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11-010-XIB
Canadian Economic Observer
June 2007

Current economic conditions

Summary table - key indicators

Overview*

Real GDP growth doubled to 0.9% in the first quarter. With consumer spending growing at a steady pace of 1%, the upturn reflected a rebound in housing and a modest rebuilding of inventories. The increase in GDP helped send the loonie to a 30-year high.

The cold snap gave a boost to export earnings and corporate profits. However, business investment dipped for the first time since 2002. While the energy sector continued to boost non-residential structures, spending on machinery and equipment fell. New orders for capital goods remain strong, suggesting the retreat was likely to be temporary.

The 0.7% difference between GDP growth in Canada and the US was the largest since 2002, reversing all of the differential in favour of the US in the previous three quarters. Nearly half the gap originated in residential construction. Canada’s strength in housing was most pronounced for existing homes, where sales continued to rise in April after a record first quarter. By contrast, existing home sales in the US continued to weaken in April, although new home sales rebounded.

Canada’s financial dealings with the rest of the world continued to change rapidly in the first quarter. Canadians invested a record $25.8 billion in foreign securities, driven by purchases of Maple bonds (issued by foreigners and denominated in Canadian dollars). Meanwhile, foreign direct investment in Canada exceeded $20 bil­lion for the third straight quarter. This mostly reflected acquisitions of Canadian firms, especially in the resource sector. This helped send the Toronto stock market to record highs. Meanwhile, Canadian direct invest-ment abroad remained strong at $12.9 billion, bringing its total over the past year to nearly $60 billion.

While there have been several high profile strikes so far this year, time lost to labour disputes is on track to match 2006’s total, which was the second lowest on record back to 1946. Overall, 250,200 person days were lost to work stoppages in the first quarter. While strikes have affected visible industries such as transportation and mining, they have fallen sharply in highly-unionized sectors. Strike activity has virtually disappeared in construction, where record low unemployment has sent incomes soaring 10% in the past year, second only to mining. Strikes are also on pace to fall below last year’s record low in manufacturing, where unemployment has risen. Strike activity also has fallen sharply in the public sector.

Labour markets

After a robust gain in the first quarter, employment slowed to a 0.1% gain in May after no change in April. The mix of jobs shifted to full-time positions, particularly among youths. Both the labour force and the unemployment rate were unchanged.

Self-employment picked up the slack in private sector payrolls in May. This may partly reflect the concentration of employment growth in construction, while manufacturing and trade shed employment.

Construction growth was led by Ontario and Quebec. In a reversal of the recent trend, however, services employ­ment fell in these two provinces. The loss of manufacturing jobs was more pronounced in the Atlantic and western regions than in central Canada. BC added to its Canada-best job growth so far this year, as rapid growth in construction was reinforced by gains in services, especially goods-handling industries. As a result, its unemployment rate has fallen a full point since December to 4.2%, approaching Alberta’s low of 3.8%.

Leading indicators 

The leading indicator rose 0.4% in April, matching both its increase in March and its average gain over the previous year. Household spending slowed from its recent torrid pace, while manufacturing continued to recover from a prolonged slump.

For the second straight month, none of the three manufacturing components fell. New orders posted the largest gain with a 0.9% increase. Aircraft and autos led this advance. The steady growth of orders this year was reflected in a rebound in manufacturing shipments, which helped stabilize the ratio of shipments to inventories. The average workweek also edged up.

Financial market conditions continued to strengthen, with the stock market setting new record highs. Prices strengthened across the board in April, unlike previous gains which often were concentrated in metals and energy.

Household spending was mixed. Furniture and appliance sales continued to expand steadily. Housing levelled off, largely because housing starts returned to more normal levels after receiving a boost from the unseasonably warm start to the year. Purchases of other durable goods fell for a second straight month due to slower auto sales.

Output

Real GDP expanded 0.3% in March, after growing 0.4% in February. Growth was led by services, boosted by the recovery from a rail strike. Goods production fell, with gains in manufacturing offset by a drop in energy output after a cold snap came to an end.

Services grew 0.5%, their largest advance so far this year. The end of the rail strike boosted transportation and wholesaling.  But the gains in services were widespread. Consumers flocked to retail stores and recreation. Business and financial services remained robust. Government services grew at a steady rate.

Manufacturers boosted output by nearly 1%, leaving quarterly production unchanged after four consecutive declines. The March increase was widespread, reflecting steady growth in capital goods supplemented by a rebound in autos and several resource-based industries which were slowed by the rail strike in February.

