11-010-XIB
Canadian Economic Observer
July 2005

Summary Table - Key Indicators

Overview*

Output started the second quarter with a strong gain. Household demand remained the driving force of growth, while manufacturing and mining bounced back from declines over the winter. Jobs strengthened throughout the second quarter.

Consumers continued to snap up big-ticket retail goods at a rapid rate in April. Lower prices and solid job gains fuelled growth. Low interest rates also kept housing demand on an even keel. Some services also were strong, notably restaurant sales in western Canada.

Business investment plans took off in the spring, as revealed by a surge of building permits and contract awards. This is only slowly translating into more investment spending due to the long lags in developing many of these projects.

The trade surplus received a boost from another increase in the terms of trade in April, when export prices jumped 2%. A wide range of resource exports continued to grow, led this month by processed meat and potash.

Commodity prices hit new highs in June, driven by oil and metals. This helped send the Toronto stock market above 10,000 for the first time in almost 5 years. The loonie also hit a 3-month high despite rising US interest rates.

Despite high commodity prices, the CPI slowed to a 1.6% increase from last May. This was the lowest in over a year, and almost half the 2.8% rate in the US. Falling import prices lowered the cost of durable and semi-durable goods.

Labour Markets

Employment rose 0.1% in June, capping a solid second quarter gain of 0.4% after only 0.1% in the first. Moreover, full-time jobs surged 0.4%, more than offsetting a drop in part-time positions. With no change in the labour force, the unemployment rate fell to 6.7%, equalling its all-time low set in 2000 and in 1976. BC and Alberta led the drop in unemployment, to 5.7% and 3.5% respectively, partly because of lower rates of participation in the labour force. These were the lowest unemployment rates ever in these provinces except early in 1981.

Resources and construction continued to power job growth, up nearly 10% from last June. These sectors contributed over three-quarters of the increase in private sector payrolls in the last 12 months. Business services continued to post solid gains. Recreation and accommodation retrenched, partly due to the slump in US visitors (down 9% year-over-year in April).

Central Canada took the lead in monthly job growth from the West. Quebec was particularly robust thanks to construction and health care, while the loss of factory jobs in Ontario and Quebec was at least temporarily halted. Jobs stalled in Alberta and BC, partly due to the scarcity of labour. The labour force fell in BC and stalled in Alberta, and growth in the last year has been below the national average despite the abundance of jobs and low unemployment.

Leading indicators

The leading indicator advanced 0.3% in May, matching its revised rate of increase for April. Domestic demand continued to improve, reinforced by a rebound in housing. Seven of the ten components rose or were flat, while three fell. The US leading indicator resumed its near year-long decline, although the American economy has shown few signs of slowing. The drop in the US index had a major negative impact on our leading indicator, cutting its growth rate since September in half to 0.2%: without it, the Canadian index would have risen 0.4% a month.

The housing index edged up 0.1%, putting an end to nine months of decline. House sales led the upturn, rising to their highest level since March 2004. Sales for the first five months of the year broke last year’s record in four cities, of which three are in Alberta and BC: Victoria, Calgary and Edmonton. These provinces led job growth over the past year, encouraging new arrivals and first-time buyers to purchase a home. In 2004, BC posted its first net inflow of inter-provincial migrants in nearly a decade, while Ontario saw its first outflow in 10 years. Mortgage rates remained at historically low levels.

Housing starts also hit record highs in Western Canada, but slipped in Ontario and Quebec where the number of unsold new homes rose sharply (doubling in Toronto and Montreal in just one year). Furniture and appliance sales trended upwards at a rapid clip, posting its largest three consecutive increases since autumn 2003. Sales of other durable goods dipped for the first time this year, due to autos.

Manufacturing demand continued to expand with new orders trending up. Growth was driven by investment goods industries. The impact on shipments was mitigated by the long production lags in most of these industries. Overall, shipments were flat while inventories continued to rise, pushing down the ratio of shipments to stocks. The average workweek and employment in business services could not hold on to their recent gains.

The financial market indicators continued to grow rapidly. The stock market was led by energy and consumer goods. The money supply recovered in recent months from a 0.2% drop last November.

After two months of levelling off, the US leading indicator resumed its downward trend with a 0.2% drop. This drop may not signal a near-term slowdown for the US economy or our exports. The US index has been weak over the past year, yet our exports in the first fourth months of this year were 4.6% ahead of last year. The weakness of the US index originated in manufacturing and the yield curve. Manufacturing is over-weighted in the leading indicator compared with its dwindling contribution to US output. The yield curve was the steepest in a year, partly due to falling bond yields. This dampened the leading index although interest rates have had little measurable impact slowing US growth.

Output

Real GDP started the second quarter with a 0.4% jump in April, recovering from a 0.1% dip in March. A small part of this see-saw pattern reflects a rebound from a strike in Quebec’s education sector.

Manufacturing and mining both rebounded from back-to-back declines. Mining was led by the oil sands, where output began to recover from fire damage over the winter. Metal and diamond output was also strong, while iron ore was dampened by a strike. Manufacturing was boosted by lumber and metals and a sixth straight increase for ICT goods, their best stretch of uninterrupted growth since the ICT boom peaked in 2000. These gains offset continued losses in auto output, which has yet to post a monthly increase so far this year.

