11-010-XIB
Canadian Economic Observer
May 2004

Summary Table - Key Indicators

Overview*

Both GDP and employment stalled at the start of the new year, partly because of temporary factors such as poor weather and strikes as well as high inventories. But a number of trends were encouraging for the underlying trend of growth, notably strong household demand, solid gains in export markets and rising commodity prices. This was reflected in a resumption of job growth in April.

Household spending was consistently the strongest sector of demand in the first quarter. Retail sales posted solid gains in January and February, while auto and housing sales continued to improve into March. In particular, housing starts hit their highest level in over a year, even before another cut to interest rates and the rebound in employment in April.

A number of our export markets improved in the first quarter, notably the US and far eastern Asia. GDP growth in the US was sustained by business investment, which rose 10% from a year earlier. Rapid gains in housing and retail sales resumed, after being depressed by a cold snap in January. Strong growth in the US and China and a recovery in Japan sent commodity prices to their highest level in years. Conversely, consumer prices in Canada were little affected, as the year-over-year increase in the CPI slowed to 0.7%. This was less than the 1.7% rise in the US, a reversal from the last two years when inflation was higher in Canada than in the US.

High inventories were one area that hindered growth. By April, 17% of manufacturers said stocks of finished goods were too high, up from 9% at the start of the year. This disquiet was reflected in a levelling off of both output and employment at factories so far this year. Manufacturers did receive a boost from higher prices so far in 2004, largely because last year’s increase in the exchange rate (which depressed Canadian dollars earned from exports) has been reversed. The stock market in March and April posted back-to-back declines after a year of recovery.

Labour Markets

Employment rose 0.3% in April, its first significant advance in 2004. All of the growth occurred in full-time positions. The labour force also posted its first increase of the year, but not enough to stop the unemployment rate from falling to 7.3%, its lowest since September 2001.

The expansion of jobs was about equally split between goods and services. Natural resources remained the strongest sector in goods, reflecting buoyant commodity prices. The robust underlying trend of housing demand helped construction pull out of its winter doldrums with a 1.4% gain. Factory jobs held steady at about their level of last November, as steady growth in the US and a lower dollar have stopped the losses posted in 2003. Finance and business demand drove the gain in services, which offset a slowdown in the public sector and a sharp drop in trade.

Quebec returned to the pole position for job growth, a place it has not held since the first half of 2003. Full-time job growth was particularly strong at 1.5% for the month, as was demand for services. As a result, unemployment fell to an 18-month low of 8.4%. Alberta also chipped in with a 0.3% increase in jobs, led by natural resources. Over the past year, only Quebec and Alberta exceeded the 1.7% national average for job growth. Ontario recouped some of its recent losses, led by construction, while BC continued to slump in 2004, driven by losses in trade and information services.

Leading indicators

The composite leading index rose by 0.7% in March, after upward revised gains of 0.6% in January and February and 0.5% in December. This upturn is attributable to an increase in the number of components expanding to seven out of ten, one more than in February and two more than in January. The housing component swung from negative to positive territory in March. Manufacturing and the US leading indicator continued to drive overall growth for the third straight month.

Housing regained its position at the head of household demand due to gains for both new and existing housing. The increases spread to Ontario and western Canada, after Quebec dominated growth last year. In Ontario, housing starts have jumped 40% since January as vacancy rates fell, notably for multiple units in Toronto. At the same time, existing home sales hit record highs in Toronto as well as Vancouver and Calgary.

Elsewhere, retail sales were mixed. Demand for furniture and appliances continued to be brisk: this category has led the growth of retail sales in recent years, along with recreation equipment. Sales of other durable goods continued to be pulled down by slumping auto demand. The upward trend of prices for these goods remained the opposite of those for furniture and appliances.

The US leading indicator posted its tenth straight increase. This upturn finally was reflected in jobs, an encouraging sign for continued growth in household demand and for our exports. Increased export demand already was a factor in new orders for manufactured goods posting their largest advance since the summer of 2000. Without the growth in manufacturing and the US leading index, the growth of Canada’s leading indicator would have been only 0.2%.

Demand for labour was the principal source of weakness in Canada, contributing to two of the three components that fell. Manufacturers continued to trim the average workweek, which fell to its lowest level since May 1999. Meanwhile, services employment fell for the first time since August 2003, led by declines for temporary help agencies in March.

Output

Real GDP was unchanged in February after a 0.2% dip to start the year. This left year-over-year growth stuck at just below 2%, where it has hovered since last April (with the exception of the blackout last August).

Natural resources and construction have stalled so far this year, after leading growth in 2003. While demand and prices remained strong, output has been hampered by unusually cold weather as well as a strike in metal mining. Job gains in these industries in April suggest a resumption of growth.