However, these gains were offset by losses in the primary sector. Energy output tumbled 2% due to lower demand for heat as temperatures moderated. As well, drilling for natural gas posted the largest drop in its current slump, as firms adjust their exploration budgets to lower than expected prices. Output of metal mining fell due to a strike in the iron ore industry.

Household demand

Consumers came out of hibernation with temperatures returning to normal, and retail sales volume jumped 1.6% in March. Despite the weak start to the year, first-quarter sales rose 1.2%, equalling their average quarterly increase over the past year.

Demand remained strongest for electronic goods, notably TVs where sales jumped 10% in the first quarter. The strong housing market also boosted purchases of furniture and appliances. Auto demand rebounded slowly from a weak start to the year, before rising much more sharply in April.

Outlays for other goods posted modest gains. Lower prices helped stimulate interest in clothing. But sharply higher prices helped dampen energy consumption.

The housing market started spring on a solid footing. Housing starts in April held on to most of their 7% gain the month before. New home sales rose sharply. Unlike the US, however, this was accompanied by strong demand for existing homes.

Merchandise trade

Canada’s first-quarter current account surplus with the rest of the world rose nearly $2 billion, largely due to higher energy exports. Overseas demand for metals also remained robust. The deficits in investment income and travel were little changed.

Both exports and imports in March recovered from declines in February when the rail strike hampered transportation. Exports normally carried by rail led the increase, notably cars, metals and forestry products. The increase in imports was stronger and more widespread than exports, reflecting the buoyancy of domestic spending. As a result, the monthly trade surplus fell to a 5-month low.

Auto exports jumped 8% to more than recoup their loss in February. Forestry products nearly kept pace with autos, led by pulp and paper. Industrial goods rose 3%, driven by new records for metals, especially nickel where exports hit $930 million, triple their level in March 2006.

Exports that are less dependent on transport by rail were sluggish. Energy fell 5%, as the volume of natural gas exports returned to more normal levels. Machinery and equipment was little changed. Aircraft and industrial machinery completed their best quarter ever, but demand remained weak for telecom equipment.

A 22% jump in energy accounted for nearly half the overall growth of imports. Refiners in Eastern Canada increased demand, after the cold snap and a refinery fire reduced inventories in February. The recovery of auto assemblies in Canada boosted demand for auto parts. The booming air transport industry led the growth of imports of machinery and equipment. Robust consumer spending was reflected in an eighth straight increase in imports of consumer goods.

Prices

A rebound in energy prices boosted the implicit price index of GDP by 1.5% in the first quarter, after almost no change in the fourth. Excluding energy, prices rose 0.9%, up from 0.5%, partly due to special payments in the government sector.

Consumer prices rose 0.2% in April, slowing the year-over-year rate of inflation to 2.2%. Energy prices remained the largest source of upward pressure. Gasoline prices rose 3%, although they were slightly below their level of April 2006. This contrast with a 10% hike in gas prices in the US largely reflects the appreciation of the Canadian dollar over the past year.

Elsewhere, the cost of services continued to increase, led by the cost of housing. While housing prices moderated in Alberta, they have accelerated sharply in Saskatchewan so far this year. Consumers paid less for autos and electronic goods. The spike in the cost of food during the winter began to subside, as crop conditions returned to normal in the US. Still, vegetable prices remain 10% ahead of a year-ago.

The sharp rise in the exchange rate already began to squeeze industrial prices in April. The exchange rate by itself trimmed the increase for manufactured goods from 1% to 0.2%. Much of the gains made by oil and metals prices were offset by sharply lower prices for exports such as autos, forestry products and machinery and equipment.

Financial markets

Household borrowing remained the major source of demand for funds on financial markets in the first quarter. Both consumer credit and mortgage demand expanded, reflecting healthy household spending. Still, the burden of servicing the debt remained stable at 8% of disposable income.

The Canadian dollar rose to a 30-year high of US 93 cents late in May. It averaged 85 cents in the first quarter, before climbing to 90 cents in April. Both short-term mortgage rates and bond yields rose about 15 basis points.

The stock market set a record high for the fourth month this year. Most sectors participated in the advance, with metals and energy posting the largest gains.  The US stock market clawed its way back to its previous peak reached in 2000.

