11-010-XIB
Canadian Economic Observer
June 2005

Summary Table - Key Indicators

Overview*

First-quarter growth was steady at 0.6%, driven by consumer spending and business investment. These gains were partly offset by a drop in housing and a slowdown in inventories, while the growth of imports continued to outstrip exports. Prospects for the second quarter brightened. Housing rebounded in April, helping the leading indicator hit a 6-month high, while job growth strengthened in April and May.

Business investment rose 3% in volume, boosting year-over-year growth to 8%. This marks its best year of growth since early 2000 (excluding a blip late in mid-2003). All components of spending picked up. The resource boom continued to fuel gains in engineering, while a surge in permits suggests building has pulled out of a prolonged slump. Higher outlays for machinery and equipment were driven by computers, industrial machinery and aircraft.

The sectoral pattern of net lending was little changed. The corporate surplus remained near its all-time high of $80 billion, as higher profits and lower outlays for inventories and interest and dividends offset more investment. Household borrowing continued to grow thanks to rapid spending at a time of slower income growth. Governments racked up a slightly smaller surplus, partly because of large relief aid to Asian countries affected by the tsunami.

The current account surplus shrank for the fourth consecutive quarter, to a 2-year low of $4 billion. This was less than half its peak a year-ago. Surging import volume (up 12% year-over-year, the most since early 2000) trimmed the surplus in trade in goods. Meanwhile, export growth has been halved over the past year due to slower demand and the higher dollar.

Labour Markets

Employment posted a second straight solid gain of 0.2% in May, after a sluggish start to the year. The bulk of jobs were full-time positions for adult men. A sharp increase in the labour force kept the unemployment rate stable at 6.8%.

Private sector payrolls accounted for all of the increase. Resources led the growth in goods; while construction lost some of the ground gained in April, since December employment in resources and construction has risen at a double-digit rate (totalling over 100,000 jobs). Over 80% of jobs in these two industries are held by men, which helps explain why two-thirds of job growth so far this year has gone to adult men.

Trade and transport also had a good month, partly because they are needed to ship our resources overseas. Business services posted solid gains. The government sector cut back, while manufacturing continued to shed jobs.

BC remained far ahead in job growth, up 4.1% from last May thanks to natural resources and construction and, since December, transportation. Alberta was next at 1.8% due to resources and transportation as well as business services (several mega-projects are in their planning and development phase). All of the increase in jobs was outside of Edmonton and Calgary. Fuelled by the tar sands, the Athabasca region had 10% more jobs than last May; together with neighbouring Cold Lake, it had the lowest unemployment rate in the country at 3.1%. Only Northern BC and Kootenay had faster job growth. Ontario remained slightly above-average, as growth in construction and trade offset losses in manufacturing. Jobs fell in Quebec due to losses in manufacturing and the public sector.

Leading indicators

The leading indicator rose 0.4% in April, its largest advance since last fall when the Canadian dollar began to retreat from its 12-year high. Demand for labour pulled out of its lethargic start to the year, while domestic spending continued to improve. Six of the ten components rose, one more than in March, while three were unchanged. The housing index was the only component to decline, continuing to back off slowly from its 25-year high set last July.

Firms were increasingly willing to hire as well as invest more, partly due to ballooning income in the resource sector. Employment rose in business services, especially architectural and engineering services just as firms announced the launch of a spate of new capital projects. The average workweek grew in most manufacturing industries, especially those related to construction, machinery and metals. However, sharp declines in beverages and tobacco kept the overall workweek stable. The April survey of business conditions confirmed a growing optimism among manufacturers about employment, with 84% saying they will keep or add to their workforce in the spring.

New orders continued to improve, adding to the previous month’s 12-month high growth rate. This upturn in demand put an end to a 2-month drop in the ratio of shipments to stocks. Growth again was driven by construction, machinery and metals. Manufacturing in central Canada was hampered by a downturn in transportation equipment, reflecting losses for autos in Ontario and aerospace in Quebec.

Sales of durable goods rebounded quickly from a one-month slump in car sales. Furniture and appliances continued to expand, boosted by the ongoing strength in house sales.

Existing home sales continued to grow, as did new listings. Montreal and Edmonton posted their best April ever among the 25 largest urban centres, while Calgary continued to set all-time highs. Conversely, housing starts shifted from western to eastern Canada, with recent declines in BC pulling down the national total.

The US leading indicator was unchanged for a fourth straight month. The gap between short and long-term interest rates levelled off, after being the principal source of weakness over the past year. Within domestic demand, building permits slumped as the weather worsened. In March, our exports to the US held on to their February gain, which recouped all of their losses since September.

Output

Following four straight solid advances, real output dipped 0.1% in March, its first retreat in over a year. Most of the weakness was concentrated in construction and mining, sectors which led growth much of last year and where prices remain strong. Manufacturing also slumped, although reversing this trend may be more difficult. Business services buttressed overall GDP as investment gathered steam.

