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Current economic conditions
Real output growth moderated to 0.5% in the second quarter, well below the 0.9% increase in hours worked. Consumer spending and business investment both continued to keep domestic demand growing faster than GDP. Housing retreated, while exports were stagnant.
Canada’s growth in the second quarter lagged behind Europe, the UK and the United States. Growth in the euro-zone picked up to 0.9%, a notable turnaround from its weak performance in recent years. Growth in Asia also accelerated, notably China. The resurgence of overseas demand at a time of slower growth south of the border was reflected in the distribution of our exports, where a pick-up in shipments abroad partly offset a drop to the US over the past year.
Business investment grew almost 2% in volume and remained 10% ahead of a year-ago despite a dip in profits in the first half of the year. Firms continued to import more machinery and equipment, while the oilpatch fuelled growth in engineering work. Building construction fell for the first time since 2004.
The simultaneous drop of both residential and non-residential building in the second quarter suggests that weather and not economic forces was a major cause. Construction had soared in the first quarter when temperatures were unusually mild, and activity returned to more normal levels in the second. Housing starts and building permits point to a resumption of growth during the summer. As well, housing prices remain strong, up 10% from last year, in marked contrast with the sharp deceleration in the US. Of course, much of the strength in Canada originated in the west.
The US housing market slowed dramatically in the spring and summer. This has triggered a 20% drop in Canada’s lumber exports so far this year. But the weakness in the US housing market has not spread to the rest of consumer spending. In fact, housing-related items helped spur a strong gain in retail sales in July. This reflects steady job growth over the summer. Household wealth picked up in the first quarter, when gains in the stock market outweighed the slowdown in home equity. More recently, oil prices have moderated, which will further reduce the trade deficit while freeing up discretionary spending.
Employment dipped 0.1% in August, its third straight slow month following May’s large advance. The mix of jobs again shifted from part-time (-2.1%) to full-time (+0.3%). The labour force also fell, which capped the unemployment rate at 6.5%.
Most of the loss of jobs in August originated in the public sector , reflecting declines in education and the winding down of the Census. Manufacturing also continued to shed jobs. Business services led growth, after another solid gain in business investment in the second quarter.
Alberta posted the only large increase in employment, driven by business services, although it did not keep up with a 1.0% jump in its labour force. BC also saw large gains in business services, but this was offset by losses in manufacturing. The loss of manufacturing jobs slowed in central Canada, but declines in services pulled down overall employment. Finance and public services were weak in both Ontario and Quebec. Unemployment in Ontario retreated below the national average, after surpassing it for the first time ever in July.
The composite index rose by 0.2% in July, after an upward revised 0.3% increase in June. The components related to consumer spending continued to lead growth, while the housing and stock markets rebounded from their spring slump after leading growth at the start of the year. Partly offsetting these gains was a slowdown in the United States, which aggravated the drop in orders for manufactured goods in Canada.
Sales of furniture and appliances and sales of other durable goods both rose by about 1%, the most of the ten components of the composite index. Higher housing starts helped buttress the housing index. Starts in the first half of the year were running ahead of last year’s pace, in marked contrast to the slowdown in the United States. Robust growth in Alberta led the Canada Mortgage and Housing Corporation to revise up its forecast for starts in Canada twice so far this year.
The stock market rallied over the summer, fuelled by takeover bids for some of the largest companies. Increased demand for business services also helped boost the services employment component.
The leading indicator for the United States fell 0.2%. This followed a 0.1% drop the month before, and suggests a continuation of the economy’s slow growth that surfaced in the second quarter.
Lower shipments to the United States continued to hamper manufacturing activity in Canada. New orders were particularly weak, down 0.9%, their largest drop since early 2003. The ratio of shipments to inventories was unchanged, thanks to firms moving quickly to trim output in line with the drop in shipments.
