11-010-XIB
Canadian Economic Observer
May 2007

Summary table - key indicators

Overview*

Output growth quickened in February, leaving it well-positioned for a solid first-quarter increase. The recent string of strong employment gains was interrupted in April, although the unemployment rate remained at a record low.

The solid growth of the economy in the first quarter is noteworthy for several reasons. It suggests that much of the slump in output last September and October was an isolated event, not the beginning of a cyclical slowdown. This was reflected in the steady gains in the leading indicator and employment throughout last fall, which continued in the first quarter. The buoyancy of output also shows the resiliency of the Canadian economy in the face of a rail strike and a slowdown in US growth. US demand was hampered by the continued weakness in housing, although this slump has not spilled over into sectors such as consumer spending and business investment.

The cold snap appears to have had more of an impact of the distribution than the overall level of output. While demand for utilities hit a record high, the cold dampened work outdoors in the construction and resource industries. It also appears to have discouraged consumers from venturing out, especially to buy autos. The coldest winter in 25 years in the US exaggerated the slump in housing, which began to improve as temperatures recovered.

Labour markets

The labour market was unchanged in April, after three consecutive increases in employment to start the new year. Jobs continued to shift from full-time to part-time positions, further dampening hours worked. Most of the drop in full-time jobs was among youths. The unemployment rate held steady at its record low of 6.1%.

In the goods-producing sector, the resource and construction industries returned to solid growth, after cold weather had slowed work outdoors. These gains were offset by renewed losses in manufacturing. Services also were balanced evenly between gains in trade and public services and losses in finance and business services.

Regionally, Alberta returned to the lead in employment growth, after a pause in March, driven by natural resources and trade and transportation. More part-time jobs may have encouraged women to enter the labour force. Employment posted a rare across-the-board increase in the Atlantic provinces, whose unemployment rate equalled the record low of 8.9% set in February (with Newfoundland and PEI hitting their lowest levels in a quarter of a century).

Quebec’s unemployment rate also eased to a record low of 7.3%, led by solid employment growth in construction and trade. Manufacturers in central Canada continued to trim employment. Unlike Quebec, these losses in Ontario were not offset elsewhere, and employment dipped for the first time in six months. BC also posted its first drop since last fall, mostly in the services sector.

Leading indicators

The composite index advanced 0.4% in March, reinforcing its 0.7% gain the month before. Household spending remained the driving force of growth, boosted by a robust labour market. Financial market conditions also remained buoyant, with the stock market hitting a new record. Manufacturing continued to recover slowly, as sluggish US demand was compounded by the rail strike.

Household spending lost some of its élan. Durable goods sales posted their first drop in over a year, largely due to slow demand for vehicles. The housing market remained strong in the first quarter, after small declines in the second half of 2006. This helped stimulate more purchases of furniture and appliances, which posted their largest increase since last summer. Consumer services also led the growth of services employment in March.

Manufacturing continued to recover tentatively from a brief contraction last autumn. New orders for durable goods rose for a third straight month, led by transportation equipment. However, this upturn in orders has not yet been reflected in higher shipments, which continued to fall while inventories rose. Some of the problems in February reflected the impact of rail strike. The average workweek in factories grew slightly, consistent with a levelling off of manufacturing employment in recent months, after steady declines from their peak early in 2005.

The US leading indicator fell 0.1%, resuming the slow decline seen in most of 2006 after starting 2007 with back-to-back increases. The weakness of the US leading indicator has been a poor predictor of the US economy, which has consistently performed well over the past year. However, it has been a good augur of Canadian exports to the US, which so far this year are below the level of a year ago. This partly reflects our dependence on the US housing and auto markets, which have lagged the rest of their economy.

Output

Real GDP expanded by 0.4% in February, a resumption of the strong growth late in 2006 after a pause in January. The 1.3% growth since October represents the strongest four-month period since mid-2005.

The energy sector led growth, as the cold boosted demand for electricity and oil and gas. Firms remain cautious about drilling for new wells (especially gas), which fell for the sixth time in seven months.

The boost to energy demand from the cold snap was partly offset elsewhere. Home-building was sharply curtailed by the cold, while output fell in other sectors which are exposed to the elements, notably transportation and metal mining. A rail strike also hampered these latter two industries.

Manufacturing output eked out a small increase, despite being hampered by the rail strike. This was its third increase in four months. More encouragingly, the balance of opinion about production in the second-quarter business conditions survey was more positive than it has been in almost three years. Autos rebounded from sharp cuts in January, and assemblies were up slightly year-over-year, a marked change from the 25% drop last October. A fire at a refinery in Ontario curtailed petroleum production.

