11-010-XIB
Canadian Economic Observer
April 2007

Summary table - key indicators

Overview*

Output and employment continued to grow early in the new year, although the change from record warmth to below-average temperatures after mid-January make monthly changes hard to interpret. The cold snap had an even larger impact on the US economy.

National net worth jumped 2.7% in the fourth quarter, led by a record drop in net foreign indebtedness. This reflected continued large purchases of foreign bonds (notably Maple bonds) as well as a drop in the exchange rate. Firms in Canada also issued more bonds, leading to the first increase in their debt-to-equity ratio since early 2003, although they appear to have regained their preference for equity issues early in 2007.

Foreigners continued to issue large amounts of Maple bonds in Canada (foreign bonds denominated in Canadian dollars). Nearly three-quarters of the record $6.2 billion of foreign bonds Canadians bought in January were Maple bonds.

Household net worth in Canada continued to expand rapidly, with growth doubling to 3.8%. The stock market led the increase. Homeowner net equity continued to post solid gains of over 3%. In the US, homeowner net equity resumed its increase in the fourth quarter: however, after a pause in the third, the year-over-year increase in homeowner equity in the US was up less than in Canada (4% versus 15%). Most of this gap reflected stronger prices for existing homes in Canada.

Cross-border shopping trips by Americans to Canada fell 12% in January, tumbling below the 1 million mark for the first time on record back to 1972. US same-day car trips to Canada have declined steadily from about 2 million when the loonie began to rise four years ago. Almost all of the January drop was into Ontario, which was plagued by poor weather. Fewer travellers to Canada dampened retail sales and travel-related services, notably gambling (which is heavily reliant on cross-border trips from the US).

Labour markets

Employment increased 0.3% in March, capping its largest quarterly increase (1%) in over four years. However, hours worked in the first quarter rose only 0.3%. Part-time positions grew faster than full-time, a reversal of the trend in 2006. Partly, this reflects the sharp growth of jobs held by youths, who have a marked preference for part-time work. With the labour force also expanding rapidly, especially adult women, the unemployment rate remained at its 30-year low of 6.1%.

For a second straight month, services contributed all the growth in employment. Accommodation and food led the way, and at 8.8% posted the largest year-over-year growth of any major sector. Trade also saw solid gains. Goods were pulled down by losses in natural resources and construction, both industries where work outdoors could have been hampered by the cold.

Employment growth was concentrated in central Canada and BC. Accommodation and food and other services led the increase in Ontario and Quebec, after their slow start to the year. BC was driven by an increase in manufacturing. The unemployment rate in BC dipped to 3.9%, making it the only province outside of the prairies to ever breach the 4% mark. The labour market cooled in Alberta, after a brisk start to the year.

Leading indicators

The composite index rose 0.7% in February, topping its 0.5% gain at the start of the year. Growth was led by a pick up in new orders for manufactured goods and continued strong consumer spending and financial markets. Only one of the ten components fell in both January and February.

Consumer demand for durable goods remained buoyant at the turn of the year. Robust labour market conditions and lower gas prices fuelled strong growth in real incomes. However, housing retreated sharply in February, as a return to seasonable winter conditions followed the unusually balmy conditions that had boosted starts and sales in the previous two months.

Financial market conditions continued to improve. The stock market hit new highs early in the new year, before its recent slip. The optimistic outlook for firms was reflected in investment intentions. Firms plan to spend 5% more in 2007, their fourth straight year of strong growth. Almost all sectors plan to boost investment, with energy again leading the way as gains for utilities and the oilsands offset cuts by natural gas producers.

New orders for durable manufactured goods jumped 1.8%, their largest monthly advance in over two years. A rebound in transportation equipment led the upturn. The increase in demand already had started to be reflected in higher output and shipments late in 2006, although not enough to reverse the drop in the ratio of shipments to inventories. Manufacturers remained cautious about their labour demand, as the workweek stayed the same while layoffs multiplied.

The US leading indicator rose 0.2%, continuing its gradual recovery from declines in the second half of 2006. Continued strong labour market conditions were reflected in higher consumer confidence. Industrial production rebounded sharply in February, led by a recovery in autos and the need for power as cold temperatures lingered.

Output

Monthly real GDP grew 0.1% in January, reinforcing the gains of 0.3% in November and 0.4% in December. Energy demand led the way, up 1.5% as colder weather finally arrived (especially in the US). Energy output had fallen in each of the previous three months due to unseasonably warm weather. Increased demand for oil and gas also boosted drilling for the first time in six months.

The belated arrival of winter had a mixed impact on other sectors. The mild start to the year gave a boost to construction, especially high-rise buildings. House sales posted their largest increase in nearly a year. However, the lack of snow at ski resorts in eastern Canada hampered recreation and travel-related industries.