Other resource and construction industries lowered output. Housing activity backed off from its peak last year, although non-residential outlays continued to strengthen gradually. Forestry output fell for a seventh straight month, while a sharp drop in natural gas exports hampered utilities.

Demand for most services grew steadily. Consumers led the way, spending more on retail goods, housing and restaurants. Business services also posted modest gains. Travel-related services, notably accommodation and gambling, continued to be curbed by the high dollar dampening the influx of US visitors. Goods-handling industries were checked by a slowdown in the volume of international trade.

Household Demand

Household spending showed few signs of slowing down. Retail sales shot ahead 1.4% in volume, matching their average monthly gain in the first three months of the year. Durable goods led the way, posting their best increase in over a year.

Demand for big-ticket items was fuelled by price cuts across the board and low interest rates. Truck sales were especially targeted for discounts after a weak start to the year, and demand responded by rising 5%. Spending on electronics and household furnishings grew at a rapid clip.

Clothing demand also shot up in response to nearly a 2% drop in prices. But sharply higher prices for food and energy in April dampened consumption of non-durable goods.

Housing demand eased in May after strong gains in April. Housing starts slowed 5%, although all of the dip was for multiples. But brisk sales continued to keep a lid on the backlog of unsold homes.

Household borrowing grew by 1.1% in the first quarter, while personal savings turned negative. These changes were dwarfed by gains on the asset side of the household balance sheet. The value of housing alone rose by $15 billion, or three times the increase in mortgage debt. Financial assets jumped another $50 billion, led by gains in stocks and bonds.

Merchandise trade

The trade surplus widened slightly to $5.1 billion in April, as rising prices gave more of a lift to exports than to imports. A dip in the exchange rate boosted prices of tradeable goods. Export growth was driven by Europe and Asia, while shipments to the US were down slightly compared with both March and last April.

Exports earnings eked out a small gain, continuing their sluggish trend so far this year. Prices jumped nearly 2%, led by energy and metal ores together with small increases for manufactured goods.

Machinery and equipment remained the strongest area of export growth in 2005. Demand has been particularly strong for construction and mining machinery, where Canada has considerable expertise. Aircraft has also performed well this year, while other ICT goods have strengthened. At the other end of the spectrum, auto exports continued to trend down this year due to slow car sales in the US.

Resource exports all remained ahead of where they started the new year, as April mostly added to the first-quarter surge in commodity prices. Food exports were boosted by another gain for processed meat, where capacity has expanded rapidly after the US imposed a ban on live cattle imported from Canada. Strong demand from farmers overseas also boosted fertilizer exports, notably potash, by one-quarter from last year. Despite soaring prices, energy exports were restrained by a drop in US demand for gas.

Import demand was slowed by a levelling-off for machinery and equipment, after four consecutive gains. A decline in industrial machinery offset further gains for computers. Autos recovered some of their first-quarter losses. Consumer goods slipped to their lowest level so far this year due to a decline for clothing. China’s share of clothing imports has risen slightly to one-third this year.

Prices

Consumer prices fell 0.2% between April and May, largely due to a temporary drop in gasoline prices. The cost of durable and semi-durable goods remained below the level of a year ago, helped by falling import prices as the loonie appreciated. The drop was led by computers, cameras and appliances. Clothing prices were 1% below last year. The rising price of buying a home remained the major source of upward pressure on service prices, offsetting weakness in travel (especially in Ontario).

Inflation remained above average in Eastern Canada, and below average in Alberta and BC despite strong economic growth in these two provinces.

Commodity prices rebounded to new highs in June, after a brief reversal from booming prices in the first quarter. Crude oil again led the way, breaching $60 (US) a barrel for the first time. Not all oil prices have moved in unison. While West Texas Intermediate, the benchmark price for crude in North America, has hit record levels, the heavier types of oil coming from our oil sands have not seen prices rise as fast. This is because of their higher sulphur content, which many refineries cannot yet process. This partly explains the interest in finding new markets for this type of oil, notably in China.

Food prices held steady despite the prospect of drought for Australia and Europe. Rocks remained in stronger demand than trees. Strong demand kept potash prices rising. Copper also hit a record, while the search for alternative energy sources sent uranium higher. Most other metals continued to retreat. Pulp and paper prices remained depressed by rising output from southern hemisphere countries and a 2-year slump in US newsprint consumption. Paper used in photocopying also fell as technology changed office use. Industrial prices levelled off in May after five straight increases, but only because of a temporary dip in gasoline prices. Prices of exported goods were boosted by a lower dollar and higher commodity prices.

Financial markets

The Toronto stock market breached the 10,000 level for the first time since October 2000 before settling for a 3% gain in June, the same as May. It has rallied by 73% since bottoming out in October 2002, although it remains below its record high of over 11,000 set in 2001. The rise was again led by energy stocks, up over one-third this year to account for one-quarter of the market’s value (versus 9% world-wide). Energy has accounted for over 80% of the advance so far in 2005. Gold and financial stocks also rose.

