11-010-XIB
Canadian Economic Observer
May 2003

Summary Table - Key Indicators

Overview*

Output continued to shoot ahead early in the new year, with GDP in January and February already 0.7% ahead of its fourth-quarter average. The gain was led by the resource sector and housing. On balance, the coldest winter in a decade was a boon to the economy, notably the energy sector where prices hit record highs (before tumbling in April with moderating temperatures and the quick defeat of the Hussein regime in Iraq). Retail sales completed their best three months in over a year, with a rebound for autos reinforcing the cold weather-related gains for clothing and auto parts and repairs.

The manufacturing sector slumped again, in response to sluggish US demand. This was particularly true of auto sales and business investment, both of which contracted in the US in the first quarter. Overall, their GDP posted only a 0.4% gain, as the economy continued to shed jobs.

There were several notable developments in the financial sector. The stock market posted its first monthly gain of the year in April. Business credit demand rose for the third month in a row in March, after a steady decline since September 2001. Another boost to short-term interest rates and stronger growth here helped to send the dollar to a five-year high against the US greenback. The steady rise in the exchange rate has begun to affect prices. Industrial prices fell by 0.5% in March, and import prices dropped in February despite a sharp rise in the cost of oil. Conversely, the drop in the US dollar contributed to a record increase in their non-oil import prices.

Labour Markets

Employment dipped 0.1% in April, its first monthly retreat since December 2001. The drop was confined to a 1% loss of part-time positions, especially among youths, as full-time jobs have expanded every month this year. With the labour force continuing to grow steadily, the unemployment rate rose from 7.3% to 7.5%.

The SARS crisis appears to have played an important role in the decrease in jobs. All of their loss was concentrated in Ontario (-26,500), notably health care (-13,500) and accommodation and food (-12,100). Most of the national increase in unemployment also originated in Ontario.

Elsewhere, manufacturing posted its third drop of the year, hitting its lowest level since last May, with slower auto sales in the US a major factor. Apart from SARS, travel-related industries were also hamstrung by the fall-out from the war in Iraq. Offsetting these declines were sharp gains in trade and finance and real estate (the latter has posted the fastest growth of any industry in the past year, up 6.5% to surpass construction), the beneficiaries of strong household demand.

Leading indicator

The composite leading index continued to grow at a steady pace of 0.2% in March. Household demand remained the major source of growth. Overall, four components were up, one less than in February as housing turned down. Four components fell and two were unchanged.

Housing starts eased from the very high level they hit in February. Still, they remained slightly above their average level in 2002, encouraged by rising incomes and low mortgage rates. Another measure of the strength of household demand was a strong advance in employment in services. Partly offsetting these gains was an eighth decline in nine months for sales of durable goods, led by losses in the auto sector. The trend of stronger household demand for housing relative to durable goods began two years ago.

Manufacturing was mixed. Slowing auto sales here and in the US led to a fifth straight decline in new orders for durable goods, and the largest of any component. This drop contrasts with the strength of demand for energy products, which helped to lift the ratio of shipments to stocks for the first time in three months. The average workweek stayed near its highest level since World War II.

The US leading indicator continued to rise 0.1%, but growth remained largely attributable to the financial market components. Contrary to Canada, the household-related components remained weak after big drops in employment in February and March.

Output

The economy started the new year on a strong footing, with real GDP growing 0.2% in February after a 0.5% gain in January. These were the best back-to-back gains since last summer. Goods-producing industries led the upturn: continued strength in the primary sector and a rebound in construction outweighed renewed weakness in manufacturing.

Natural resources continued their steady recovery of the last six months. Forestry led the way, as ice conditions allowed operations in normally inaccessible areas. Mining received a boost early in the year from the opening of a second diamond mine in the north. High prices encouraged rapid growth in exploration for oil and gas for a fourth straight month. Actual energy output dipped, however, since February did not quite match January’s cold. This was more than offset by the boost slightly milder temperatures gave to the construction industry, with housing up 3%.

Manufacturers retrenched anew, after a one-month respite from cuts in January. The auto industry dominated these changes, as poor sales in the US forced firms to quickly reverse their January decision to boost assemblies. Without support from autos, the weak underlying trend of several important industries was more apparent, notably for ICT products and aerospace, both of which had slumped steadily over the last half year.

Services remained buoyed by widespread gains in business services. Consumer spending was concentrated on retail goods: spending slipped for gambling and restaurants even before the SARS scare. Transportation activity remained lacklustre, as a nearly empty grain distribution system hampered demand for rail and water, and air transport remained low enough to force the last national carrier into bankruptcy. This offset gains in transporting other resources, notably oil and gas by pipeline.

