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Current economic conditions
The economy continued to strengthen, with GDP posting a fourth straight solid advance in February. Growth was concentrated in services, especially retail and transportation. Resources and construction stalled in the first quarter, partly due to supply problems, before leading a resumption of job growth in April.
Retail sales volume posted back-to-back gains of about 2% to start the new year, its best performance in three years. Autos led the way, although demand shifted sharply from domestic trucks to cars made overseas. Some of the strength in spending on durable goods was at the expense of housing, where starts completed their weakest quarter in two years. This was the reverse of the pattern in the US, where housing led growth in the first quarter while auto sales stalled.
Commodity prices remained high, fuelled by rapid growth in China and solid gains in the US. While resource output was hampered over the winter, investment in resources and the transportation needed to carry them propelled Alberta and BC ahead of the other provinces. By March, the unemployment rates in these two provinces were the lowest in a generation. Demand in these sectors fuelled the fastest growing industries in manufacturing, notably heavy-duty trucks and construction and mining machinery. And of course resources have led the gain in the stock market so far this year. Wholesalers have also benefited from handling 10% more goods (especially building supplies and machinery and equipment) than a year earlier, a sharp turnaround from no growth in the previous year.
The investment sector continued to strengthen, even before firms announced $55 billion of projects in the Alberta tar sands and numerous infrastructure and mining projects in BC in March and April. Output rose across the board in capital goods industries. Imports of machinery and equipment rose for a third straight month, led by aircraft, whose fortunes have turned around quickly, helped by travel inflows from Asia. Non-residential building rose for the second time in three months, and soaring permits in March point to ongoing recovery from its prolonged slump in 2004.
Employment grew 0.2% in April after a lethargic first quarter. Just as important, all of the increase was in full-time positions, especially among adult women. The participation rate continued its year-long downward trend, hitting a 29-month low of 67.2%, with declines everywhere but booming BC. As a result, the unemployment rate edged down to 6.8%. The unemployment rate in BC has fallen 1.4 points in the past year compared with 0.3 in the other regions.
Construction again led job growth, and is nearly 10% ahead of last year. Resource industries were not far behind with 8% growth from April 2004. The surge in business plans for capital projects gave a boost to professional, scientific and technical services. Public services also rose sharply, especially education (up 7% in the last year). Manufacturing continued to shed jobs, especially in Quebec which posted the only significant regional drop in employment.
BC again led job growth at 4.0% from last April, widening the gap between it and the rest of the country. Resources and construction led the way, up 19% and 28% respectively. Alberta was next at 1.4%, as construction has not kept pace with resources. Ontario was buoyed by the public sector. Employment growth in the last year was largely outside of the largest cities (except Vancouver); Montreal, Toronto, Edmonton and Calgary were little changed, while northern Alberta and the interior of BC posted big gains.
The composite index grew 0.2%, boosted by the export sector. The index had hit its low when it stalled in November, coincident with the Canadian dollar hitting its recent high. Since then, the leading indicator has trended up, highlighted by a 0.7% gain in the unsmoothed version in March, the largest advance in a year. A recovery in manufacturing orders led the advance, although labour demand stayed weak. Five components increased and four fell, while one was unchanged in March.
New orders posted their largest advance in over a year, thanks to an upturn for exports and steady gains for domestic spending. The largest increases were for autos, metals and paper. The improvement in demand slowed the rate of inventory accumulation, but not enough to prevent another drop in the ratio of shipments to inventories.
Firms remained cautious about hiring. Employment fell in business services. Manufacturers also trimmed the average workweek. However, most of the drop was in the beverage and tobacco industries. In the last year, the workweek in these industries combined has shortened the most in Ontario (from 39.8 to 31.9 hours), Alberta (41.9 to 32.2) and BC (36.0 to 27.1).