Construction fell for a second straight month due to lower home-building. Housing starts already rebounded in the spring. More importantly, non-residential building rose for a fourth straight month, its best such string since 2002 after a prolonged slump. Engineering also improved steadily as resource projects geared up. Drilling for oil and gas was an exception, hampered by poor weather in Northern Alberta. Production problems in the tar sands also hindered crude oil output. Coal continued to trend up, boosted by Chinese demand.

Manufacturers cut output nearly 1% after a small dip in February. Autos led the retreat, with assemblies down 5% as firms struggled to lower inventories. Lumber also fell sharply. Metals remained a pillar of strength, with sustained growth for iron and steel and aluminium. Capital goods industries gave back some of their gains over the previous two months, despite ongoing strength in computers and construction and mining machinery.

Services were buoyed by strong gains in the ICT sector. Finance and real estate demand remained brisk. Transport was hampered by the drop in exports of autos and resources. Most consumer-related services also saw demand slow after a brisk start to the year. Government was restrained by strikes in Quebec’s education sector.

Household Demand

Housing sprang back to life in April, after posting its first quarterly decline since 2000. House starts rose 6% in April to 230,400 units at annual rates, equalling their 2004 average. Ground-breaking on single-family homes hit their highest level so far this year, while multiples rose for a third straight month. Existing home sales also bounced back strongly in April, driven by the booming market in Calgary.

Retail sales volume edged down 0.3% in March, after rising almost 4% in the first two months of the year. Autos led the retreat, notably trucks after a strong start to the year. Vehicle sales remained flat in April despite heftier price discounts.

Demand for non-auto retail sales stalled in March. A temporary lull in house sales hindered furniture and appliances outside of consumer electronics. Price hikes cut into clothing demand. Non-durables were an exception, as consumption of food and gasoline was undeterred by price hikes.

Merchandise trade

Both exports and imports were little changed in March. For exports, this marks a continuation of the slowdown that lingered throughout the first quarter, especially shipments to the US. The slack in imports follows solid gains at the turn of the year.

The dip in exports south of the border was concentrated in autos, down 8% in the month after stalling in January and February. Weak sales of several large vehicles produced in Canada led to these cutbacks. A return to colder weather in the US sharply boosted energy demand. Exports of most other resource products fell slightly after back-to-back gains. Exports of machinery and equipment rose for a third straight month, led by aircraft and computers.

Imports also were hampered by losses in the auto sector, especially parts used in domestic assemblies. The strength of business investment was reflected in a fourth straight increase for imported machinery and equipment. Demand was strongest for machinery used in the oilpatch. Clothing and textile imports were little changed, completing a relatively uneventful first quarter (up less than 1%) compared with the surge into the US and the EU after quotas on Chinese shipments expired.

The dwindling trade surplus in the first quarter accompanied a slowdown in Canadian direct investment abroad, despite the rising loonie (which lowers the cost of foreign acquisitions). There was a slight increase in the purchase of foreign bonds by Canadians: interestingly, much of this is from foreign borrowers coming to Canada’s rich capital markets and issuing foreign bonds denominated in Canadian dollars (shifting all the risk of future exchange rate movements to foreigners). Foreigners also continued to snap up Canadian equities, buying nearly $5 billion in the first quarter when prices soared for our resource stocks.

Prices

Overall, prices for Canadian made products rose 2.9% from a year-ago, down from their peak of 3.5% last summer. The annual rate has been below 2% the last two quarters, due to falling export prices after last year’s rebound. The recent drop in import prices levelled off in the first quarter. With housing prices rising, this pushed up costs for spenders in Canada.

Consumer prices continued their upward trend, with a 0.3% increase between March and April nudging the annual rate of inflation up to 2.4%. Energy prices remained the main source of upward pressure, with higher gasoline prices reinforced by a hike in Ontario’s electricity rates. Poor growing conditions in the US also raised the cost of food.

Most other prices were restrained or fell in the month. Heavy discounting of winter clothing sent semi-durables tumbling. Durables also fell due to cuts for furniture and electronics (both of which are more than 3% below last year’s prices) as well as autos. Services were checked by shelter (especially rents) and air transport.

Commodity prices in May saw their first significant drop of the year, with losses across the board. Energy posted the largest decline, as crude oil’s retreat from a record high offset gains in uranium and coal. Industrial goods dipped for a second straight month, led by lumber. Food gave back some of the ground gained in April.

Prices for manufactured goods strengthened for a fifth straight month, rising 0.5% in April. All of the increase originated in a lower Canadian dollar, which offset lower prices for commodities such as lumber and metals.

Financial markets

The Toronto stock market returned to its winning ways, rising 3% in May after small setbacks in the previous two months. Energy and consumer products led the rally. Despite the upward trend over the last two years, which lifted prices by nearly 50%, the market remains nearly 20% below its all-time peak set in 2000.

The Canadian dollar was steady at about US80 cents. The trade-weighted exchange rate rose, largely because of a 3% gain against the euro which plunged to a 7-month low after voters in France rejected a new EU constitution.