Household Demand

Retail sales in February surged ahead by 0.9% in volume, slightly faster than gains in the previous two months. The 2.4% jump in demand since November was the best three-month increase since the buying binge that followed September 11. Autos returned to the forefront of consumer demand, continuing a seven-month pattern of alternating increases and decreases (depending upon the finance packages and rebates offered by firms). Demand fell again in March, leaving unit sales up 7% in the first quarter.

Other durable goods remained a more consistent source of growth. Deep discounts early in the new year boosted demand for computers, while the stress of the cold snap on vehicles raised outlays for auto parts and repairs. Furniture and appliance sales slipped in February following six months of uninterrupted gains. Elsewhere, clothing purchases stayed near record levels after surging in January, while rising energy prices continued to take a big bite out of discretionary income.

The housing market backed off the torrid pace it had set early in the new year. Starts dipped 14% in March, but remained at the second-best level in over a decade after a stellar gain in February. Despite a dip in new home sales so far this year, the number of vacant units continued to decline, helping to keep the upward pressure on prices. One measure of the tightness of the housing market is that the backlog of unsold units equalled only 0.5 months of demand, versus 4.1 months in the US. Existing home sales also retreated in the first quarter.

Merchandise trade

Trade flows across the border remained listless in February. While trade in energy products was inflated by higher prices, these gains were offset by common sectors of weakness: slowing demand for autos and business investment–notably aircraft, which went into a tailspin as tensions mounted in the lead-up to the war in Iraq. The slump in trade has continued for nearly a year, leaving exports up only 2% and imports 3% compared with last February.

Exports fell 1.6%, giving back almost all the ground gained in January. Machinery and equipment fell 8%, as US business investment turned down again. While aircraft led the drop, off nearly one-quarter, losses were posted in all sectors, ranging from industrial machinery to computers and telecom equipment. Forestry products were checked by losses for lumber, as US housing starts tumbled. Weak industrial demand crimped shipments of metal ores.

Energy, autos and consumer goods all edged up about 2%. This left energy receipts nearly 80% ahead of last year’s level, a reflection of the impact of the cold weather on prices. Conversely, the gain for autos followed several months of cutbacks, notably for cars as sales in the US retreated. Consumer goods continued their double-digit annual growth, buoyed by the strength of demand for pharmaceuticals.

Imports were flat after a small dip in January. Machinery and equipment fell for the third straight month, although the weakness was more concentrated in aircraft than was the drop for exports. Autos recovered less than half their retreat of the month before, while consumer goods edged down for a second straight month.

Prices

The consumer price index rose 0.1% between February and March, far less than its increase in the previous two months, lowering the annual rate of inflation from 4.6% to 4.3%. While a levelling-off for crude oil was reflected in prices at the pump, the cost of energy continued to rise due to soaring demand for home heating. Apart from energy, few notable price changes were seen. Clothing prices jumped as the change of seasons approached, while a drop in travel costs helped to dampen services.

The four-month rally in commodity prices, which lifted the Bank of Canada index to its highest level in two years, was interrupted in April. The retreat originated in energy prices, as oil was undercut by the swiftness of the demise of the regime in Iraq and natural gas demand moderated with the arrival of spring. Prices for other commodities remained steady, notably for metals.

Along with falling energy costs, the appreciation of the Canadian dollar was measurably moderating prices. Manufacturers received 0.5% less for their products in March, with all of the drop accounted for by the rising exchange rate. Overall, prices fell for 13 of 22 commodity groups. As well, the cost of imports fell in February, despite a sharp hike in the cost of oil.

Financial markets

The Canadian dollar continued to appreciate in April, nudging above a five-year high of 70 cents (US). A second straight 25-basis point increase in the Bank Rate helped to raise the dollar, which has appreciated over 10% in the past year (the trade-weighted dollar index was up slightly less, due to gains made by the euro).

Investors channelled money into money market funds for a second straight month. The reversal from a year-long downward trend may partly reflect the increase in short-term interest rates. As well, investors continued to shun non-money market funds in March for the fourth month in a row.

Domestic credit demand picked up, with consumers leading the way due to the acceleration of auto purchases in February. A more fundamental shift may be underway in the business sector, where credit demand rose for the third straight month in March. While the increase totalled only 0.5%, it marked a sharp reversal from the steady 6% decline after the events of September 2001. As well, firms stepped up bond issues in the first quarter, after cutting back in the second half of last year.