Manufacturers trimmed output 1%, giving back about half of their gains in the previous two months. Fewer auto assemblies drove most of the decline, reflecting lower exports to the weak US market. Sawmills and ICT manufacturers continued to trim output. Capital goods and primary metals remained the major areas of growth.

Many services were hampered by the weather. This was especially true of travel-related industries, such as gambling, accommodation and air transport. Financial and business services grew steadily, reflecting robust trading in financial markets and strong business profits and investment plans.

Household demand

Retail sales volume was flat in January, after a 2.2% surge in December. All of the slowdown originated in lower auto sales. Auto purchases continued to slow in February, partly because cold weather deterred consumers from venturing out.

Non-automotive demand was robust in January. Spending on electronic goods, notably TVs, continued to lead the increase. Furniture and appliance sales were supported by strong house sales at the turn of the year. While December’s hefty price discounts for clothing came to an end, the arrival of cold weather spurred sales (just as it did in the US). The cold snap also spurred a large increase in household spending on utilities.

The prolonged cold snap in February sent housing starts plunging 21% to less than 200,000 units (at annual rates), their lowest level in three years, while also pushing new home sales sharply lower. Existing home sales were less affected, giving back only about a third of their gain in January. Continued strength in Alberta and Vancouver offset losses in central Canada.

Merchandise trade

Exports in January rose for a third straight month. Exporters continued to diversify away from the US, with exports to the rest of the world up 2.6%. With imports retreating from December’s record high, this sent the monthly trade surplus over $6 billion for the first time in a year.

Export earnings increased 1%, after solid gains in the previous two months. Exports have recouped all of their losses in the first ten months of 2006, reaching a record $40.7 billion, just ahead of the previous mark set in December 2005. Machinery and equipment led the advance, reflecting widespread gains supplemented by a large shipment of drilling equipment. Industrial goods continued to set new highs, buoyed by record prices for metals. The recent upturn in agricultural prices moved exports into uncharted territory, especially soybeans and corn. Forestry products eked out a second straight increase, but remained the weakest sector over the past year after steady declines through most of 2006.

Energy was the only resource sector where exports fell, much of it due to lower oil prices. The fourth-quarter rally for auto exports came to an end, in line with weaker truck sales in the US after new emissions standards took effect.

Imports retreated almost 3%, mostly due to lower volumes, after three consecutive monthly increases. All sectors fell, except food which was boosted by higher prices for imported fruits and vegetables. Auto imports fall the most, reflecting both lower sales and assemblies in Canada. Most of drop in machinery and equipment reflected a dip in the volatile aircraft component. Consumer goods imports slipped despite continued strong sales for clothing and electronics.

Prices

The CPI rose 0.5% between January and February, lifting the annual inflation rate from 1.2% to 2.0%, the most since September 2005 (when energy spiked in the wake of hurricane Katrina). Food and energy led the monthly increase.

Energy was driven by a 10% hike in gasoline prices in Ontario, the result of local shortages caused by a refinery fire. Gasoline prices were little changed in the rest of the country. Food prices were boosted by the rising cost of imported vegetables resulting from crop damage in California.

The cost of shelter started to moderate, after putting the most upward pressure on prices over the past year. This largely reflects a slowdown in new house prices, where the year-over-year increase decelerated from a high of 12.1% last summer to 10.1% in January (mostly due to smaller price hikes in Calgary). Mortgage interest costs have also begun to slow.

Elsewhere, the cost of durable and semi-durable goods continued to trend down. While auto companies have moved away from relying on incentives to boost sales, prices continued to fall for a wide range of electronic goods. Clothing retailers returned to price discounts after weak sales in January.

Commodity prices edged down in March, after large gains at the start of the year. The end of the coldest February since 1979 in the US helped energy prices moderate, although inventory levels remain low (especially for gasoline, as the driving season approaches). Metals prices continued to set records, notably nickel, while copper hit a 5-month high.

Financial markets

The stock market resumed its upward march, rising 1% in March after a pause the month before. The increase was led by a recovery for energy, snapping a 3-month slide. Metals continued their advance in tandem with prices on commodity markets, while financial issues also rose steadily. Strong stock prices triggered $5 billion of new issues in February, the most in over a year.

The Canadian dollar rose a full cent to over US 86 cents. Interest rates were little changed across the spectrum. Despite low rates, firms retired long-term debt in the first two months of the year, while sharply stepping up equity issues.

Regional economies

Business investment intentions for 2007 grew the most in central Canada, after lagging western Canada’s growth in 2006. This broadly reflects strong growth in utilities as well as a rebound in manufacturing in central Canada, and a cooling of the oil and gas sector in the west. Investment in Atlantic Canada continues to rise only 2% a year.