Households continued to buy more consumer goods. Higher auto sales led a rebound from a one-month drop in durable goods sales. Furniture and appliance demand continued to rise, up 0.7%, driven by the steady gains in house sales. Western Canada continued to dominate the increase in housing starts, with the prairies matching British Columbia’s 10% hike and surpassing last year’s record levels. Overall, starts were unchanged, due to declines in Eastern Canada.
The US leading indicator was flat for a third straight month, after three consecutive declines. The stock market improved. The components related to domestic demand continued to grow steadily. Our exports to the US in February recovered all of the ground lost since last September. The interest rate spread remained the principal source of weakness. The yield curve steepened, due to short-term rates edging up from record lows combined with falling long-term rates. But interest rates across the spectrum remain so low that it is difficult to characterize them as a threat to growth.
Real GDP grew by 0.3% in February after a 0.2% gain in January, matching the last two months of 2004. This four-month stretch was the best period for growth since the summer of 2004, itself a 2-year high.
Services have taken the lead so far in 2005, while goods production slipped in the first two months. Consumer spending led the way, notably retail sales. A pick-up in the volume of international trade boosted demand for wholesale trade and rail transportation (which handle most of our bulky resource products). Ports on the BC coast announced plans to add new terminals, while a pipeline will connect tar sands oil to the west coast. Air transport also posted a third straight increase, as strong international travel flows from overseas overcame the impact of high oil prices on air fares. Air transport in Canada is within 1% of its pre-9/11 level, having recovered from a 25% drop between September 2001 and the worst of the SARS crisis in 2003, a remarkable turnaround considering the national airline went bankrupt last October (conversely, airlines in the US continued to shed jobs, hitting a 10-year low in March). Booming financial and real estate markets boosted the financial sector.
Not all services have thrived in recent months. Arts and recreation stumbled, matching a similar slump in the US (where hockey is much less important). Demand for business services remains sluggish, while governments output levelled off.
Manufacturing output rose slowly in the first two months of the year. Capital goods industries led output, especially construction and mining machinery, where growth totalled almost 10% to start the year. These industries were the most optimistic about second-quarter output. Vehicle assemblies eked out a small gain, driven by large trucks needed to haul goods in North America which offset most of the recent slowdown in autos. Heavy-duty truck sales have more than doubled since 2003. The ICT sector raised output, notably computers. Forestry and clothing-related industries retrenched.
Goods output outside of factories fell across the board. Warm weather dampened utilities. Mining output was hampered by production problems in the tar sands. The increasing dominance of tar sands in our oil output (they require few search costs) also may explain why exploration and development of oil and gas was up only 10% in the last year despite record prices. Construction activity also levelled off so far this year after a period of rapid growth.
Retail sales volume rose 1.8% in February on top of a 2.3% gain to start the new year. This leaves sales positioned to post their best quarterly increase since the aftermath of the 9/11 attacks. Year-over-year sales were up 6%, the highest in 3 years.
Spending on durable goods spearheaded the increase, driven by autos. While auto sales retreated in March, unit sales rose 4% in the first quarter. But there was a sharp shift in demand from trucks to cars and from domestic to overseas producers for the second quarter in a row.
Outlays for computers, electronics, furniture and appliances continued to pick up steam, after a weak fourth quarter. Clothing purchases also strengthened after a drop late in 2004.
Housing starts edged up in March, completing a weak first quarter in which starts fell 10%. The drop in construction kept a lid on vacant units, despite falling new home sales. The market for existing homes eked out a small gain at the start of the year, after a sharp drop in the fourth quarter.
Canada’s exports rebounded 1.4% in February, led by another gain in prices, which apparently continued in March. The US has already published the price of imports by country for March, revealing a 1.8% increase for Canada. Since the US accounts for the lion’s share of our exports, there is a very good correlation between the overall growth in Canada’s export prices and the price of US imports from Canada.
Almost all of the increase in exports was to the US, despite a temporary lull in their energy demand. Energy exports rose only 1% after a 12% drop in January. These two months were unseasonably warm in the US, although colder temperatures sent utilities demand soaring in March. The warm weather did give a boost to US housing starts, which was reflected in higher lumber exports for Canada.
