11-010-XIB
Canadian Economic Observer
April 2008

Summary table - key indicators

Overview*

Output in January rebounded smartly from a sharp drop in December, reflecting a widespread increase in demand. This is consistent with employment, which picked up steadily through the first quarter.

The bounce in output in January reflected the transitory nature of the factors that depressed GDP in December. Just over half of this decline originated in a sharp slowdown in auto assemblies, the majority of which were related to model changeovers at several factories. Auto output in January recouped about half of these losses, and will continue to strengthen in February as more retooling is completed and cuts to control inventories moderate.

As well, the sharp recovery of transportation and housing starts and a surge in auto sales in January points to heavy snow in December and the impending cut in the GST rate as factors that shifted a significant amount of activity from December to January. Observers should keep this in mind when analyzing data for February and March, which saw record snowfalls in Eastern Canada (while housing starts continued to rise rapidly in February, snow was cited as a factor in slower home sales and hampered retail sales as well, according to several reports from retailers). Besides deterring consumers from going out, snow slowed transportation (especially by air and road), while extreme cold shut down oilsands and other operations in northern Alberta and BC for several days in February. The steady gains in employment through the first quarter is probably a good guide to the underlying trend of the economy.

The major economic development in the first quarter was the increasing gap between growth in Canada and mild contraction in the US. Nowhere was the divergence more evident than in the auto and housing markets, which remained robust in Canada even as they deteriorated further in the US. Household spending in Canada was supported by steady growth in employment and incomes, while commodity and stock market prices remained high. In the US, confidence plummeted as jobs shrank, food and energy prices boosted inflation and the financial system remained under duress.

The strength of the housing market in Canada was a key to keeping the net worth of Canadian households expanding in the fourth quarter 6.4% from a year earlier. The 9% gain in homeowner equity in Canada was in marked contrast with the 4% drop in the US. Financial flows data show steady growth in business credit on both sides of the border, despite tighter credit conditions.

Regional economies

Every province will benefit from higher business investment in 2008, according to the survey of investment intentions. The pervasiveness of the increase reflects the boom in energy investment in the western Canada and Newfoundland, a surge for mining in Quebec and BC, and a rebound in manufacturing in central Canada.

Firms in Alberta plan the largest dollar increase in business outlays, up $2.5 billion. The continuing boom in the oilsands and pipelines related to their development drove this increase. Pipelines also played a major role in investment growth of over 20% in Manitoba and Saskatchewan, supplemented by gains in mining and hydro development.

Firms in BC intend to raise capital spending for a sixth straight year, the longest string of unbroken gains in Canada. Its oil and gas industry plans the largest hike of any province this year, after it slowed in 2007. The mining industry also intends to nearly double investment to $1.2 billion. Increased spending downstream in smelting and refining helped offset declines for manufacturers of forestry products.

Manufacturers in both Quebec and Ontario intend to invest more, after cutbacks in 2007. Refiners of oil and metals led the turnaround in Quebec. Further upstream, mining operations in Quebec also plan a large increase to $1.9 billion, the most in Canada (reflecting Quebec’s diverse metals base of gold, copper and iron ore). Ontario’s manufacturing investment increase was smaller but more broadly based than Quebec. As well, gains in finance and transportation offset a drop in mining (one of the few for this industry anywhere in Canada, as a major expansion was completed in 2007).

Since 2002, investment in both Ontario and Quebec has risen by a steady pace of just over 30%. This is less than half the gains in the prairies and BC, and slightly ahead of the Atlantic region.

Newfoundland led investment plans in the Atlantic region thanks to its offshore oil development. All the maritime provinces posted modest gains in intentions for 2008. New Brunswick has the smallest projected increase of any province, as work slowed in transportation.

Labour markets

Employment rose 0.1% in March, lifting first-quarter growth to 0.5% after solid gains in January and February. All of March’s increase was in part-time positions, especially in central Canada which was several affected by heavy snow during the month. Together with poor weather and people taking more holidays, this reduced hours worked nearly 1%. A sharp expansion in the labour force, especially for adult males in Ontario and BC, helped raise the unemployment rate from 5.8% to 6.0%.

There was a significant provincial dimension to labour market changes in March, which may reflect unusual weather patterns across the country. While snow approached record highs in eastern Canada, western Canada began to recover from the coldest February in years. Partly as a result, job growth picked up sharply in Alberta and BC, led by construction. Conversely, construction fell in Ontario and Quebec. Manufacturing in central Canada recovered, but this was offset by losses in Alberta and BC. The financial sector shed large numbers of jobs in Ontario and BC.

Leading Indicators

The smoothed composite index dipped 0.3% in February after a 0.1% gain in January. Four of the ten components increased, and six decreased. Most of the weakness originated in a sharp contraction of manufacturing, especially autos, at the turn of the year. A rebound in household demand and the stock market have not yet impacted the smoothed version of the index (which uses a 5-month moving average).