Manufacturing continued to tread water, with little net growth over the last three months. Output of ICT goods slumped anew, after a brief rally at the end of 2003, with computers particularly weak. Auto assemblies flattened out in the first two months of this year. Aerospace continued a two-year slide. Non-durable goods fared even worse, with large cuts in clothing and tobacco.

The slack in goods production so far this year was reflected in goods-handling industries. Both wholesale trade and transportation posted consecutive declines, the latter aggravated by a rail strike late in February.

Most other services also were sluggish, apart from strong growth in retail trade. Information and culture continued a slump that began last summer, with losses in telecommunications as well as printing and film production.

Household Demand

Retail sales volume grew 2.4% in February, after a 1.1% gain the month before. These represent the best back-to-back gains since the rebound of consumer spending after September 2001.

About half of the increase originated in auto sales, which snapped out of a 6-month slide with an 8% gain, and autos continued to accelerate in March. But virtually all retailers benefited from more spending. Unusually cold weather drove consumers to purchase substantially more clothing for a second straight month. Furniture and appliances continued to be buoyed by strong housing demand. Computers were one of the few areas where spending softened, as consumers balked at a rare price increase. Total consumer spending was less buoyant than retail sales, as demand for home heating returned to its average level of 2003, after setting a record in January.

Housing improved for a second straight month after a weather-induced dip in January. Housing starts advanced another 16% in March to 247,000 units (at annual rates), their highest level in over a year. Growth was again led by multiple units, after this sector was most affected by the weather in January against a backdrop of low vacancy rates. Ground-breaking on single-family homes also rose, hitting its highest level in over a year. A rebound in sales in recent months capped the number of unsold units. Falling mortgage rates also helped lift existing home sales in March, which are running 10% ahead of last year’s strong pace.

Merchandise trade

Trade flows across the border rose sharply in both directions. The increase included all major commodities, which strongly suggests that much of the sharp drop in trade in January was weather-related. The strengthening world economy boosted exports outside the US at a double-digit rate over the last year. This was reinforced last month by solid growth in shipments to the US. Meanwhile, a 2.5% increase in import prices may signal the end of a year-long drop.

Exports jumped 7.0%, hitting their highest level since March 2003. Auto products led the increase, although most of this only recouped January’s losses. Conversely, the gain for industrial goods raised their exports to a record level. Metals spearheaded the advance, led by copper, zinc and aluminum where prices hit new cyclical peaks. Higher prices boosted forestry and energy products. The recovery of capital spending in the US helped lift the volume of machinery and equipment exports 11% from a year ago, the most of any sector except industrial goods. Strong demand for computers offset continued weakness in aircraft.

Imports recovered 6%, although our import bill remained 5% below a year-earlier due to a 10% drop in prices. Machinery and equipment remained the strongest area of import demand, up nearly 10% in the month due to widespread increases. Most other components of imports grew 5%. Auto products remained the most depressed compared with a year ago, off 13%, reflecting the slump in Canadian auto sales over the last six months (which finally ended in the spring).

Prices

Consumer prices inched up 0.1% between February and March, leaving the index at the same level as in December. Gasoline prices continued to exert the most upward pressure, reflecting the recent surge in crude oil prices on world markets.

Prices also edged up for many non-energy goods. Despite these small increases, most remained below the level of a year earlier, reflecting lower import prices in 2003 due to our rising exchange rate. Consumer prices ranged from 1% lower for clothing and furniture and appliances, to 2% down for autos and imported fruits and vegetables, and over 4% drops for recreation and home entertainment equipment. The monthly upturn in prices reflected the levelling-off of our exchange rate and a pick-up in consumer spending in some of theses areas, notably autos.

Commodity prices softened in April after rapid growth in the first quarter. The drop was especially pronounced for metals, on concerns that Chinese demand was slowing and US interest rates were rising. Still, prices for industrial materials remained one-third ahead of last year. Oil prices remained an exception to the slowdown in commodity prices, closing above $37 (US) a barrel, the highest since the 1991 Gulf war.

Manufacturers saw prices rise for a fourth straight month in March, aided by the retreat of the Canada/US exchange rate. The 0.5% gain in March brought the increase so far this year to just over 3%, a welcome turnaround from a 4% drop last year. Unlike the widespread price increases in February, industries in March were about equally split between raising and holding the line on prices. More manufacturers also reported a shortage of raw materials (7% in April, up from 3% in the previous year), especially steel and metals due to surging demand from China.

Financial markets

Another cut in the Bank Rate lowered it to 2.25%, returning to the level that existed when rates began rising two years ago. But mortgage rates for a term of one year or more rose, following the upward trend of bond rates in North America (especially in the US, where they jumped half a percentage point). The Canadian dollar continued to retreat from its high set early in the new year, falling 3 cents to below 73 cents (US).

