11-010-XIB
Canadian Economic Observer
June 2006

Summary table - key indicators

Overview*

The economy rebounded from a slight slowdown late last year to post a 0.9% gain in the first quarter, the fastest growth in real GDP in almost two years. This matched a similar upturn in job growth early this year, while the US economy also bounced back from a weak fourth quarter. Subsequently, a surge of full-time jobs sent unemployment in Canada to a record low in May.

First-quarter growth was driven by household and business spending, as export volumes were little changed. Investment posted a 1.6% gain, with warm weather hampering oil and gas drilling early in the new year (colder weather in March allowed drilling to return to normal levels). Conversely, housing received a boost from the mild temperatures, although this stimulus also wore off by spring.

The record warm winter in the US reversed the 3-year-long surge in energy prices. This sharply curtailed Canada’s export earnings, lowering both our trade surplus and corporate profits. While prices recovered in the spring, notably for oil, metals have increasingly out-shone energy in commodity markets so far this year. Copper prices led the way, doubling in just the last two months.

The May surge in employment appears to reflect a number of factors. Alberta’s labour supply finally responded to the latent strength of its booming oil economy. While Ontario and Quebec continued to lose manufacturing jobs, this was more than offset by gains in services, supplemented by public sector hiring in education and health care.

The strength of the labour market and the prosperity cheques issued in Alberta sent year-over-year disposable income growth to a 5-year high of 6%. The sharp substitution of full-time for part-time jobs in May will further boost incomes and offset the effect of higher energy prices on discretionary spending.

Labour Markets

The labour market surged in May, with a 0.6% hike in employment driving the unemployment rate to a record low of 6.1%. Alberta, Ontario and Quebec each contributed one-third of the overall gain in jobs. More impressively, full-time jobs soared by a record 151,000, one-third of them at the expense of fewer part-time positions. The substitution of full-time for part-time jobs occurred in 8 of the 10 provinces, presumably as employers struggled to find employees.

Alberta’s 1.7% increase equalled its fastest ever, while the 32,000 increase in absolute terms was a new record (breaking the previous one set 3 months earlier). The jump appears to be a case of supply finally starting to catch up with the underlying strength of demand. Alberta’s population grew by 0.4% in the month, while its participation rate jumped nearly a full point due to across the board gains by age and sex. Alberta’s participation rate has been slow to respond to the booming economy: it was flat in the last seven months of 2005, before rising 0.1% a month between January and April. Demand remained the strongest in natural resources, construction, finance and health care. Lower-paying industries such as agriculture, manufacturing and recreation continued to lose workers to the faster-growing ones. The job increase in Alberta coincided with the NEB revising up its forecast of oilsands output by 40% to 3 million barrels a day in 2015, the result of nearly $100 billion in investment.

Ontario and Quebec continued to grow despite further losses in manufacturing. Growth in Ontario was dominated by youths, with trade and business services doing much of the hiring. Adult unemployment in Ontario fell to 4.8%, versus 6.9% in Quebec. Employers in Quebec turned to this larger pool of adults to find workers. Education and health care continued to lead the way, as they accounted for two-thirds of jobs growth in the past year. Construction and finance led private sector growth.

Leading indicators

The composite leading indicator continued to rise, up 0.5% in April after a 0.6% gain in March. Consumer spending took the lead in growth, as the burst of demand in the stock and housing markets early in the year moderated in the spring.

Stronger sales of durable goods offset a sharp downturn in the housing component. Both housing starts and house sales returned to more normal levels, after exceptional gains during the period of mild weather at the start of the year. Instead, consumers shifted their spending to durable goods, which then posted their largest gain in six months. Demand was particularly strong for electronics and furniture and appliances.

The financial sector remained buoyant. Stock market prices moderated slightly, as mining overtook energy for the lead in driving commodity prices higher. Increased business spending continued to boost the overall increase in the services employment component.

The manufacturing industry continued to struggle. Lower shipments pulled down the trend of the ratio of shipments to inventories, as declines for exports outweighed higher domestic investment demand. The inflow of new orders also was slow. The average workweek levelled off after three straight declines, and the loss of manufacturing jobs has moderated so far this year.

Much of the weakness in export demand for manufactured goods appears rooted in the rising dollar, as the US economy continues to perform well. The US leading indicator rose 0.2% in April, with a pick-up in industrial activity and continued gains in consumer spending outweighed the dampening effect of higher gasoline prices and slowing housing demand.

Output

Real GDP rose 0.1% in March, after an upwardly revised gain of 0.3% in February and 0.2% in January. The energy sector expanded 1.1%, notably oil and gas drilling. Energy output rose in eight of the last nine months, for an overall gain of 5%. Crude oil production was 8.5% ahead of last March, lead by gains in offshore Newfoundland and in the oilsands. Nearly two-thirds (64.6%) of oil is exported, versus 60.1% of natural gas.