While consumers hibernated for the month, services were buoyed by strength in financial and business services. This reflected record highs in the stock market and corporate profits. While rail transport was slowed by the strike, some of this loss was partly offset by firms shipping by other modes of transport. Still, transportation fell overall as there are few alternatives to rail for bulky natural resource products.

Household demand

Consumer spending in February was little changed for the second straight month. While a cold snap discouraged consumers from visiting retailers, it sent energy consumption soaring. Vehicle sales bore the brunt of the reluctance to spend. With auto sales flat in March, first-quarter unit purchases posted their largest drop in over a year.

Spending on other durable goods was surprisingly strong. Lower prices kept demand soaring for TVs and electronic goods. Furniture and appliance purchases also added to a strong start to the year.

Elsewhere, sharp price hikes for food and energy dampened their consumption. Clothing purchases slowed for a second consecutive month, despite the cold.

The housing market steadied in March, after the turbulence caused by unseasonably large weather fluctuations in recent months. Housing starts bounced back by 7% in March, although they remained below the level of a year ago. This slower pace was reflected in a slight easing of the backlog of unsold homes. Existing home sales were unchanged in March, capping a record quarterly high.

Merchandise trade

Exports slowed in February, snapping three months of increases that sent them to a record high in January. With imports up marginally, the trade surplus fell nearly $1 billion. The 15-day rail strike hampered exports (especially bulky resource products), while imports into the country were little affected (even if their distribution from the port of entry was slowed).

Non-energy exports fell across the board. The largest declines were for forestry and industrial goods, which are the most dependent on rail (notably chemicals, lumber, and metals). Grain and auto exports were less affected by the strike. Machinery and equipment retreated, as airplane shipments returned to more normal levels after a spike in January. Energy exports jumped 16%, as cold weather in the US sent demand soaring for oil and gas (which are shipped by pipeline).

Imports edged up 0.3%, largely due to increases for autos and industrial goods. Imports of industrial goods surpassed autos as our leading import in mid-2006, and the gap has continued to widen. Much of this growth was driven by metal ores (such as raw copper from Chile) destined for refining in Canada, and then re-exported. These increases were largely offset by lower imports of energy and machinery and equipment.

Prices

The monthly CPI rose by 0.5% in March, matching February’s increase and sending the year-over-year inflation rate to an 8-month high of 2.3%. Energy prices remained the main source of upward pressure, reflecting increased demand due to the cold snap as well as gasoline shortages in Ontario.

Most other prices were little changed in March. The cost of durable and semi-durable goods edged down, led by cuts for clothing and vehicles. The recent surge in food prices was slowed by less crop damage in the US. The cost of housing remained the main source of upward pressure on services, although it too moderated slightly as a result of slower price increases for new homes in Alberta.

The boom in commodity prices showed few signs of letting up in April. Prices across the board hit new highs for the year. Energy again led the way, led by oil as inventories were low entering the driving season. Metals continued to set records, notably nickel.

Prices for manufactured goods in March rose for the fifth month, their longest string of advances in two years. However, the 1.3% increase was largely based on sharp hikes for gasoline and metals, with a small assist from food. Otherwise, 15 of 21 industry prices were either flat or declining. This downward pressure will be exacerbated by the rebound in the loonie in April.

Financial markets

The stock market advanced 1.9% in April, setting another monthly record. Gains were widespread, with notable strength in energy, metals and consumer issues. Stocks in the US have kept up with the 4% gain in Canada so far this year, despite a sharp drop for home-builders reflecting the slump in the US housing market.

Strong economic growth and buoyant commodity prices helped send the Canadian dollar back above US 90 cents in April for the first time in six months. The dollar started 2007 near 85 cents. The dollar also strengthened against the euro and yen.

Buoyant stock market conditions encouraged firms in the first quarter to raise the most equity funds in over two years. Bond issues recovered sharply in March. With so much money being raised in stock and bond markets, firms had less need for short-term loans.

Household borrowing grew at a steady pace of 0.8% in February. Mortgages again led the way, while slow auto sales dampened demand for consumer credit.

Regional economy

The rail strike was felt most keenly in the regions located farthest from the country’s manufacturing centre, as manufacturing shipments in February were down 1.4% in British Columbia and 2.1% in the Atlantic Provinces. Shipments also declined in Ontario due to refinery production stoppages. These problems in Ontario did provide opportunities for Quebec and the Prairies, where total refinery shipments were up (petroleum products are shipped mainly by truck).