Imports edged down 0.2% after solid growth of over 5% in the previous two months. Much of the slowdown originated in autos. Machinery and equipment posted a third straight increase, while strong consumer spending pulled in consumer imports. Clothing imports recovered from a drop in February, but so far this year remain below their four-quarter average.
The CPI rose 0.3% between February and March, its largest rise in five months, raising the annual rate of inflation to 2.3%. Higher oil prices drove most of the increase, notably gasoline. Few other oil-dependent products experienced price hikes, apart from airline fares. As well, clothing prices again jumped over 1%, belying fears of a flood of cheap imports early in the new year.
Elsewhere, most prices were subdued. The cost of durable goods fell for the third straight month, largely because of discounts for autos as sales softened.
Commodity prices in April held on to most of their sharp gains made in the first quarter. Oil prices hit a new record high early in the month before subsiding. Nickel prices have doubled in the past year, fuelled by demand from China (especially its 40 nuclear plants under construction), airplanes and batteries for hybrid cars. A small dip for other metals offset increases for food.
Industrial prices rose for a fourth straight month, although the rate of increase slowed to 0.3% in March as the Canadian dollar rose (whose reversal in April will further boost prices). Still, the year-over-year increase in industrial prices slowed from 7% last June to 2%, largely due to lower prices for wood, autos and computers.
The stock market retreated for a second straight month, leaving the TSE about where it stood in early February. Energy and metals led the drop, as investors cashed in profits after spectacular gains at the start of the year. Most other stocks drifted lower.
Short-term interest rates were unchanged for the sixth straight month. But mortgage and bond rates edged down for the first time this year. The Canadian dollar retreated to near its January level.
Business short-term credit demand rose sharply in the first quarter. This is consistent with firms reporting a further build-up of inventories: the business conditions survey found 29% of manufacturers said inventories were too high in April, the most since January 2002.
Western Canada continued to lead growth, powered by non-farm resources. Alberta’s oil sector and BC’s mining and forestry industries benefited the most. As well, booming trade in both directions between China and Canada boosted demand for goods-handling industries on the west coast.
The rosy outlook for western provinces was reflected in business investment. Only Alberta and BC were able to sustain strong investment growth over the last two years. Alberta’s 9% gain in intentions for 2005 was dominated by oil and gas, as it accounts for two-thirds of all spending by this industry in Canada. BC firms planned an 11% gain, fuelled by sawmills. Higher lumber output raised BC’s GDP more than any province last year. Both provinces should exceed intentions in 2005, given the slew of new projects announced in the spring for the oilpatch and BC’s transportation infrastructure.
Investment plans picked up to 9% growth in Ontario after slow demand in 2004. A wide range of manufacturers plan to spend more on machinery and equipment. A slowdown in Quebec largely reflected the completion of a smelter, which offset increases for other resource-based industries.
In the United States, first-quarter GDP rose 0.8% after 0.9% growth in the fourth. Year-over-year growth has slowed from 5% early in 2004 to 3.6%. Business investment remained the engine of growth, although the expiry of tax incentives did see quarterly growth slow from 5% to 1.2%. Housing demand remained brisk (helped by mild weather) while consumers shifted spending from autos to other products. Personal income growth slowed from nearly 3% to 0.5% after Microsoft’s special dividend payment of nearly $100 billion (at annual rates) in December. Most measures of inflation accelerated, even excluding energy.
The merchandise trade deficit expanded for a second straight month, to a record $64.7 billion in February, surpassing the previous high set in November. Rising oil prices pushed up the cost of imports by $1.7 billion. But even non-oil imports rose by $0.6 billion, mostly consumer goods and autos. Meanwhile exports have stalled since December, and are up less than 10% in the past year. Clothing and textile imports so far this year are 14% ahead of a year earlier.