Regional economies

Ontario recovered from a slow start to the year. The upturn was led by manufacturing, where a 3.6% jump in shipments in March led to the first quarterly gain in over a year. While the re-opening of the Nanticoke oil refinery played a role in the increase, growth was driven by autos and capital goods. Ontario also recorded the only increase in housing starts in April.

Labour income in Quebec jumped 5% in March, mostly due to large pay equity settlements in its public sector. The increase lifted its year-over-year gain in incomes to 8.9%, second only to Alberta among the provinces. However, more income was not yet reflected in spending. Retail sales growth of 0.6% was only one-third the national average in March. Housing starts fell in April, after posting the largest decline in Canada in the first quarter.

Western Canada was buoyed by above-average gains in consumer spending. Retail sales rose about 3% in the prairie provinces and in BC in the first quarter. This reflected healthy growth in labour income and jobs. Manufacturing shipments in Alberta continued to be buttressed by high oil prices. They stalled in BC in the first three months of the year due to losses in lumber and food.

International economies

In the United States, business investment recovered from a wobbly start to the year. Capital goods were the driving force behind a 0.7% gain in industrial production with a third straight increase. Construction spending grew for a third straight month in April, as increases for non-residential outlays outweighed declines in housing.  New orders for capital goods in April pointed to further gains.  This increase followed a rebound in profits in the first quarter.

New home sales jumped 16% in April, although they remain 10% below a year-earlier. The median sales price fell 10%, as sales of homes for $150,000 or less nearly doubled. Since sales of more expensive homes also rose, this appears to be a shift in supply by builders, not a sharp drop in prices. The increase in sales significantly lowered the backlog of unsold homes. This encouraged builders to start construction on more homes for the second straight month.

Important sectors of demand in the US remained weak. Retail sales slipped in April. While the pick-up in housing gave a boost to furniture and appliances, auto sales slowed as gas prices climbed to new record highs. Higher prices for energy imports also sent the trade deficit to a 6-month high in March.

Real GDP in the euro-zone eased from 0.9% to 0.6% in the first quarter of 2007, buoyed by business investment and personal spending. Industrial production was steady in March, as a pickup in non-durable goods offset weakness in capital goods. New orders rebounded sharply as every sector strengthened after several months of sluggish demand.  The external trade surplus widened as the energy deficit eased and surpluses grew for chemicals and machinery and autos. The unemployment rate fell to 7.1% in April, the lowest on record back to 1993, reflecting both more people employed and leaving the labour force (due to sick leave and disability). Consumer demand remained stable and inflation moderated to 1.9%.

German GDP rose 0.5% in the first quarter, just half its pace late in 2006. Strong foreign demand boosted industrial production again in March, while new orders posted their third straight monthly gain and business confidence held near its post-unification high.  Consumers were hesitant to spend, however, due in part to the lingering effect of January’s increase in the VAT.  Unemployment rose slightly in April, snapping a run of 13 consecutive monthly declines, but the rate was unchanged at 9.2%.

France grew 0.5% in the first quarter, as real GDP matched its previous quarterly pace.  Output was almost flat in March, after a strong gain the month before, while new orders rebounded. Consumer spending was upbeat as the unemployment rate fell again in April and inflation of 1.3% was the second lowest in the euro-zone.

Britain posted growth of 0.7% in the first quarter, unchanged from the previous two periods. Industrial production recovered in March, although foreign demand remained weak, partly due to the strength of the pound. Consumers reined in spending in March. With inflation sitting at 2.8% in April, the central bank boosted interest rates to their highest level in six years in May.

Real GDP growth slowed to 0.2% in Italy, after a 1.1% surge in the fourth quarter.  Output recovered in March, after two straight declines to start the year, and new orders picked up for the first time in six months. Consumer spending was sluggish despite a fall in inflation to 1.8%.

Japan grew 0.6% in the first quarter, its ninth straight quarterly expansion. Exports and personal spending were firm, while business investment fell for the first time in five quarters due to the telecommunications and auto sectors. Exports to the US saw their largest drop in three years in March due to a dip in autos. Shipments to Asia, led by China, however, hit their fastest pace in three months. The unemployment rate fell to a 9-year low of 3.8% in April.

India’s economy expanded by 2.3% in the first quarter, boosted by robust growth in manufacturing and trade. Year-over-year growth was 9.4%, the strongest in 18 years.


Note

* Based on data available on June  8; all data references are in current dollars unless otherwise stated.



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