Retail sales in British Columbia have rebounded strongly since November, when they were hampered by frequent storms and power outages. Housing starts grew for the second time in three months.

Retail sales also rose in the Atlantic Provinces. However, a return to normal winter conditions after an unseasonably warm month of January triggered a sharp decline in non residential building starts and permits.

As was the case in Atlantic Canada, housing starts remained low in Ontario in March after building permits fell by half in February. Refineries were almost entirely responsible for the 0.6% drop in shipments. The underlying trend remains positive due to two consecutive substantial increases in shipments in November and December, a rare occurrence since 2003. Ontario was once again responsible in 2006 for most of the slowdown in the national trend. Had it not been for the downturn in Ontario, shipments would have been up 3% last year rather than down 0.7%.

Economic conditions remain buoyant in the Prairies. Housing starts stayed at record levels. Building permits were still high in February thanks to strong gains in Manitoba. This explains why machinery declined only slightly compared to the record highs achieved in January.

Along with refinery shipments, shipments of machinery boosted Quebec, in large part due to soaring demand from the mining and electric power sectors. Mining investment is projected to grow by 50% over the year. Manufacturers also intend to increase capital investment by 7%, again mainly in the natural resources sector.

International economies

In the United States, real GDP growth slowed to 0.3% in the first quarter. The continuing slide in housing was aggravated by cuts in military spending and inventories and a setback to exports.

Housing contracted for a sixth straight quarter. Its 17% drop over the past year was its worst performance since the 1990-91 recession. Still, there were few signs that the housing slump was affecting the rest of the economy. Consumer spending rose at a steady 1% clip. Business investment rebounded from a dip late last year, led by strong demand for ICT goods. The drop in exports was the first in almost four years, and is likely an aberration as overseas demand strengthens.

Household demand began to thaw after a cold winter, bolstered by steady gains in employment and incomes. Retail sales rose 0.7% in March, led by clothing and building materials. Auto sales remained weak, although imports grabbed a 25.2% share, the most in 20 years as Japanese producers could not meet demand from their plants in North America. While existing home sales fell sharply, new home sales rebounded. This helped boost housing starts for a second consecutive month. But both starts and sales remained almost one-quarter below the level of a year-earlier.

Orders for durable goods picked up sharply in March. Core capital goods led the way, up 5% after a sluggish start to the year. This points to a continued pick-up in business investment, after it rebounded in the first quarter. The trade deficit fell slightly in February.

The euro-zone economy accelerated in February. Industrial production rebounded to more than offset its January decline, as output, led by energy and capital goods, was up in every sector. New orders, however, declined for the second straight month, dampened by weak demand for electronics and transport equipment. The external trade deficit narrowed as a decline in the energy deficit was reinforced by rising surpluses for chemicals, machinery and vehicles despite the continued appreciation of the euro. Consumer’s boosted their spending in March, even as interest rates were hiked up once again. The unemployment rate continued its downward trend, falling to 7.2%, while inflation inched up to an annual rate of 1.9%.

The German economy continued to power forward. Real GDP for 2006 rose 2.7%, its best performance since 2000, fuelled by both domestic and foreign demand. Industrial production rose a further 0.9% in February, with new orders surging 4%. Consumer demand remained surprisingly resilient in the wake of a hike in the VAT to start the year, partly because the number of unemployed fell to a four year low in April.

Output recovered in France in February, rising 1.1% after a slight drop the month before. A reversal in new orders, however, indicates the see-saw pattern in industrial production of late will continue. Consumer demand remained brisk, with retail sales up for the third consecutive month in March. Inflation was stable at 1.2%, the second lowest rate in the euro-zone.

Industrial production remained sluggish in Britain in February. Foreign demand continued to wane due to the strength of the pound (which hit a 15-year high in April). The 11.2 billion euro external trade deficit in February was the largest in the euro-zone. Consumer spending picked up after a slow start to the year, aided by retailer discounts.

Japanese industrial production recovered slightly in February, after a sudden drop the month before. Export demand remained robust, fuelled by soaring trade with China, which displaced the US as Japan’s largest trading partner. Exports to China grew 21% in the year to March, almost double the growth of exports to the US. Imports from China rose 13% to an all-time high.

Real GDP in China grew 11.1% in the first quarter of the year from a year earlier, as every major sector posted gains. China displaced the US as the largest source of European Union imports last year. In an effort to curb credit and investment growth, the Bank of China raised the reserve requirement for the fourth time this year in April. Singapore’s economy grew 1.8% in the first quarter, led equally by manufacturing and services.

Note

* Based on data available on May 11; all data references are in current dollars unless otherwise stated.