A lower trade deficit will be difficult to achieve in March, when import prices rose 1.8% (after a 0.8% rise in February) when oil prices jumped 11%. In the past year import prices rose 7%, as increases from Canada and the EU (whose exchange rates have risen) offset a dip for China. The increase for Canada was split between a 4% hike for manufactured goods and a 24% increase for other goods (including a 7% jump between February and March).
The return of more seasonable weather helped push housing down 18% after two months of record-breaking starts. But permits remain high, and the backlog of units authorized but not started remains 12% ahead of last year.
Retail sales rose 0.3% in March, their third straight small advance. Almost all of the increase reflected higher gasoline prices. Auto sales picked up slightly, but the weakness in housing dampened furniture and appliances. Clothing and department store sales fell sharply, and were little changed from a year earlier.
Industrial production rose 0.3% in March, surpassing the downward revised 0.2% total gain in the first two months of the year. All of the increase originated in utilities as cold temperatures returned. Manufacturing output fell 0.1%, in part because of fewer auto assemblies and a fourth straight drop for clothing. Auto assemblies have levelled off over the past year, while clothing were down 10% (although clothing represents only 0.7% of industrial production in the US). Capital goods remained a source of strength despite a drop in exports. Overall, the increases in output were the least widespread since the industrial sector began to recover late in 2003 from a 3-year slump (excluding the hurricane-induced drop last September).
Industrial production fell by 0.5% in the euro-zone in February as every sector contracted, with the exception of energy. New orders were down for the second month, with every sector also retreating, excluding machinery and equipment, which rose 1.3% after being flat the month before. The external trade surplus narrowed as a large jump in the energy deficit, fuelled by high oil prices, outweighed gains in machinery and autos. The deficit with China continued to widen as imports grew 20% year-over-year, while exports rose 4%. Consumer spending picked up in February. The annual rate of inflation was stable in March as increases for fuel and tobacco offset decreases for clothing and telecommunications.
The French economy continued to show signs of slowing early in the new year. Industrial production fell by 0.5% in February, led by a 1% drop in manufacturing as the impact of high oil prices and a strong euro dampened demand. Consumer spending faltered in March for a second straight month, and wages continued to trail inflation. Widespread strikes and demonstrations early in April also hurt incomes, and prompted the government to introduce tax incentives for company profit schemes, an extra pay raise to civil servants and an extension of fuel subsidies to farmers. Inflation rose slightly in March to 2.1%.
German industrial production fell 1.4% in February, losing half of its January gain. Export demand remained upbeat, however, helped by corporate restructuring. Consumer spending rallied for the first time in five months, while prices fell slightly in March for one of the lowest annual inflation rates (1.7%) in the euro-zone.
Fourth quarter GDP in Italy was revised down to a decline of 0.4% from a 0.3% rise, as the high euro and oil prices dampened exports and squeezed manufacturers more than originally estimated. Business confidence fell in March to its lowest level in almost two years, while consumer confidence retreated for the fourth time in five months. Spending remained dormant despite a tax cut aimed at boosting demand. Inflation inched up to 2.1% in March.
Slow exports remained a drag on Japan. Export volumes rose slightly in March following two straight declines. Consumer spending began to stir, as wages stabilized after three years of declines. Deflation persisted, however, with consumer prices falling for a seventh consecutive year in March. Unemployment eased slightly to 4.5%.
China’s economy grew 9.5% from the first quarter of 2004, boosted by strong exports and consumer demand. Exports surged 35% year-over-year to $156 billion (US), while imports rose 12% to $139 billion. Domestic demand was upbeat with retail sales gaining 14% (already surpassing their 13% gain last year), business investment rose 23% and industrial production 16%. The trade surplus widened further in March, buoyed by exports of clothing, electronics and machinery to the US and Europe. Textile exports alone rose 29% in the first quarter after quotas were abolished.
* Based on data available on May 6; all data references are in current dollars unless otherwise stated.