The Canadian dollar continued to rally from its spring slump. It rose above 81 cents (US), despite a further drop in longer-term interest rates. The loonie fared even better against the euro, which was dampened by political and economic turmoil for a second straight month.

National net worth accelerated 2.3% in the first quarter, led by strong business investment and housing. Corporations used their financial surplus to further reduce their debt-to-equity ratio, a trend which continued in April and May. A strong trade surplus also allowed Canada to further reduce foreign indebtedness.

Regional Economies

Demand in Western Canada kept its lead on growth in the rest of the country. Alberta garnered most Canada’s higher export earnings this year, reinforcing in April its recent gains in shipments of energy, capital goods and processed meat. Alberta also has accounted for most of Canada’s growth in manufacturing shipments since December. Its retail sales in April jumped more than 2% for the third time this year, while auto sales hit a 15- year high. Higher auto sales in Alberta contributed nearly half of the national gain so far in 2005, with two-thirds going to North American-built trucks and vans. Sales of trucks and vans are up one-quarter from last year, and account for 65% of all vehicle sales in Alberta (compared with less than half elsewhere in Canada). Alberta housing starts also hit a 25-year high in May.

Housing starts in British Columbia approached their record set last August, driven by a boom in condos. In Vancouver, there were three condos for every other type of housing started in May. Existing home sales also hit record highs. Growth in housing was fuelled by net in-migration to BC from the other provinces, a reversal from the net outflow in recent years. Tourism has fully-recovered from its SARS-related drop in 2003. Manufacturing shipments posted a third drop so far this year, pulled down by lower shipments of forestry products to China, especialled paper. Demand from China slowed this year.

In Ontario, retail sales and manufacturing shipments picked up, although not as much as in the West. New home sales also rebounded, with most of this demand met by selling off the backlog of unsold homes built up since the start of the year. Ontario was the only region where year-to-date exports have fallen from last year, reflecting slumping auto shipments to the US. North American auto producers have steadily cut output since the new year. One bright spot was an increase in commercial building permits at a time of falling office vacancy rates in Toronto.

Quebec’s economy improved, leaving it positioned between the boom in Western Canada and slow growth in Ontario. Manufacturing shipments rose 1.6% in April after a first-quarter gain of 2%, reflecting Quebec’s greater orientation to resources and capital goods compared with Ontario’s dependence on autos. Exports were up 5% from a year earlier, similar to the growth in BC. Retail sales in April jumped 0.9%, double its growth in March.

International economies

In the United States, housing and business investment remained the driving force of growth. Housing starts in May added to their 10% gain the month before, while home sales held at the record level set in April. Meanwhile, industrial production recovered 0.4%, led by business equipment, which is 8% ahead of last year. New orders point to continuing strength, especially for aircraft and defense goods.

Retail sales dipped 0.5% in May, their first retreat of the year. All of the drop was in autos and gasoline. Housing-related items remained popular, while clothing demand retreated. Auto sales soared in June in response to larger rebates. Consumers remain unperturbed by high gasoline prices, with consumption on track to rise 1.7% this year, according to the Department of Energy.

The trade deficit expanded further. The current account deficit grew to $195 billion in the first quarter, up $7 billion from the fourth. The increase originated in higher oil prices and a $3.3 billion increase in aid to other countries after the tsunami. Import growth in April continued to outstrip exports. The cost of imported oil hit a record average of $45 a barrel, while clothing and textile imports from China so far this year were 52% ahead of last year. Exports of food and industrial goods picked up, especially to China and South America.

Industrial output rebounded in the euro-zone in April, despite a drop for energy. New orders rose for the first time this year, led by demand for machinery and equipment and textiles. The weakness in consumer spending continued with April retail sales losing all their gain early this year. The external trade surplus narrowed as the widening energy deficit more than offset the gain in the surplus for machinery and autos. Inflation eased in May to an annual rate of 1.9%, reflecting a slowdown in energy prices in the month, while unemployment eased to 8.8%.

German industrial production decelerated in April. New orders continued their see-saw pattern of late, falling again after a rise in March. Inflation inched up to an annual rate of 1.6% in May, while the April external trade surplus narrowed slightly.

Output continued to slow in France as industrial production fell in April for the third straight month. New orders gave back all their gain in March and have declined for three out of the last four months. Consumers continued their spending spree, buoyed by low interest rates.

Industrial production rose in the UK for the first time this year, up 0.8% in April. Consumers were hesitant to spend as the housing market continued to soften and energy prices soared.

Consumer spending remained the driving force in Japan’s economy in May. Retail sales growth hit its strongest pace in eight years, boosted by gains in earnings and high oil prices. The volume of exports fell for the fourth time in five months, with exports to Asia having their steepest fall in over two years. Two reasons could account for the drop: the possibility that China is expanding its production of industrial goods and needs to import fewer basic materials from Japan; or Japanese companies are manufacturing products destined for China within the country itself. Exports to the US continued to rise, however, up 1.9% in volume. Foreign direct investment in Japan surpassed outflows for the first time ever, reaching $38 billion in the year to April.

Note

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