The volume of GDP was unchanged in June, after upward-revised gains of 0.1% in May and 0.2% in April. The economy continued to be split between growth in services and losses in goods, which is broadly symptomatic of buoyant domestic demand and sluggish exports.
Goods were restrained by a second straight month of losses in the primary sector and home-building. Mining output fell for a third straight month, mostly the result of cutbacks due to the glut of natural gas. Farm production also tumbled as a result of sharp declines for both crops and livestock. The grain harvest will be lowered by dry conditions on the prairies, while the re-opening of the US border led to a near-record decline in our cattle herd as calves were shipped south.
Manufacturing output held steady for a second consecutive month. Resource-based industries continued to retrench, notably lumber and paper. These losses were offset by further gains in capital goods and a rebound in autos.
Services expanded, although growth has slowed steadily over the last four months to just 0.1% in June. Government spending on services ground to a halt. Consumer demand for services fell, especially travel-dependent industries such as gambling and accommodation as the inflow of US visitors continued to decline. One-third of hotel operators also report shortages of skilled and unskilled labour. Business services remained the main pocket of growth.
Household spending slowed after a robust start to the year, mostly due to declines for autos and housing. Auto sales rebounded in July, while housing starts held on to their June advance.
Retail sales volume grew by 0.2% in June, capping a 2% quarterly gain after a 3% hike in the first quarter. The monthly increase was likely checked by consumers delaying purchases of big-ticket items until after the GST cut took effect July 1. This is one reason vehicle sales fell in June before recovering in July.
Overall, sales of durable goods dipped 0.2% in June. While auto sales slowed, demand remained strong for home-related items like furniture and electronic goods. Lured by price discounts, clothing purchases rose nearly 1%, although not enough to fully recoup May’s retreat.
Housing starts were stable in July at 237,000 units (at annual rates), with a third straight increase for multiples offsetting a dip for singles. So far this year, starts are running slightly ahead of last year’s pace. This partly reflects that continued strong sales kept the overhang of unsold homes falling through June (especially in Alberta and BC). Existing home sales slowed in June and July, leaving demand so far this year up 3%.
The current account surplus was cut in half to $4.2 billion in the second quarter, mostly due to a falling surplus in merchandise trade. Lower gas prices trimmed the energy surplus by $1 billion, while the non-energy balance slipped into a small deficit for the first time since 1992, the result of lower exports (especially forestry products) and strong import demand. Canadian direct investment abroad outstripped foreign direct investment in Canada, while our investment in foreign bonds continued to surge as non-residents sold more ‘Maple bonds’ in Canada.
Exports rebounded 1.1% to partly offset declines over the previous two months. The recovery was helped by a levelling off of the Canadian dollar, after a 4.3% jump in the previous two months helped lower export prices. With imports down slightly, due to lower prices, the trade balance rose to $4.7 billion.
Exports to the rest of the world continued to grow faster than exports to the US, continuing a trend that began early this year. This is consistent with the pick-up in growth in Europe and Asia and the slowdown in the US. In fact, shipments to the US dipped 0.3% in the past year (despite gains in energy), but total exports continued to grow thanks to gains of 22% to the EU and 12% to Japan.
Energy and metals accounted for most of the growth in exports. For energy, this continued the small improvement in the second quarter after a precipitous decline in the first. Metals strengthened steadily in the first half of 2006 to new record highs, reflecting the surge in prices for copper, nickel and gold and strong demand for aluminum and iron ore.
Most other exports were little changed in the month, and were 4% to 10% below their levels of June 2005. Forestry was hampered by further losses for lumber, which has plunged 20% since January as the US housing market contracted. Autos continued to be hampered by weakness in US demand for trucks and SUVs. Machinery and equipment was hampered throughout the second quarter by losses for aircraft and industrial and ICT goods.
Nominal imports were checked by lower prices, especially for machinery and equipment which fell sharply throughout the second quarter, helping raise the volume of imports over 4%. Demand was particularly strong for industrial machinery. Elsewhere, auto imports continued to level off in the second quarter after a weak first. Imports of consumer goods rose 2%, in line with the strong trend of retail sales this year.
