11-010-XIB
Canadian Economic Observer
May 2006

Summary table - key indicators

Overview*

Output and jobs continued to grow steadily in Canada early in 2006, while first-quarter real GDP growth in the US recovered from a slowdown in the fourth. The record warm winter in North America dampened demand and output in our energy sector, but oil prices rebounded to set new records in April.

The housing and stock markets continued to add to their gains so far this year. This wealth, along with gains in incomes and jobs, fuelled a fifth straight increase in retail sales volume in February.

The Canadian dollar touched a 28-year high of almost 90 cents (US) late in April. The strength of the dollar continued to squeeze manufacturing exports, but also dampened the impact of high oil prices on household budgets.

Meanwhile, the energy boom continued to worsen shortages in western Canada. Nearly 25% of manufacturers in Alberta reported shortages of both skilled and unskilled labour were hampering production. The draining of the labour pool from nearby provinces was reflected in growing shortages in BC and Saskatchewan (where shortages of skilled labour in April were worse than in Alberta, partly because the population shrank as people moved west).

Provincial GDP for 2005 showed the west continuing to lead growth. Alberta, BC and Saskatchewan were the only provinces to post above-average gains (up 4.5%, 3.5% and 3.2% respectively). Fuelled by rising resource exports, profits and investment were strong in all three provinces. In turn, this buoyed jobs and household spending.

Central Canada continued to grow by over 2% a year. Ontario and Quebec both posted export growth of 3%, despite the squeeze on manufacturing from a higher dollar, while consumer spending rose 3% in each province. Investment was slightly weaker in Quebec, which also was the only province (outside of PEI) where housing contracted. Housing in Quebec had nearly doubled over the previous four years, the most of any province.

All four Atlantic provinces saw sub-par growth in 2005. Exports fell, as this region is relatively more dependent on the weak forestry and fishing sectors. Business investment also slowed, partly because some large mining projects were completed. And a stagnant population capped the expansion of household demand.

Labour Markets

Employment grew 0.1% in April, after a brief pick-up to 0.3% in March. The underlying tone of the labour market remained very strong, as all of the increase was in full-time jobs. The substitution of full-time for part-time positions was most pronounced in Alberta and BC, where unemployment was the lowest and shortages mounted.

Overall, job growth in Alberta and BC was modest at about 3,500 each. But full-time jobs rose 31,000 in the two provinces, while part-time fell 24,000, as employers extended the hours of employees to deal with the shortfall of manpower. Alberta’s increase was again led by natural resources, manufacturing and professional services, while BC was driven by services related to trade and travel.

Employment was little changed in central Canada. A rebound in manufacturing was offset by losses in services, especially in Quebec. All the Atlantic provinces saw jobs increase, although many were part-time.

Leading indicators

The leading indicator growth picked up to a 0.6% gain in March, double its increase in February. The advance was spurred by ongoing gains in housing and the stock market since the start of the year. Only two of the ten components declined, both related to manufacturing.

The housing index rose 2.9%, its largest gain since last summer. Housing starts led the increase, especially in Alberta and BC. While unusually warm weather helped new home construction in January, building remained strong even as temperatures returned to more seasonal norms.

The buoyancy of housing demand was reflected in a 1.8% surge in furniture and appliance sales, its most since June 1991. Demand for other durable goods eked out a small gain after declines in three of the previous four months. Auto sales remained lacklustre, having never returned to their peak rates of increase last summer when discounts proliferated.

The stock market hit another record in March, buoyed by metals whose prices recently replaced energy’s as the focus of demand on commodity markets.

Manufacturers continued to struggle with sluggish demand and rising input costs. New orders trended down, and shipments followed suit after five months of modest gains. Losses in key export industries such as wood outweighed continued strong gains for investment goods, notably machinery and non-metallic minerals destined for the booming western provinces.

The strength of business spending was reflected in rising demand for business services. Firms responded to the pressure on profits by continuing to rein-in inventories (which fell even faster than shipments) and reducing labour costs by cutting the workweek and payrolls.

The underlying trend of US demand improved, with the US leading indicator growing 0.5%, the most in nearly two years. While housing has softened, solid job growth supported consumer spending and export and business investment demand remained solid.

Output

Real GDP continued to grow at a steady pace of 0.2% in February. Growth so far this year has been driven by services and construction. A mild winter slowed energy output while manufacturing was hampered by losses in non-durable industries.