Quebec led the major provinces with an 8% the increase in business investment plans, after trailing the national average for four years. Mining led the way with a 50% ($0.4 billion) hike in spending, reflecting intense interest in gold and other metals in the north. Manufacturers plan a 7% increase, led by more investment in resource industries. However, food processing, textiles and clothing all plan more cutbacks. Services were buoyed by gains for commercial real estate, transport and wholesale trade.

Firms plan to spend 6% more in Ontario, slightly less than the year before. Electric utilities (including wind energy) again accounted for nearly half the increase. Most manufacturers intend to spend more, apart from the auto industry, which made large investments in 2006. Most services plan to expand, led by transportation, retailers and finance.

After double-digit gains in 2006, investment growth in both Alberta and BC slowed to less than 5%. Most of the slowdown originated in sharp cutbacks in conventional oil and gas (mostly the latter). In Alberta, these cuts were offset by an acceleration of spending on the oilsands (which kept total spending on oil and gas rising) and utilities. Growth in BC was sustained by utilities as well as resource-based manufacturing. Transportation investment also remains strong (after rising nearly 50% in 2006) as BC ports, harbors, air terminals and roads all struggled to handle the increasing flow of people and cargo, especially from Asia.

Investment plans fell outright for Saskatchewan, Newfoundland and Nova Scotia: all three declines were the result of cutbacks in the oil and gas sector (of 14%, 33% and 57%, respectively). New Brunswick and Manitoba posted large increases in investment, mostly reflecting strong growth in utilities and manufacturing.

International economies

In the United States, weather dominated economic performance in February. The coldest February in over a quarter of a century sent utilities output to a record high, powering a 1% gain in industrial production. Auto assemblies led a recovery in manufacturing output.

The cold snap also discouraged consumers from venturing out. As a result, retail sales were flat, while new house sales slipped, especially in the Northeast, which was more affected by the winter blast. Housing starts rebounded (despite a 30% drop in the Northeast) from a sharp decrease in January. Building permits fell over 2% in both months, probably a better indication of the underlying trend. Lower prices helped existing home sales post their largest monthly gain in almost two years.

With household demand slowing, the economy was increasingly reliant on business investment and exports for growth. Exports rose for the sixth consecutive month in January, driven by investment and consumer goods. With imports down (despite a $1 billion increase for oil), the trade deficit fell to $59.1 billion. This follows a $34 billion drop in the fourth-quarter current account deficit, which fell below $200 billion for the first time in over year.

Conversely, the year started poorly for investment. New orders for capital goods fell in January and February, after profits posted their first quarterly decline in over two years (excluding the drop related to Hurricane Katrina).

Industrial production in the euro-zone downshifted in January after a strong gain the month before. Output fell across the board with the exception of a small rise in capital goods. New orders followed suit, unable to sustain their strength in the final quarter of 2006. A surge in demand for electronics was negated by a retreat for textiles. The external trade deficit narrowed in January as rising surpluses for chemicals, machinery and autos more than offset a growing energy deficit. Rising interest rates helped dampen consumer spending early in the new year, despite mild weather and retailer discounting. Inflation was stable in February at 1.8%, while the unemployment rate eased to 7.3%.

German industrial production was robust in January, rising 1.7% due to strong foreign demand despite the rising euro. Retail sales plunged almost 10%, their steepest drop since reunification in 1990, as the VAT was raised to 19% from 16%. Unemployment fell to a six-year low in March, pushing the jobless rate down to 9.2%, while inflation, boosted by the VAT, jumped to 1.9% in February from 1.4% at the end of last year.

Industrial production in France continued its see-saw pattern, falling slightly in January. Boding well for an upswing, new orders surged 7%, one of the strongest gains in the euro-zone, and were up 18% from a year earlier. Robust production and strong orders boosted business confidence to its highest level in a year. Consumer spending picked up after a slump in December. Inflation eased to an annual rate of 1.2%, the second lowest in the euro-zone, while the unemployment rate fell to 8.4% in February, its lowest in 24 years.

In Britain, industrial production stalled in January, after a small decline the month before. The strength of the pound continued to dampen exports. Britain posted the largest external trade deficit in 2006 in the euro-zone. Consumers reined in spending in the new year, almost wiping out their December gain. The government tabled its new budget in March, cutting both income and business taxes in an effort to boost demand.

Japan revised its fourth-quarter GDP growth upwards to 1.3% due to strong business investment, up 3.1% from the third quarter, while public sector investment was raised a full percentage point to 3.7%. Consumer demand remained upbeat in January after solid gains at the end of last year.

China’s industrial production surged to start the year, growing a combined 18.5% in January and February from a year earlier. Export demand was strong in February, totalling $82.1 billion, up 52% from a year ago.

Note

* Based on data available on April 5; all data references are in current dollars unless otherwise stated.