Household demand improved across the board. Spending on durable goods rose modestly, even before the reduction in the GST rate gave a further boost to auto purchases in January. The housing index fell as lower existing home sales offset higher housing starts in both January and February.

The stock market continued to trend down. Higher commodity prices led firms to plan more business investment in 2008, especially in energy and metal mines. Strong business demand was reflected in the growth of services employment in February.

The leading indicator for the United States fell 0.2%, after revisions aggravated its declines late in 2007. Continued weakness in housing and consumer confidence also helped lower the stock market in the US.

Manufacturing contracted at year-end, driven by the sharp drop in auto output. As a result, orders, shipments and the average workweek all tumbled. The estimated workweek for December was revised down significantly.

Output

Real GDP rebounded 0.6% in January from its December drop, leaving the level of output 0.2% above its fourth quarter average. Goods recovered less than half the ground lost in December, but services grew sharply after the GST rate fell and weather improved.

Demand for services jumped 0.5%, their largest advance since last May. Retail and other consumer services led the gain. Some sectors bounced back from the crippling effect of heavy snow, notably transportation (especially truck and rail) and the performing arts and spectator sports. Wholesale trade also rebounded sharply as the flow of goods returned to normal. Financial and real estate activity remained brisk, while business and government services grew slowly.

Manufacturers led goods, recovering half of December’s 3.4% decline. Auto assemblies led the upturn. Most other industries also expanded, notably machinery (where agricultural equipment posted a seventh straight increase) and wood (which snapped a string of eight consecutive cuts).

Output in the primary sector remained depressed. Forestry operations again fell sharply. Little offset came from mining, as an upturn for oil and gas was largely offset by widespread losses in metal and non-metal mines. The drop in metals output continues last year’s trend of high prices eliciting no increase in supplies.

Household demand

Retail sales volume rose 1.0% in January, improving on the gains of 0.5% in November and 0.7% in December. A sharp jump in auto sales led the increase, but most sectors of demand benefited from a rebound from storms in December, the reduction of the GST on January 1, and the proliferation of gift cards which have shifted some Christmas shopping into the new year. As well, trips by Canadians to the US fell 8% in December and January (far exceeding the drop in US visitors to Canada). Half the decrease was in same-day auto trips, which accompanied the loonie retreating to parity with the US dollar and poor weather for traveling.

Auto sales rose 14% in number in January, notably for passenger cars. Along with the GST cut, firms continued to lower prices in response to the stronger loonie. By February, auto prices were nearly 7% below a year-earlier, the largest drop in half a century. Unit auto sales dipped 5% in February, but remained at historically high levels.

Spending on other durable goods also rose sharply. Computers and TVs recovered from a rare slowdown the month before, suggesting the impending GST cut induced consumers to wait until January to buy these goods. Housing-related items also rebounded in January. Clothing demand rose sharply after a weak fourth quarter.

Conditions in the housing market remained volatile. Housing starts in February jumped 18%, on top of a 25% rebound in January from a storm-related drop in December. Much of the February increase originated in multiple units. Ground-breaking on single-family homes also rose 2%, ending a 2-month slide. New home sales have been on an upward trend since last autumn, posting their first year-over-year increase since July 2007.

However, existing home sales fell in February. For the second time in three months, weather played a role in the decline. In Toronto, for example, record snow for the month also fell on every weekend, leading to a slowdown in foot traffic in homes according to the local real estate board. Heavy snow continued to affect southern Ontario and Quebec into March, preventing households from venturing out and slowing construction and transportation.

Merchandise trade

Higher prices, primarily for oil and gold, pushed export growth in January to its fastest pace in more than a year. A 3.6% rise in exports paired with a 1% gain in imports widened the trade surplus to $3.3 billion.

Crude oil exports hit a record high of $4.6 billion, buoying exports to the US. Increased shipments of canola, fertilizers and uranium as well as higher price for gold boosted exports to the rest of the world.

Canola sales have been on a steep upward trend since mid-2007, reaching a record $300 million in January 2008. Strong demand from China has been a major contributor, doubling to $300 million for all of 2007 and hitting $100 million in the first month of 2008. Agricultural exports rose above $3 billion for the first time ever as a result of rising demand and prices for canola as well as other grains.

In contrast to most resources, machinery and autos have been sluggish in recent months as aerospace production ramps up again for 2008 and auto assemblies are retooled for new specifications.

Import gains were concentrated in energy products, including crude and refined petroleum, as bitterly cold weather and unanticipated refinery closures interrupted regular interprovincial flows.

Prices

Consumer prices edged up 0.1% between January and February, resulting in a slowdown in the year-over-year increase to a 6-month low of 1.8%. While the cost of housing, food and energy continued to rise, this was largely offset by a sharp drop in the price of durable goods.

Prices for durable goods fell 1.1%, matching their retreat in January when the GST rate fell a point. While the rate of decline slowed for most durables, it intensified for autos. Auto prices have fallen 6.8% in the past year, with the bulk of the decline occurring last summer and in the first two months of this year. The drop in February appears to be a response to the loonie’s rise to parity with the US dollar, as sales in Canada remain strong.