Finance was the fastest-growing area in services, buoyed by strong trading in securities and mutual funds. Real estate demand also continued to grow. Consumer spending expanded steadily, mostly for non-automotive goods and restaurants. Business and government services also advanced.

The growth of construction was led by a third straight 1% increase for housing, its best three months since mid-2004. Non-residential building also remained buoyant. Exploration and development of oil and gas recovered only a small part of the sharp drop in January, when warm weather hampered activity.

Temperatures returned to near normal levels in February, reflected in a 5% rebound in utility output. Still, oil and gas output fell, as inventories in North America remained high.

Manufacturers cut output by 0.4% in February, after slowing to no growth the month before. Non-durables continued to be the hardest hit, notably pulp and paper and clothing. Production of durable goods remained buoyed by the strength of investment demand. This was most evident in February in gains for construction and mining machinery, metal fabricating, communications equipment and heavy trucks (which kept motor vehicle output rising despite a drop in auto exports). Manufacturing firms kept inventories in check, with only 15% saying they were too high in April, half the number of last April.

Household Demand

The volume of retail sales rose 0.2% in February, its fifth straight increase. Consumer purchasing power was boosted by a wide-range of price cuts (notably for gasoline), which reduced overall nominal retail receipts.

Besides adding to the recent strong increases in retail sales, the February gain was impressive because auto sales continued to languish. The number of vehicles sold fell slightly, and preliminary data for March show another sluggish month, the seventh straight since the expiry of last summer’s price discounts.

Household electronics, especially TVs, remained a focal point of consumer interest, stimulated by falling prices and new products. Clothing also continued to benefit from lower prices, aided in part by the rising exchange rate that dampened the cost of imports.

Housing starts continued to exceed expectations, rising 4% in March to an annual rate of 252,300 units, the most since mid-2004. Mild weather gave a boost to construction in all regions throughout the first quarter, but growth remained strongest in the booming Alberta and BC markets. Starts of multiple units were particularly robust, especially in Vancouver where condos account for over two-thirds of all starts. Ground-breaking on single-family units fell in tandem with lower sales. Existing home sales flattened out after gains in the first two months of the year.

Merchandise trade

Trade flows dipped in both directions in February, interrupting the recent upward trend. Lower US demand for energy products led the drop in exports, while imports fell across the board. The monthly trade surplus was little changed at $6.3 billion, as a $1 billion drop in the surplus with the US was offset by a widening deficit in overseas trade.

Exports fell 1.9% in February after a 1.6% drop in January. Almost all of February’s decline originated in lower prices for energy products, especially natural gas where the mild winter in North America sent prices plunging.

Most other exports started the year slowly. Auto exports fell 5% in February reflecting slow sales in the US. Machinery and equipment was dampened by a one-third drop for aircraft. Weak demand for forestry products continued to hamper non-energy resources, including lumber which retreated after five months of strong gains following rebuilding from last summer’s hurricane damage on the US Gulf Coast.

Some resource exports remained strong. Wheat hit its highest level in a year. Metal ores rose, led by copper. Chemical exports also continued to grow, boosted by ethylene glycol.

After rising steadily in 2005, imports levelled off in January and fell 4.6% in February. Crude oil led the drop, while the slump in domestic demand for autos also curtailed imports. Imports of metals, chemicals and machinery and equipment returned to more moderate levels after substantial increases in the previous two months, especially excavating machinery destined for the oilsands.

Prices

The consumer price index rose 0.2% between February and March, offsetting a decline the month before and leaving the annual rate of inflation unchanged at 2.2%.

Most of the upward pressure on prices continued to come from gasoline (up 5% in the month) and new home prices. Gasoline and housing prices continued to rise rapidly in April.

Energy prices explain most of the higher inflation in the US in the past year (3.4% versus 2.2% in Canada); excluding energy, the CPI rose 2.2% in the US and 1.7% in Canada. Gasoline prices in Canada were 7% ahead of last year’s level: still, this is far below the 17% increase in the US (partly because oil prices are set in US dollars, which require fewer Canadian dollars to purchase due to the rise in the exchange rate over the past year).

Since the loonie began to appreciate in 2003, gasoline prices in Canada have risen 31%, versus 72% in the US between December 2002 and March 2006. This differential represents a saving of 28.8 cents a litre for Canadian motorists. Most of the 41-point differential reflects the 26% rise in the Canada/US exchange rate. This represents a savings of over $600 per household (double the $300 from lower prices for durable and semi-durable goods over the same period). The rest reflects factors such as the higher level of flat taxes in Canada (all provinces and the federal government apply a flat tax per litre, which partly explains why prices remain higher in Canada in absolute terms).