Most non-energy resources trimmed production in March, despite soaring commodity prices. This dichotomy was most evident in metal mining, where output fell for a third straight month even as prices reached stratospheric levels. Non-metallic minerals also retrenched, notably as potash retreated at a double-digit rate for the third time this year as producers haggled over prices with Chinese buyers.

Business investment-related industries continued to strengthen. Non-residential construction increased for the third month in a row. This boosted metal fabricating and machinery manufacturers, especially makers of construction and mining equipment. Aircraft and computer and electronic products also held up well in the first quarter, buttressed by strong export demand.

Other manufacturers lowered output in response to slumping exports. The largest cuts were in auto assemblies and pulp and paper. Overall, manufacturing output edged down 0.4%, after a similar dip in February.

Services continued to be buoyed by strong consumer and financial demand. Besides more retail goods, consumers also spent about 1% more on recreation and restaurants. Finance was boosted again by more trading in securities. Goods-handling industries were hampered by the slack for most non-energy producers. Wholesale trade was unchanged, while transportation was hamstrung by lower commodity exports. As well, demand for urban transit fell steadily in the first quarter and is up only 1.1% in the last year, despite record high gasoline prices.

Household demand

Consumer spending remained robust in the first quarter, while the stimulus warm weather gave to housing early in the new year was wearing off in March and April. Consumer spending was driven by the robust gain in disposable incomes. Strong labour markets kept labour income growing at a healthy clip of 1.2%, while the $400 prosperity checks sent to Albertans boosted overall government transfers by nearly 7%.

After a brief pause in February, retail sales resumed the solid growth that began last October, rising 1.2% in March. This completed the best quarterly increase in retail demand since 2001. Auto sales led the monthly advance, although they did not recover last summer’s peak levels and they slumped again in April. TVs and furniture and appliances posted the biggest gains in the first quarter.

Spending on other goods tapered off in March, after large increases to start the year when many gift cards were redeemed. Price hikes dampened demand for food and energy.

Housing starts tumbled to 218,000 units (at annual rates) in April, after strong demand and a warm winter raised starts to an average of 248,000 in the first quarter. Most of April’s decline originated in the volatile multiple units sector. Ground-breaking on single-family dwellings slipped for a third straight month. While new home sales rebounded in April, existing house sales fell from their first-quarter peak.

Merchandise trade

The current account surplus eased from a record $13 billion in the fourth quarter to $10.7 billion in the first, still the second-largest ever. Most of the drop reflected lower prices for energy exports and a rising travel deficit, which hit a 14-year high. The investment income deficit continued to shrink rapidly: it stands at just over $2 billion, down from over $6 billion just two quarters ago and its peak of over $10 billion early in 2003. Interest income earned on foreign bonds has doubled in the past two years, while the rising dollar has helped lower the cost of serving our foreign debt.

Exports rebounded almost 2% in March, despite further declines in energy shipments at the end of a record warm winter in the US. Machinery and equipment led the increase, notably planes and helicopters for civilian and military use. Food exports also strengthened, partly as livestock approached its 2002 high after the US ban on young cattle imports was lifted.

Other exports were mixed. Rising prices for copper and zinc boosted metals, but chemicals slumped. Increases for coal and electricity offset lower prices for natural gas, where US inventories remained high. Forestry and autos were pulled down by losses for lumber and passenger cars.

Imports rose 3.6% due to across-the-board strength in domestic demand. Business investment in machinery and equipment led the way, reflecting widespread gains in aircraft, industrial and drilling demand, Energy was boosted by refiners needing more crude oil after cutting back after prices surged over the winter. Precious metals drove the increase in imports of industrial goods. The strength of retail sales pulled in more imports of vehicles and other consumer goods.

Prices

The price of domestically produced goods and services fell 0.7% in the first quarter. All of the drop reflected lower energy prices, especially for natural gas, while non-energy prices rose 0.7%. Import prices also fell further, as the exchange rate rose steadily, capping inflation for buyers in Canada at just 0.3%.

The consumer price index rose 0.5% between March and April, largely due to a 16% surge in gasoline prices. Excluding energy, prices actually fell in the month.

The drop in non-energy prices originated in declines for a wide range of durable and semi-durable goods. Prices fell sharply for furniture, appliances, electronics, clothing and autos. All these items have a relatively high import content, and the cost of imported consumer goods has fallen 5% since 2004 as the loonie has risen.

The cost of services rose 0.4%, led by the rising cost of shelter. New home prices were 6.5% ahead of a year-ago, largely due to a 25% hike in Alberta’s booming housing market.

Commodity prices dipped in May, largely because oil retreated from its record high of $75 (US) a barrel and natural gas prices remained about half of last year’s peak. Instead, metals increasingly replaced energy as the focus of interest. Copper was particularly strong, while nickel and zinc also rose considerably. Strong demand and the inelasticity of supply in the short-term drove these increases.