Food and energy prices continued creep up in response to higher grain and oil prices on world markets. Strong demand for housing and travel kept services prices rising at an above-average rate.

Commodity prices rose again in March, with most of the gains in the first half of the month. Food prices eased slightly after grain prices spiked in January and February (although the price of rice hit a 34-year high in March, leading some countries to ban exports and suppress domestic prices). Metals prices continued to shine, with gold passing $1,000 (US) an ounce and copper hit a new record early in the month. Energy prices also set new records. Crude oil extended their run above $100 a barrel, while natural gas continued to rise as cold weather in the US helped further reduce inventories.

Financial markets

The stock market retreated 4% in March, after recovering in February all the ground lost in January. Energy and mining stocks fell slightly after double-digit gains the month before, while financials continued to slide. The US stock market continued to tumble much faster, down 10% so far this year versus a drop of only 3.5% in Toronto. This reflected the greater orientation of US markets to financial companies, which fell sharply after the near-failure of the Bear Stearns investment dealer (which was a heavy investor in the sub-prime mortgages).

Credit demand expanded steadily in the new year. Household credit grew 1% in January, reflecting healthy gains for big-ticket items like housing and autos. Short-term business credit rose steadily into February. However, net new issues of both stocks and bonds slowed sharply after large issues in January.

The Canadian dollar continued to hover around parity with the US greenback for the fifth straight month. Short-term interest rates followed the drop in the Bank Rate, while yields on government bonds posted similar declines.

International economies

In the United States, the housing market showed signs of temporarily leveling off, as lower prices helped existing home sales post a 2.9% gain in February after no change in January. Though new home sales slipped 1.8%, most of the decline was concentrated in the Northeast where traffic was interrupted by snow storms. Housing starts slid 0.6% but all regions aside from the Northeast were stable or registering gains. However, building permits fell 7.8% and the declines were spread across the country, suggesting the correction may not yet have run its course.

The financial sector has been hard hit by the drying up of markets for various instruments, a point driven home by the recent bailout of Bear Stearns. Employment in finance has fallen by 100,000 since last July, the most of any industry outside of construction and manufacturing. Given the size of the sector, comprising nearly 10% of GDP (much larger than it is in Canada), this will be a major drag on growth in the first quarter.

A respite from January’s colder temperatures sent utilities output tumbling, accounting for over half of February’s 0.5% decline in industrial production. A dip in manufactured goods rounded out the drop. New orders also fell, with capital goods dropping 2.6% in February while previous months were revised downward. Retail sales shrank 0.6%, reversing a similar gain in January, primarily as a result of lower autos sales.

While many indicators were lacklustre for the month, exports continued to bolster the economy in January, registering a 1.6% advance. Imports also increased, rising 1.2% as record oil prices push up the energy bill.

The euro-zone economy picked up speed in the new year, as industrial production grew 0.9% after stagnating late in 2007. Every sector strengthened, with the exception of energy, led by a strong gain in capital goods. New orders followed suit, strengthening across the board after a weak December. The rapid appreciation of the euro dampened exports, particularly to the US and Japan, although trade remained brisk with Russia, India and China. The annual inflation rate reached a 14-year high of 3.3% in February, when food prices jumped 5.8% and energy topped 10%.

The German economy powered forward early in 2008. Exports their fastest growth in 16 months in January. While the weak dollar and the slowdown in the US economy hampered overseas exports, shipments to Russia and the Middle East soared, particularly for machinery and equipment. Industrial production strengthened for a second straight month, even as new orders dipped. Consumer spending rebounded in January after months of decline, while inflation was steady at an annual rate of 2.9% in February.

French industrial production posted a second consecutive gain in January, while new orders saw their strongest rise in over 6 months. Even as business confidence picked up, consumer confidence hit a record low in March when inflation hit a 12-year high, and retail sales slowed.

Industrial production in Britain was flat for the second month in a row in January. Weakness in the pound boosted exports, narrowing the trade deficit for the second straight month. Consumer spending remained tepid, although the 2.2% inflation rate remained far below the euro-zone in February.

Japan’s economy stalled in the new year. Industrial production retrenched in January as business confidence fell to four-year lows. Household spending stalled when consumer prices rose at their fastest pace in a decade and the unemployment rate increased for the first time in five months. Excluding food and energy, however, prices fell in February and have not risen for more than nine years.

Inflation continued to mount in China, hitting a 12‑year high of 8.7% in February as food prices jumped 23%, aggravated by snowstorms that damaged crops and disrupted transportation. The storms hit 20 provinces, collapsing almost 500,000 buildings and affecting over 70 million people. Still, retail sales grew by 20% in January and February from a year-earlier, due to strong demand and rising prices. To an effort to stem inflation, China has allowed its currency to rise 10.5% against the US dollar since October, hitting a record high in March.

Note

* Based on data available on April 4; all data references are in current dollars unless otherwise stated.