Consumer prices edged up 0.1% in July to offset a dip in June. The levelling off of prices follows increases averaging 0.3% in the first five months of the year. As a result, the year-over-year rate of inflation slowed from 2.8% in May to 2.4% in July. By comparison, inflation in the US was 4.1%.
Prices of durable and semi-durable goods fell nearly a full point in July, partly in response to the cut in the GST. Prices fell the most for big-ticket items such as furniture and appliances, autos and jewellery. As well, the drop in taxes showed up in some services such as telephones and restaurants. But prices for many smaller items were little changed, such as newspapers and clothing.
These declines were offset by a 2.6% jump in the cost of energy. Higher energy costs also put increasing upward pressure on energy-intensive goods, notably air and bus fares. As well, taxes rose for alcohol and tobacco. And the increase in housing prices continued, led again by Alberta.
Commodity prices added a small gain in August after rising sharply in July. Energy managed a small increase, giving back much of their sharp hike early in the month when the war in Lebanon escalated. Crude oil finished below $70 (US) a barrel for the first time since mid-June. Prices of metals continued to soar, notably nickel (where shortages led the London Metal Exchange to take extraordinary measures to calm the market).
The drop in lumber prices accelerated. Newsprint also weakened on news of a steep 8.5% drop in North American consumption in the year to July (US demand alone has fallen 25% since 2000, as readership and ads dwindle and papers trim their size).
Slumping demand for lumber and newsprint is vividly apparent in exports. Lumber shipments in June tumbled to their lowest level in almost 3 years, and were one-third below their most recent peak in 2004 (a loss of $4 billion at annual rates). The retreat for newsprint was almost as bad: a 10% drop in the past year bought the total decline since 2001 to 30%, or over $3 billion.
Prices for manufacturing goods jumped 1.7% in July. Metals led the increase, with nickel up 40% in the month while copper, zinc and gold also posted double-digit increases. But the easing of the dollar also gave a much-needed boost to prices of exports such as autos and forestry products. Overall, only 1 of the 21 commodities saw prices fall in July, while 16 rose.
Canadians snapped up $18.8 billion of foreign securities in the second quarter, about two-thirds in bonds and one-third stocks. Meanwhile, foreign investment in Canadian securities was the highest in six quarters. They bought $9.1 billion of equities, despite a drop in the Toronto stock market, and $4.6 billion of money market paper as the differential between Canadian and US yields narrowed.
The stock market continued to recover from its spring swoon, rising 2.1% in August after a 1.8% gain in July. Unlike previous months, however, resource stocks contributed little to the increase. Energy was flat while metals added only modestly to their recent surge. Instead, financial and consumer staples led the increase.
Short-term interest rates were unchanged, while bond yields eased nearly a quarter of a parentage point, helping to lower mortgage rates. The Canadian dollar hovered just below (US) 90 cents for a third straight month.
Residential building and renovations rose 8.5% in the year ending in the second quarter. Nominally, this represents a healthy gain. But growth was increasingly concentrated in the west: excluding Alberta’s 36% gain, growth would have been 4.8%, or only slightly more than in the US. And without BC’s 23% increase, growth would have been less at 1.5%.
And nominal growth in western Canada’s housing industry was increasingly driven by higher prices. New housing prices in Calgary were 49% higher than last June, while Edmonton was up 28%. As a result, the overall implicit price index for housing rose 6.2% in the past year, double the rate in mid-2005.
Alberta remained the leader in retail sales growth at 0.5% in June, the only province outside of Ontario to post an increase. Labour income growth in Alberta remained steady at an 11% annual rate.