Firms reduced their fund-raising in bond markets in March, shifting their borrowing to short-term credit, which posted its first significant increase since 2000 (except during the September 2001 crisis). Conversely, household credit demand slowed in February, despite the rapid growth of spending.

The stock market lost ground for a second straight month, down 4% in April. This marked its first back-to-back losses since the rally began in April 2003. Most sectors continued to hold up, but heavy losses in metals and info tech again pulled down the overall index. New equity issues into March have not been slowed by the dip in prices.

International economies

In the United States, real GDP grew 1.0% in the first quarter, the same as the fourth. Business investment increasingly moved to the fore, as a fourth straight solid gain lifted its year-over-year growth to 10%. This is the strongest sign that the 2-year slump in capital spending is over. Growth was led by information processing equipment and software, which account for nearly half of all business investment.

Elsewhere, household spending cooled slightly, partly due to the cold snap in January. But it quickly recovered. This was most evident in new home sales, which jumped 9% in March to lift year-over-year growth to 22%. Housing starts followed suit, rising 6% to edge back above 2 million units (at annual rate). Retail sales jumped 1.8% in March on the heels of a 1% gain in February. Building materials led the way, soaring 11% to account for half of the overall increase. Strong housing demand also gave a lift to furniture and appliance sales. Another good sign for our exports was a second straight pick-up in auto purchases.

While household demand accelerated sharply in March, the industrial sector retreated. Industrial production dipped 0.2%, its first drop since June, as manufacturing output was unchanged and warmer weather reduced demand for utilities. Manufacturing was hampered by losses for consumer and business goods (despite robust sales), which were offset by large gains for construction supplies. The strong underlying trend of demand was reflected in new orders, which rose 4% led by metals and autos.

Exports continued to recover in February after the US dollar fell and overseas demand improved. They rose 5%, their best in nearly a decade, led by industrial materials and capital goods. Meanwhile, the 1.7% gain in imports was driven by higher oil prices, while non-oil imports fell.

Consumer prices rose 0.5% in March, after increases of 0.5% and 0.3% in the previous two months. Higher oil prices led the way, soaring nearly 10% to account for nearly half of the first-quarter hike. Core inflation posted its largest 3-month increase in over two years Medical care and housing helped boost these prices.

Economic growth remained anemic in the euro-zone in February, reflected in rising unemployment. Industrial production rebounded 0.1%, while new orders inched up 0.5% after a 3% decline to start the year. Foreign demand for machinery and vehicles strengthened, however, boosting the external trade surplus. Consumer spending remained weak, while inflation rose to an annual rate of 1.7% in March. On May 1, the euro-zone expanded with the accession of 10 countries: Cyprus, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Slovenia and Slovakia. The unemployment rate for this expanded zone was stable at 9.0% in March (for the EU15 the rate was 8.8%).

In France, industrial production rebounded 0.8% in February, after a similar fall to start the year, and new orders remained upbeat. Exports slowed in February, and imports picked up, squeezing the trade surplus. However, the labour market remained weak. The February unemployment rate was revised upwards to 9.8% from 9.6%. For 2003 as a whole, jobs were lost for the first time since 1993, primarily due to a large cut in the public sector. Inflation was steady in March at an annual rate of 1.9%.

German industrial production stalled in February, after a slight pick-up the month before. New orders were flat in the month, following a dip in January. Consumer spending remained sluggish despite recent tax breaks, as the job market continued to deteriorate. Unemployment rose sharply in February, lifting the jobless rate to 10.4%. Prices remained in check with an annual inflation rate of 1% in March, the lowest in the euro-zone after Finland.

In Britain, GDP slowed from 0.9% to 0.6% in the first quarter. The slump in goods production deepened, notably manufacturing. Services rose steadily, buoyed by business and consumer demand. Industrial production contracted 0.6% in February after being flat the month before. Retail sales volumes were brisk, however, as wages gained almost 4% from a year earlier. Inflation eased to an annual rate of 1.1% in March, the lowest since mid-2003. The February unemployment rate held steady at 4.8%.

The Japanese economy continued to strengthen early in the new year as exports to other Asian nations gained momentum, while retail sales in Japan remain weak. Industrial production rose 0.1% in March, after a strong gain the month before, raising annual growth to 7.7%, the most in the G7. The trade surplus was over $10 billion (US) in March, as exports to Asia jumped 20% from a year ago. Imports rose 12% year-over-year, boosted by the revival in domestic demand. The unemployment rate eased to a 3-year low of 4.7% in March.

China’s economy powered forward in the first quarter with real GDP growing 9.7% from a year earlier, led by business investment (up 43%) as firms increased capacity. Record imports in March boosted the trade deficit to $8.4 billion for the first three months of the year. Imports rose 42.8% to $46.4 billion, while exports grew 42.9% to $45.8 billion. China’s central bank tightened monetary policy again in April, further raising its reserve requirement for banks.

Note

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