Short-term interest rates remained steady, while continued declining bond rates helped push down mortgage rates. The drop was greater in the US, where 10-year Treasuries yielded less than 4%. Despite lower bond rates, firms continued to substitute equity and short-term paper for bonds in the first four months of the year.

Regional economies

Western Canada continued to experience the country’s best economic conditions. Their resources accounted for almost the entire year-over-year increase in exports in the first quarter. Owing to this resource boom, non-residential industrial permits doubled in Alberta to a 7-year high. Employment in British Columbia, where business services in the West are concentrated, benefited the most from higher investment.

Investment goods contributed to a third consecutive strong increase in shipments in the West. Strength in transportation equipment and computers was reinforced by growth in wood and metals on the Prairies. Machinery reached a record high level in British Columbia.

Since December, the Prairies have contributed more than either Ontario or Quebec to the national growth of labour income and retail sales, a rare occurrence. Labour income and retail sales also rose sharply in British Columbia.

Ontario trailed growth in the rest of Canada in March. Weak labour income resulted in flat retail sales. Shipments declined 4%, while exports registered their first year-over-year decrease in more than a year. The auto sector was the weakest, after US firms announced production cuts in the first quarter. However, some pockets of strength remained, especially in the investment sector.

Manufacturing shipments were also weaker in Quebec, but the 2.4% decline was not as steep as in Ontario, reflecting Quebec’s more diversified manufacturing sector. A sharp decline in aerospace, a volatile sector on a monthly basis, was offset by growth in forestry products, metals as well as plastics and chemical products. The slump in textiles and clothing following the closure of several small plants early in the year eased in the spring.

International economies

Household demand in the United States rose sharply in April. Retail sales jumped 1.4%, led by autos and clothing. So far this year, auto sales are matching last year’s 16.7 million unit pace. But the composition of sales has shifted from trucks to cars (especially high mileage hybrids), sending the share captured by imports to a record high of 42.7%. These factors suggest that the drop in the trade deficit in March, much of it driven by lower consumer imports, may be only temporary.

Existing home sales also set new records, jumping 5% to 7.18 million units (annualized). Median prices were 15% ahead of last year. Housing starts recovered about two-thirds of the sharp drop in March (when cold weather accompanied an early Easter): 40% of new homes are sold before construction begins, a share that has risen about 10 points in each of last two decades.

Factory output was flat in April, torn between a pick-up in capital goods and a downturn for consumer goods. The rebound in capital goods follows a first-quarter slowdown after the expiry of accelerated depreciation for tax purposes. The slump in auto assemblies may be short-lived, to judge by an upturn in sales and orders in April.

Job growth slowed in May after April’s solid advance. Consumer and business services joined manufacturers in shedding jobs. Housing supported the largest gains.

The eurozone expanded by 0.5% in the first quarter of 2005, driven by export and household demand. Business investment contracted along with imports. Industrial production fell 0.2% in March, with declines in consumer and intermediate goods more than offsetting gains in energy and capital goods. New orders also retrenched, led by a steep fall for textiles and machinery and equipment. Textiles were hit by a surge of imports from China following the removal of quotas. Consumer spending remained upbeat in March and both the unemployment and inflation rate were stable in April. The external trade surplus widened in March as gains for machinery, autos and chemicals offset the growing energy deficit. Exports to China were flat while imports rose 17%. Trade with Canada for the same period fell in both directions.

Italy’s economy contracted 0.1%in the first quarter, after a similar drop in the previous quarter. Industrial production continued its downward trend in March after being flat in February. New orders followed suit, declining 5% in the month due to stagnant domestic demand.

Growth in France decelerated to 0.2% in the first quarter from 0.7% in the fourth. High oil prices and the strong euro slowed output. Industrial production fell for the second straight month in March, while new orders recovered slightly after a sharp decline to start the year. Retail sales were upbeat as domestic demand continued to buoy growth, driven by strong housing and government stimulus. The unemployment rate was unchanged at 9.8% in April.

The German economy rebounded in the first quarter, with real GDP posting 1% growth after being essentially flat for most of 2004. Industrial production eased in both February and March after a sharp increase to start the year. New orders picked up, however, and retail sales rebounded from several declines. The external trade surplus remained the largest in the eurozone, although exports levelled off in March. The unemployment rate was steady at 9.8% in April, while the 1.4% annual rate of inflation was among the lowest in the region.

Real GDP in Japan expanded by 1.3% in the first quarter. In nominal terms, however, GDP was up only 0.6% as prices fell 1.2% year-over-year. Exports, previously the economy’s driving force, continued to slide in the quarter. Consumer spending was upbeat after the effects of typhoons and an earthquake dampened demand at year-end. Falling unemployment and rising incomes also gave a boost to consumer confidence. The unemployment rate fell to six-year low in April of 4.4% with a surge in full-time workers.

Note

* Based on data available on June 10; all data references are in current dollars unless otherwise stated.