The price of non-oil manufactured goods rose 0.5% between March and April, mostly due to high prices for copper, zinc, nickel and gold. The rising dollar pushed down prices for about half of all industries, notably autos and lumber.

Financial markets

The Canadian dollar continued to strengthen, hitting a 28-year high near 91 cents (US) by the end of May. While short-term rates were raised by another quarter of a point, long-term rates fell by a similar amount. This contrasts with the US, where long-term Treasuries rose to near 5%.

Corporate net lending hit a new record of $76 billion (at annual rates) in the first quarter. While profits fell, spending dropped even faster, especially for inventories.

Firms continued to step up equity issues in the record bull market. New stock issues increased steadily from $33 billion in 2004 to $89 billion (at annual rates) in the first quarter, and they accelerated again in April.

Foreigners snapped up Canadian securities in increasing numbers in the first quarter, purchasing $8.1 billion of stock. Canadian foreign investment also rose, much of it ‘Maple bonds’ issued in Canadian dollars by non-residents to Canadian institutional investors. Direct foreign investment in Canada also rose, especially in the resource sector.

International economies

In the United States, the job market softened in May. Jobs rose only 75,000, as construction stalled in response to the slowdown in housing while manufacturers shed jobs. The unemployment rate was little changed at 4.6% (on a comparable basis, which excludes 15-year olds, Canada’s rate was 5.4%).

Consumer spending strengthened further in April. Retail sales rose 0.5%, overcoming continued weak auto sales. New home sales jumped 5% on top of a 12% gain in March, recouping most of their losses at the start of the year. Still, housing starts continued to trend down, and stood 8% below last April. Starts in the South have fallen 25% since January, suggesting the post-hurricane surge in building has passed.

The strength of consumer spending was all the more impressive since gasoline prices pushed up the CPI 0.6% in April. Consumers were unfazed, however, as consumer confidence hit its highest level since May 2002, buoyed by the labour market.

Industrial production increased 0.8%. Business equipment again remained stalwart, partly because investment was needed to cope with the highest rate of capacity utilization (81.9%) since mid-2002. Lower orders, however, point to slower growth in demand.

The March trade deficit narrowed by $3.6 billion, more than the drop in February. Exports rebounded, while oil prices retreated in the month. Still, the bill for imported oil was $65 billion in the first quarter, up from $48 billion in 2005, and oil import prices jumped 12% in April.

The pace of economic growth in the euro-zone doubled in the first quarter of 2006 as real GDP gained 0.6%, boosted by a 3.1% surge in exports. Industrial production rose 0.4% in March, led by a rebound in intermediate goods. New orders dropped, however, as demand fell across the board. Consumer spending remained hesitant, dampened by harsh weather in March. The external trade surplus returned as demand for chemicals, machinery and vehicles outweighed the growing energy deficit. Trade with Russia posted the largest growth in trade flows, with exports up 27% year-over-year for January and February and imports 52%. The unemployment rate was stable at 8% in April and the annual rate of inflation edged up to 2.4%.

Growth resumed in the German economy in the first quarter. Real GDP gained 0.4% after stagnating at the end of 2005. Industrial production contracted sharply in March, when severe weather hampered construction and manufacturing was hit by engineering strikes. Bad weather also kept consumers at home, leading to another drop in retail sales. Exports remained upbeat, while the unemployment rate fell to 11% in May from 11.3%.

Economic growth picked up in France in the first quarter, with real GDP up 0.5% on the heels of a 0.3% rise. Industrial production rebounded 1.6% in March to more than recover its February loss. New orders have followed a similar pattern, falling 2% in March after a slight increase the month before. Consumer spending eased in March, in tune with harsh weather, while the annual rate of inflation rose to 2% in April.

Britain’s economy remained robust in the first quarter, with real GDP matching its 0.6% pace of the previous quarter. Industrial production gained 0.7% in March, almost double its sudden drop in February. Consumers continued to buoy demand as exports outside the euro-zone remained weak.

Economic growth resumed in Italy, with real GDP up 0.6% in the first quarter after being flat to end 2005. Industrial production cooled in March, while new orders gave back all of their 6% gain in February. Consumer demand has been dormant, leaving retail sales volumes essentially flat since last fall. Inflation inched up to an annual rate of 2.3% in April.

Brazil grew 3.4% in the first quarter from a year earlier, boosted by a revival in construction and oil and metals production. India’s economy grew 9.3% year-over-year in the first quarter, fuelled by strong farm production and consumer spending. High oil prices, however, have widened the current account deficit and prompted a devaluation of the rupee.

Note

* Based on data available on June 9; all data references are in current dollars unless otherwise stated.