The Toronto stock market rose 4% in April, its first advance of the year. The rally was widespread except for oil and gold, which lost all of their war premium associated with the uncertainty of the attack on Iraq. Technology stocks spearheaded the advance with double-digit gains.

International economies

In the United States, first-quarter GDP edged up 0.4%, matching growth in the fourth quarter. Output had jumped 1% in the third quarter of 2002, raising hopes that the economy was breaking out of three years of lethargy. But business again began to cut spending, with investment off 1% due to renewed weakness for machinery and equipment after three consecutive advances. As well, exports softened over the last two quarters as the global economy sputtered.

Household spending remained the bulwark of growth, with increases for housing and non-durable goods offsetting a drop in auto purchases. The latter hit an annual rate of 15.9 million units, the lowest since the third quarter of 1998, sending auto inventories to a record high. Still, manufacturers lowered output enough to reduce overall inventory levels. Government spending also edged ahead, despite cuts by cash-strapped states and a slowdown in defence spending.

New orders for defense materiel jumped 14% in March, as the military reloaded after the attack on Iraq began. Non-defense capital goods regained only part of their loss the month before, while autos decelerated steadily. Inventories fell despite weak demand, after manufacturers cut output 0.5% in March. Autos, construction and capital goods led the retrenchment.

Household demand perked up in March when temperatures moderated. Housing starts jumped 8%, although both new construction and sales remained below their levels at the end of last year. Retail sales rebounded 2%, boosted by the recovery in housing and large rebates for autos. The underlying strength of household demand was brought into question after another poor performance by the labour market in April. Jobs fell for a third straight month and hours worked dropped sharply. Manufacturers slashed payrolls the most in 15 months, led by autos, while travel-related services retrenched as war engulfed Iraq. A slight recovery in labour force participation boosted the unemployment rate to 6.0%, equaling its eight-year high. Weak employment held real disposable incomes to 0.3% growth in the first quarter.

The trade deficit in February continued to recede from its record high in December, but remained the third largest on record. Exports received a temporary boost from a near-doubling of aircraft shipments. Imports shrank due to falling demand for business equipment. Import prices shot up for the fourth straight month: while rising oil costs were a factor, the falling value of the US dollar helped to push up non-energy prices by nearly 1%, the most on record dating back to 1988.

Industrial output expanded a further 0.2% in the euro-zone in February, boosted by the energy sector. Domestic demand remained strong early in the new year but waned in the run-up to the war in Iraq. The external trade surplus narrowed as exports continued to contract in response to the euro’s 23% gain against the dollar in the previous twelve months. The annual rate of inflation remained stable at 2.4% in March, while the unemployment rate rose to 8.7% from 8.6% in February and 8.2% a year ago.

Real GDP in France for the final quarter of 2002 was revised downwards to a drop of 0.1% from the initial growth estimate of 0.2%. This was the first quarterly decline since 1991. Business confidence hit an historic low early in the spring on concerns of Iraq, soaring oil costs, and a budget deficit exceeding EU limits. Inflation jumped in March to an annual rate of 2.6% from 2.2%, one of the largest hikes in the euro-zone.

The German economy grew by 0.2% in 2002, its slowest pace in nine years. Business confidence hit its lowest level in 16 months in April as dormant domestic demand and uncertainty over the war in Iraq prevailed. Industrial production fell slightly in February, even as the external trade surplus remained the largest in the euro-zone. Unemployment reached a five-year high in March, while inflation slowed to 1.2%.

GDP growth in Britain eased to 0.2% in the first quarter as demand for services slowed with the approaching war in Iraq. Restaurants and hotels were particularly hard hit as tourism declined. Retail sales were also down, while the annual rate of inflation rose to 1.6% in March.

Japanese industrial production fell again in March, down 0.2% after a 1.7% plunge the month before. A 2.2% drop in exports, mainly from the US, led to the third straight monthly contraction in the trade surplus. Imports continued to expand, boosted by high oil prices. The auto industry continued to recover, with the five biggest companies posting record profits in fiscal 2002, as shipments to other parts of Asia were strong. Domestic demand, however, stayed weak and the stock market continued to fall, hitting a 20-year low in April, while unemployment remained at record highs.

The pace of growth slowed in Singapore in the first quarter of 2003. Real GDP grew 0.2% as global demand for semiconductors and other electronics remained tepid. Before the SARS epidemic hit, the Chinese economy posted its fastest rate of growth in six years in the first quarter, fuelled by buoyant demand for autos and steel.

* Based on data available on May 9; all data references are in current dollars unless otherwise stated.

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