11-010-XIB
Canadian Economic Observer
July 2004

Summary Table - Key Indicators

Overview*

Output and jobs continued to strengthen in the second quarter, led by gains in housing and the resource sector. Inflation was lifted by higher commodity prices, although they also gave a large boost to our trade surplus and the stock market.

The share of financial assets in household net worth rose in the first quarter for the first time since the stock market bubble burst in 2000, according to National Balance Sheet data. This shift reflected the recovery of the stock market early this year. Households had moved steadily away from financial assets over the last three years, mostly in favour of real estate.

With the housing boom in the last three years, Canadian households have seen the value of their houses (+24%) rise faster than mortgage debt (+17%). As a result, homeowner net equity in housing has increased from 42% to 46%. This contrasts with the US experience, where mortgage debt has grown more than the value of housing, lowering owner equity in real estate.

Elsewhere, Canada’s net worth received a boost from another drop in net foreign debt. External debt tumbled to an 18-year low, falling from 17.7% to 15.5% of GDP in just the first three months of the year. Armed with a rising current account surplus, Canadians continued to increase investment abroad. Meanwhile, our liabilities fell slightly. Foreigners invested less in our money market, as short-term interest rates fell in Canada while US rates were steady, a trend that continued into April.

The US economy also continued to grow, led by the largest gain in industrial output in six years. But rising domestic demand and higher import prices sent the external trade deficit to a new high. Meanwhile, the CPI rose 3.1% (versus 2.5% in Canada), contributing to the Federal Reserve Board’s first interest rate hike in four years.

Labour Markets

Employment rose 0.2% in June, lifting quarterly growth to 0.5%. Job growth was concentrated in full-time positions throughout the second quarter, notably among youths. The unemployment rate edged up to 7.3% as the labour force continued to rebound from a decline early in 2004.

All of the expansion of jobs originated in the public sector. Private sector payrolls fell slightly after two months of solid growth. Trade and transportation were buoyed by the recent gains in exports, while construction remained a pillar of strength. But renewed losses in manufacturing and slack demand for business services partly offset these increases.

The Ottawa river separated regions of strength and weakness. To the east, all five provinces posted losses, notably factory jobs in Quebec. Ontario and the west recorded increases, led by BC which has recovered all of its losses early in the year thanks to gains in construction and transportation.

Leading indicators

The growth of the leading indicator picked up to 1.2% in May after hovering around 0.6% since the start of the year. This was its strongest gain since April 2002. The acceleration was driven by housing, which continued to improve after regaining its place in April at the head of the other components. The US leading indicator also continued to contribute significantly to overall growth.

Nine of the 10 components increased, two more than the month before as manufacturing rebounded.

The housing index posted a 1.9% gain in May, its largest in three months. Housing has been a pillar of growth since the start of this decade, rising by half over that period. Its sustained growth reflects several positive factors, including interest rates at historic lows. Existing home sales in May hit their fifth highest level ever. As well, low vacancy rates encouraged a high level of housing starts. As could be expected, construction dominated job growth over the last two months, accounting for one-third of growth despite representing only 6% of total employment.

Elsewhere, the improvement was widespread. Household spending on furnishings was spurred on by the boom in housing, hitting their fastest growth since February 2002. Sales of other durable goods firmed after auto demand regained the ground it had lost at the turn of the year.

The US leading indicator registered a twelfth straight monthly increase. As in Canada, growth was broad-based, with increases in 8 of the 10 components. Employment posted a third straight large advance, the best such string since 2001. The upturn accompanied a 12.3% gain in our exports to the US since January, the best 4-month period since January 1995.

The three manufacturing indicators grew in unison for the first time in two years, reflecting the upturn in both domestic and export demand. The increase in the average workweek was the first since August 2002. New orders bounced back from a dip the month before. The ratio of shipments to inventories rose briskly, as manufacturing continued to meet rising demand by running down stocks. Services employment remained weak for a third straight month, the only drop among the 10 components.

Output

Real GDP edged up 0.1% in April, building on its 0.8% hike the month before. Year-over-year growth has improved steadily from 2% last year to 3% in April. Construction remained a major prop to growth, while the primary sector strengthened in response to high commodity prices.

Construction was driven by higher home-building, up 1% after a 3% gain in March. House sales have risen 14% so far this year. But natural resources increasingly challenged housing for primacy in growth. Forestry gained 3%, its third straight solid gain as US housing demand rose. Metal mining posted its fourth hike in five months in response to higher prices. Exploration and development of oil and gas finally responded to record prices with their first increase in six months.

The increase in output of primary industries boosted demand downstream for lumber and smelting and refining. But overall manufacturing dipped due to continued heavy losses in iron and steel and renewed weakness in autos and ICT goods (notably computers). Rising exports of resources buoyed transportation. Wholesale trade continued to recover rapidly from last year’s slump, led by autos and housing.