The mild weather already was reflected in lower prices for home heating, especially natural gas, with more cuts to come in April. The cost of durable goods continued to fall, as the usual declines for computers and electronics were reinforced by the resumption of price discounts for autos.

Commodity prices rose for a second straight month, after a brief retreat at the start of 2006. All sectors participated in the increase. Copper, nickel and zinc all hit record highs. Copper inventories shrank to less than 3 days of global consumption, while Inco workers at Sudbury could strike in May. Crude oil set a new high of $75 (US) a barrel.

Financial markets

The Canadian dollar hit a 28-year high of over 89 cents (US), reversing a slight dip in March. Its 4.5% increase in April was its largest monthly gain in over 25 years.

The stock market set another monthly record in April for the third time so far this year. Metals again led the 1% gain, fed by the surge in prices for copper, nickel and gold. Energy issues also profited from high prices. Outside of resources, stocks were mixed. Consumer stocks rose, but finance, real estate and info tech retreated. The strong stock market triggered a hefty increase in new equity issues in March.

Interest rates rose about a quarter of a point across the spectrum. Despite the hike in rates, investors continued to move out of money market funds.

International economies

In the United States, real GDP in the first quarter rose 1.2%, a significant improvement from the 0.4% gain in the fourth. Business investment led the increase, posting its strongest advance in nearly two years. Housing growth remained minimal, but consumer spending picked up as incomes rose and fuel bills shrank.

Households remained unfazed by rising gasoline prices in the spring. Consumer confidence rose in April, and was up 25% since the aftermath of Hurricane Katrina. This optimism was reflected in continued gains in retail and home sales. Meanwhile, new orders for durable goods rose sharply in February and March, pointing to a strengthening manufacturing sector.

Industrial production grew 0.6% in March, after recovering in February from January’s weather-induced dip. The March increase was driven by broad based gains in manufacturing, especially investment and consumer goods. Energy remained a drag on overall output; larger than normal maintenance (partly related to new rules on ethanol) depressed oil refining for a second straight month, while oil and gas output in the Gulf of Mexico remained below its pre-hurricane levels. New orders for durables rose 6% in March, double their gain in February. Capital goods and autos drove the advance.

Retail sales rebounded 0.6% in March, keeping annual growth at a healthy 8%. Sales of motor vehicles and parts led the way, despite a slight dip in the number of vehicles sold (especially of domestic vehicles, as imports grew steadily in popularity). Building materials remained in high demand, and their 18% year-over-year growth was the most of any group (including gasoline). Clothing and general merchandise continued to be weak, partly because Easter was relatively late in April.

Housing starts fell 6% to 1.96 million units in March after an 8% drop in February. With these declines, starts in the first quarter were up less than 4%, despite the warmest January ever. Still, the number of homes under construction and the backlog of homes authorized but not yet started remains at or near their recent highs. New home sales rebounded 14% in March.

The trade deficit narrowed slightly to $65.7 billion in February, as imports fell faster than exports. Almost all of the increase in the US trade deficit in the past year reflects a $13.1 billion hike in its bill for energy imports.

Industrial production remained stable in the euro-zone in February, after slight gains of 0.2% in both December and January. Energy output recovered, while increases in capital and non-durable goods were offset by cutbacks elsewhere. New orders recovered about half their fall in January. The trade deficit eased slightly, as a large surplus in chemicals offset the rising energy deficit. Retail sales retreated in February with demand for food, beverages and tobacco slowing. The unemployment rate fell to 8.2%, while inflation inched downwards to 2.2%.

Industrial production accelerated in Germany in February, boosted by continued strength in new orders. Business confidence remained at a 15-year high in April, while exports were upbeat despite the rising euro. Consumers reined in spending, after snapping up post-holiday sales in January.

French output tumbled in February, continuing its recent oscillating trend. New orders stabilized after their January plunge, boosted in part by consumer demand. The unemployment rate continued to ease, down to 9.1% in February from 9.7% a year-earlier.

Recovery continued in Japan early in the new year. Industrial production expanded again in March, while February’s unemployment rate fell to 4.1%, its lowest level in almost eight years, pushing the jobs-to-applicants ratio to a 14-year high. Consumer confidence continued to climb in tune with incomes. Housing starts have now posted three years of growth. Consumer prices rose 0.5% in February, further evidence of the end of deflation.

Note

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