag slightly, with shipments down 2.1% owing to weakness in the province’s automobile sector. However, prospects remain bright in that sector: new motor vehicle sales started the year on a positive note in January with a monthly increase of 1.4%, their third gain in four months. And despite high gasoline prices, retail sales continued to advance strongly. A decline in housing starts was related to a return to more seasonable weather in February.

International economies

In the United States, economic trends in February were dominated by the return to more normal temperatures after record warm weather in January. Industrial production rebounded 0.7%, as utility output recovered 8% after a 12% drop the month before. Conversely, manufacturing output slowed to a 0.1% gain due to a pronounced slowdown for business equipment. This may reflect a weaker underlying trend of spending, as new orders for non-defence capital goods (excluding aircraft) fell 2% as a result of widespread declines.

Household spending remained robust, consistent with better job growth and lower energy prices in February. Housing starts gave back only half of January’s weather-related jump of 16%. While new home sales fell sharply, existing home sales rose 5%, their first gain in six months. Housing prices continued to rise at a double-digit rate. Retail sales also gave back about half of January’s 3% increase, due mostly to slower auto sales. Reconstruction after Hurricane Katrina boosted year-over-year sales of building materials from less than 10% last summer to 20% in February.

The current account deficit hit a record $225 billion in the fourth quarter, or 7% of GDP. The monthly trade deficit in goods and services continued to widen, reaching $68.5 billion in January. While exports posted a fourth straight gain, they could not keep up with imports, especially of energy products. Nearly one-quarter of Gulf energy output remains off-line after hurricane damage.

Output remained stable in the euro-zone to start the new year. Industrial production was flat in January as lower energy offset increases elsewhere. New orders, however, gave back December’s gain as demand waned for transport equipment and textiles. The trade deficit deepened as growing energy imports outweighed continuing surpluses for machinery, vehicles and chemicals. Trade continued to expand with India, Russia, China and South Korea. Consumer spending picked up in January after being dormant late in 2005. Inflation eased to an annual rate of 2.3% in February.

The German economy picked up early in the new year with industrial production rising and new orders rebounding from their year-end slump. Business confidence hit a 15-year high in March, aided by the strength in exports. Consumer spending also recovered in January, up 2.7%.

Industrial production in France continued its see-saw pattern in January, more than recovering its December drop. New orders fell, however, due to the volatile transport sector. Inflation eased in February after a sudden jump the month before, giving a boost to consumer spending.

Output slowed in Italy in the new year, as both production and new orders retreated from their December levels. The trade deficit continued to widen as exports to Asia tapered off. High labour costs eroded export competitiveness, while energy imports continued to climb.

Industrial production in Britain maintained its December pace, up 0.4% in January. Consumer demand slowed, however, after a surge in Christmas spending. The inflation rate rose for the first time in five months in February, hitting the Bank of England’s target of 2%.

Japanese industrial production rose for a sixth straight month in January, boosted by robust business investment. Improved corporate profits, up for the fourth straight year, also spurred hiring. As a result, the unemployment rate fell to its lowest level in almost eight years in February at 4.1%, while the jobs-to-applicants ratio hit a 14-year high of 1.04. Consumer confidence rose, sparking steady gains in retail sales. Inflation rose for the fourth consecutive month in February, up 0.5%, further signifying an end to seven years of deflation.

Note

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