Household spending picked-up in Ontario over the summer. Housing starts rose for a third straight month in July, while retail sales rebounded. Conversely, Quebec’s housing starts and retail sales weakened in June, and housing continued to slide in July. Job losses in Quebec’s manufacturing sector intensified over the summer to 6% from a year-ago, worse than Ontario (-5%) which had borne the brunt of losses. Nominal shipments in Quebec were inflated by soaring oil refinery receipts.
The major development in the United States was the steepening decline in housing demand in July. Existing home sales fell 4%, the largest drop so far this year. Sales were 11% below last July, while the inventory of unsold homes was up 40%. Price increases for homes slowed from 12% last year to less than 1% in July. New home sales also fell by 4% in July, leading builders to cut housing starts to a 2-year low of 1.8 million units, 13% below July 2005. The softening of housing prices led to a slowdown in the increase in homeowner net equity in the first quarter to 2.1% from an average increase of nearly 4% over the previous four quarters. Overall household wealth accelerated, however, partly due to gains in the stock market.
Consumer spending remained buoyant, with retail sales rising 1.4% in July. Autos led the way, responding to incentives to purchase. But non-auto sales also rose 0.7%, led by clothing and housing-related items, despite the slowdown in house sales. Job growth in August improved slightly on its average monthly increase of the previous four months. While construction jobs have stalled since March, services picked up the slack, notably education, health and professional and business services. Lower gas prices boosted consumer confidence in the second half of August.
The industrial sector continued to strengthen. Industrial production rose 0.4% in July, led by soaring demand for utilities as a result of the hottest summer on record. Auto assemblies fell 6% firms slashed inventories. Non-auto manufacturing rose 0.7%, led again by business equipment. Some of this demand appears to be from abroad, as capital goods led another 2% gain in exports. Rising exports have stabilized the trade deficit at about $65 billion in recent months, despite the rising cost of energy imports.
Real GDP in the euro-zone expanded by 0.9% in the second quarter of the year after a revised 0.8% gain in the first, boosted by business investment and exports. Industrial output eased in June, however, as a rebound in energy was offset by declines elsewhere. New orders retreated across the board, after posting strong gains in May. External trade was robust, restoring a surplus as exports of chemicals, machinery and autos outweighed higher energy imports. Consumer ramped up spending, particularly of food, drinks and tobacco in tune with the World Cup in Germany. The July unemployment rate was stable at 7.8%.
France’s economy grew 1.1% in the second quarter, its strongest growth in five years, buoyed by strong consumer spending and industrial production. Business investment remained stagnant, although exports of capital equipment accelerated. Employment in July grew at its fastest pace in five years, pushing the unemployment rate down to 8.9% as new jobs in services, finance and construction offset a decline in the industrial sector.
Real GDP expanded by 0.9% in Germany, its fastest pace in over five years, led by business investment as construction emerged from a decade-long slump. Industrial production fell in June following the second monthly decline in new orders. Consumer sharply curtailed their spending in July, and the jobless rate was unchanged at 10.6%.
Britain’s economy grew 0.8%, gaining slightly on its first quarter pace. Output slowed in June as import growth continued to outpace exports. Consumer spending has been brisk, with the volume of retail sales retreating slightly in July for the first time in 2006. The unemployment rate remained stable at 5.4%.
Italy’s GDP grew 0.5%. Industrial production stagnated in June, in the wake of weak orders. Consumers remained hesitant to spend and retail sales volumes fell for the fifth time this year. Both business and consumer confidence have been weak.
Real GDP rose 0.2% in Japan as declines in housing and exports partly offset gains in business investment and consumer spending. Investment was up 18% on the year, the most since 1990. Industrial production retreated in July, dampened by weakness in exports, although export orders picked up in August for their strongest pace in over a year. Prices rose only slightly from year-earlier levels due to a revised calculation method which changed the base year and basket of goods. The jobless rate slid back to 4.1% in July, while the job-to-applicants ratio climbed to 1.09, its highest since June 1992.
* Based on data available on September 8; all data references are in current dollars unless otherwise stated.