Elsewhere, services were split between offsetting gains for business and losses for consumers and government. The increase in demand for business services was widespread, and accompanied other signs that firms were increasingly willing to spend more. Consumers reined in outlays for retailers, gambling and restaurants. All levels of government trimmed outlays, although the federal government has substantially shifted from non-defense to defense since the start of the year. As well, strikes lowered health care.

Household Demand

Retail sales volume retreated 1% in April, giving back about one-fifth of its advance in the first three months of 2004. Outlays fell for both durable and non-durable goods. A slowdown in auto sales led the retreat, partly as consumers balked at sharply higher prices for trucks. The slide in vehicle demand continued in May, when gasoline prices soared.

Spending on other durable goods remained robust. The housing boom supported a sixth straight strong increase for furniture and appliances. Meanwhile, clothing held on to the gains it posted in the first quarter.

Housing demand remained brisk, even with an uptick in mortgage rates. Starts remain well above their first-quarter average, with ground-breaking on single-family homes hitting a new cyclical peak of 107,800 units. Sales remain high, although not enough to absorb all of the supply arriving on the market.

Merchandise trade

Another broad gain in exports propelled the trade surplus in goods to $7.6 billion in April, its highest level ever except the winter of 2001 at the height of the California energy crisis. Not only is the current surplus more widespread, but the Canadian dollar is 10 cents higher against the US greenback than in early 2001, increasing its purchasing power for imports.

Export earnings rose 4.4%, their third straight comparable advance. About half of the gain reflected higher prices. Exports were 10% ahead of last year’s pace, their first year-over-year increase in over a year. This turnaround reflects a 7% rebound in US demand and double-digit gains overseas (notably resources to China and grain to less-developed countries).

April’s export growth was led by industrial materials, notably metals, which have spearheaded earnings gains over the last year. Forestry products were boosted by US housing demand, for lumber (which hit its highest level since punitive US duties took effect in June 2002), while energy kept pace thanks to rising prices. Machinery and equipment posted a third straight increase as US investment strengthened. Food exports were buoyed by the ongoing recovery for meat, which has recovered to its level before last year’s discovery of a case of mad cow disease and is within 6% of its all-time high partly because non-US demand has picked up. The drop in US auto sales has not curtailed over auto exports, as many models produced in Canada remain popular.

Rising prices pushed up our import bill by 1%, although the volume of demand remains little changed from where it started the new year. Machinery and equipment led the increase, notably office machinery, one sign that firms are starting to spend some of their massive cash reserves. Auto imports fell across the board as sales in Canada slumped in the spring.

Prices

The consumer price index jumped 0.6% in May, its largest monthly increase since January 2003, raising the annual rate of inflation to 2.5%. Over half of the monthly hike reflected soaring gasoline prices, which have risen 30% in the past year.

The cost of food rose significantly, as meat prices posted their first year-over-year increase since before the BSE crisis starting in 2003. Dairy products also rose, while bread, pasta and other carb-laden food continued to fall in price.

Soaring prices for new homes continued to put upward pressure on housing costs, with a 0.9% gain in the month and 6.5% in the past year. Compared with 1992, the cost of buying a new home has risen 7.3% more than renting, up from a gap of 5.4% a year earlier. The cost of durables rose as computer prices posted a rare monthly increase.

Commodity prices dipped in June, although they remain at lofty levels after a surge beginning last fall. Energy led the drop, as crude oil backed off from its record highs while natural gas also fell after three straight monthly increases. Non-energy prices strengthened again, boosted by gains for wheat and metals. Buoyed by the increase for resource products, prices for manufactured goods rose 1.5% in May on the heels of a 1% gain in April. The 5.5% annual increase was the largest since in almost a decade.

Financial markets

The Toronto stock market rose 2% in June, after a 1% rebound in May ended its spring swoon. The boom in commodity prices led the way, with increases for energy, metals and industrials. Telecom issues receded for a fourth straight month.

The Canadian dollar edged up above 73 cents (US) in June. Short-term interest rates were stable, even as the US boosted rates for the first time in four years, while mortgage and bond rates continued to creep up.

The upward pressure on interest rates was reflected in the money supply. While M1 continued its year-long increase, the broader measure M2 rose 1.2%, its most in four years as personal savings deposits expanded. Money also flowed into money market mutual funds in May after a year of steady withdrawals.

The prospect of higher financing costs did not deter business demand for credit, up 1% in April for its largest gain since the year-long slump in demand began late in 2001. Some of the increase may have reflected a slowdown in new issues of stocks and bonds.

Regional economy

The boom in the resource sector continued to give a boost to Western Canada, especially high-paying jobs in the goods-producing sector. The West posted another increase in retail sales in April, contrary to the downturn in the rest of the country. Existing home sales also surpassed the national trend by a large margin. However, manufacturing retreated slightly after shipments in the first quarter rose at their fastest pace in years, led by metals and petroleum. Shipments in Alberta fell for the first time since August 2003 due to metals, plastics and food, while paper dropped in BC. The losses in BC partly reflected a strike that paralyzed rail transport for most of April.

Manufacturing in central Canada continued to recover, while household spending was mixed. In Ontario, the auto sector hit its highest level since before the blackout in August 2003. Autos also drove the growth of exports, while metals and wood held onto their increases made in March. Retail sales in April lost some of the ground gained in the first quarter.

Retail sales in Quebec also slipped after a 2.9% jump in March. Building permits in April and May dipped after a strong first quarter, although housing starts remained near the 15-year high posted in March. Quebec replaced the West as the motor of growth in lumber and metals.

International economies

Moving jobs overseas did not contribute to the weakness in the US labour market earlier this year, according to a survey of mass layoffs by the Bureau of Labour Statistics. Only 2.5% of job losses in the first quarter were due to outsourcing, according to a survey of firms with more than 50 employees. This is consistent with BLS data showing that the drop in employment last year was due to less hiring, not the loss of existing jobs.

The current account deficit in trade hit a record $145 billion in the first quarter, after three straight declines. Over half of the $18 billion increase originated in soaring demand for imports of goods, notably oil and capital and consumer goods. The surplus on investment income also fell, while transfers abroad rose. The deficit was financed by a sharp increase in foreign purchases of US government debt. The monthly trade deficit in goods continued to set new records in April as exports retreated while non-oil imports moved up to new highs. The outlook for May is not encouraging, with import prices up 1.6%, the most in 15 months, due to the hike for crude oil. The upturn in import prices put upward pressure on the cost of consumer goods (notably clothing), which had fallen in recent years when the US dollar was at a high level.

Household demand rebounded in May from a setback in April. Retail sales rose 1.2%, led by a recovery in autos. Higher gasoline prices also accounted for one-quarter of the overall increase. Consumers also spent more on essentials like food and clothing, while household items posted a rare decline. This drop may reflect a levelling-off in the housing market. Starts dipped for a second straight month, although they still remain well ahead of last year’s torrid pace, and sales remain brisk.

Industrial production jumped 1.1% in May, its largest increase in almost six years, leaving output only 0.3% below its high set in June 2000. The recovery in manufacturing continued to be driven by business equipment, notably high-tech goods where output is 30% higher than a year ago. Construction materials also posted another strong gain. Consumer products lagged, with auto assemblies falling over the last three months. New orders dropped for a second straight month, with both autos and capital goods slowing.

The euro-zone economy continued to expand in April. Industrial production rose 0.2% after back-to-back gains of 0.3%, as a large decline in energy was offset by gains in almost every other sector. New orders posted another 1.8% rise, led by demand for electronic equipment. The external trade surplus almost doubled in April as the deficit for energy fell and the surpluses for machinery, autos and chemicals all widened. Consumer spending rebounded in April, while inflation jumped to an annual rate of 2.5% in May, up from 2% the month before, led by price hikes for transport and clothing. The unemployment rate was stable at 9%.

German industrial production rebounded 2.3% in April, after slight declines in the previous two months. New orders also rose after several months of stagnation. Although most of the demand was export driven, there was some revival in domestic demand. Retail sales volume rose 0.9% in April, almost double its previous gain. Inflation inched up 0.2% to an annual rate of 1.2% in May, while the unemployment rate was unchanged at 9.8%.

Industrial output in France fell 0.4% in April, reversing its gain the month before. New orders also retreated after a surge of 3.4% in March. Consumers ventured out to spend, however, boosting retail sales up 0.2% in the month and 2.7% from the year before. Exports picked up in April, while the May unemployment rate was steady at 9.4% and the annual inflation rate rose to 2.2%.

The Japanese economy continued to pick up steam in the new year. Business investment increased at its fastest pace in seven years in the first quarter, rising 10.2% from a year earlier, its fourth consecutive gain. Industrial production rose 0.5% in May, led by machinery and fabricated metals, while shipments increased 1.4% to their highest level since 1998 (when comparable records began). Consumer spending picked up in tune with falling unemployment. Spending grew 5.6% in May from a year earlier as the unemployment rate eased further to 4.6%, its lowest level in four years, while the ratio of job offers to job seekers hit 0.80. Housing starts cooled in April after five months of rapid gains. Deflation persisted with consumer prices down 0.3% year over year in May. Exports gained 10% from a year ago in May, boosting Japan’s trade surplus for the 11th straight month. Exports to China, South Korea and Taiwan grew by 21%, 27% and 22%, respectively, while trade to the US dropped 7%.

The Southeast Asian nations continued to race ahead. GDP in Indonesia rose 4.5% in the first quarter from a year ago, as low interest rates fuelled consumer spending and business investment. Malaysia posted its strongest quarterly growth in almost four years in the first quarter, up 7.6% year over year, while Singapore expanded 7.5%. China’s annual consumer price inflation and retail sales growth both hit seven-year highs in May, but this was largely due to the depressing impact of last spring’s SARS outbreak. The pace of growth began to ease, however, in business investment, industrial output, the money supply and bank credit, as tighter monetary policies took hold.

Note

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