11-010-XIB
Canadian Economic Observer
September 2008

Summary table - key indicators

Overview*

Real GDP rose 0.1% in June, helping second-quarter output eke out a similar gain after a revised 0.2% dip in the first. A sharp drop in inventory accumulation in the first quarter was partly reversed in the second. Profits and labour income continued to be buoyed by higher export prices, despite a drop in export volume, and domestic demand grew steadily.

The ongoing slowdown of growth in North America accompanied a downturn among the other major G7 nations. Second-quarter real GDP fell in Japan and the euro-zone including Germany, France and Italy (although some of the drop in northern Europe reflects the one-time boost to first-quarter growth from mild weather). Rising food and energy prices hampered growth in all of these nations. So far, growth in emerging nations in Asia has been less affected.

Even as growth slowed overseas, it picked up in the United States in the second quarter. In the past year, US GDP has grown by 2.2%, the most in the G7 and ahead of Canada’s 0.7% gain. Exports and business investment remained buoyant, while tax rebates helped buttress consumer spending against sharp declines in auto purchases and steeply-rising gas bills.

Auto sales over the summer slumped in both Canada and the US as gasoline prices hit record levels, surpassing $1.30 a litre in Canada and $4 a gallon in the US. The slump in sales was particularly steep in the US, where truck sales have led a 22% drop in demand for vehicles so far this year.

In the US, auto sales have replaced housing as the weakest sector of the economy. So far, however, this has not triggered sharp losses in auto output in the spring and summer. Partly this reflects that auto output in Canada shrank by one-third in December. Since then it has struggled to recover, partly because of a strike interrupting the flow of parts in March and April. The effects of the labour dispute disappeared by June, while model changeovers at some plants that began in December also were completed.

Slowing global growth helped lower commodity prices in August. As well, food prices fell further on the prospect of good crops in Canada and elsewhere. Lower commodity prices accompanied a drop in the exchange rate to a 12-month low and the first year-over-year losses in the Toronto stock market since the bull market began in 2003.

Labour markets

Employment rebounded by 0.1% in August, its first gain in four months. All of the increase was in full-time positions. Private sector payrolls drove the advance, as they have so far this year with an increase of 96,000 since December. By comparison, the public sector shed workers, and is up only 14,000 to date in 2008 after a burst of hiring late in 2007. Self-employment also declined, partly due to a sharp drop in farm jobs in central Canada which experienced a wet summer.

Construction remained the most buoyant industry, and employed 8.6% more workers than last August. Manufacturing rebounded from a sharp drop in July, and has grown in three of the last four months by a net of almost 1%. Services were little changed overall, as declines in business and public services offset small gains in most other services.

Ontario and Quebec led employment growth, despite their loss of agricultural jobs. Increases in manufacturing in Ontario and construction in Quebec drove these gains. Services employment was weak throughout western Canada, with notable declines in finance in BC and business services in Alberta. Higher construction employment helped to offset these losses.

Leading Indicators

The composite leading index was unchanged for a second straight month in July, after small gains in April and May. Two of the ten components fell in July, versus six in June. However, the declines in housing and the average workweek in manufacturing were large enough to offset small increases in the seven components that rose.

The housing index decreased by 2.9%, its largest decline since June 2002. Most of the drop originated in fewer housing starts. Consumer spending on durable goods continued to expand, although the rate of growth for auto sales slowed sharply after the hike in gasoline prices early this summer.

The manufacturing indicators remained mixed. New orders remained volatile, rebounding 1.3% from a sharp decline. This volatility largely reflects orders for aerospace, which have been oscillating around a long-term upward trend. The ratio of shipments to inventories levelled off after two straight declines. Shipments trended up for the first time in 2008. However, the average workweek in manufacturing fell 0.5% in July.

The United States leading indicator rose 0.1%, its first increase in eleven months. Real GDP growth turned up in the second quarter, led by exports and business investment.

Output

Real GDP edged up 0.1% in June, offsetting its decline the month before. Services sustained growth, as the energy sector continued to depress overall goods production.

Services were led by the public sector and goods-handling industries in wholesale and transportation. However, air transport posted a third straight decline, reversing their gains in the first quarter. Business services and finance continued to be sluggish so far this year.

The primary sector remained the weakest in the economy. Energy output fell another 0.6%, its fifth straight decline. Oil and gas production continued to be hampered by prolonged maintenance and high costs. Cool weather dampened demand for utilities. Further cuts in forestry reinforced a downturn in agricultural output.

Manufacturing output was little changed, leaving its 1.1% gain over the last three months the fastest in the economy after large drops over the winter. Auto output was boosted by the end of supply disruption to parts and two new models coming on-line. Output of capital goods remained strong, notably aerospace and machinery. Clothing and lumber output continued to slump.

Construction was buoyed by an increase in non-residential outlays; non-residential building permits rose 25% in the second quarter to $8.3 billion, surpassing their previous record set in the second quarter of 2007.

Household demand

Personal disposable incomes rose 1.2%, and their growth of 6.6% in the past year exceeded the 1.5% gain in the implicit price index for consumer spending. Incomes were buoyed by job growth, a jump in farm income as prices rose, and lower taxes.

Retail sales volume fell 0.4% in June, snapping a string of three consecutive gains. Demand fell for all durability classes. However, the steepest drop was for autos (both new and used), and new auto sales continued to slump in July as gasoline prices hit record highs.

Excluding autos, retail sales were little changed for a second straight month. Consumer interest in durable goods remained high, capping a strong quarter for computers, electronics and TVs. However, consumers balked at sharply higher clothing prices.

Existing home sales were little changed between May and June. After peaking at almost 500,000 units in January, sales have hovered around 460,000 units so far in 2008, slightly ahead of the pace a year ago. Home prices continued to slow, with a slight moderation in Alberta and BC offsetting gains in the rest of Canada.

The market for new homes continued to weaken. Sales fell in both June and July, reinforcing a downward trend that began last summer. With mounting inventories of unsold homes, ground-breaking on single-family homes continued to decline, down 26% from last July. Total housing starts were buttressed by a stable market for multiple units.

Merchandise trade

The current account surplus rose to $6.8 billion in the second quarter, entirely due to higher prices for goods. Export prices posted their largest quarterly increase on record back to 1980, led by the spike for energy. Higher energy prices were the major factor in an 8% gain in quarterly corporate profits.

Rising energy prices again boosted the monthly merchandise trade surplus, to $5.8 billion in June. The increase in energy prices also continued to shift the geographic composition of trade. Exports to the US, the destination of most of our energy exports, have recovered in recent months. Conversely, imports to Canada increasingly come from overseas, the source of most of our energy imports (especially crude oil for eastern Canada).

Export earnings rose 3.1%, their sixth straight advance. Energy drove the increase, up over 10% in the month and 72% from a year-earlier. Auto exports also recovered after strikes hampered output in the spring. Machinery and equipment was dampened by a drop in aircraft shipments, Forestry products have hovered around $2.1 billion since last November, mirroring the levelling off of US housing starts over the same period.

Import values rose 2%, also swollen by higher energy prices. Excluding an 18% hike for energy, imports fell slightly. While auto imports hit their highest level so far in 2008, aircraft imports retreated after a large gain in May.

Prices

The implicit price index for GDP rose 2.5% in the second quarter, spurred by the 8% jump in export prices. Prices paid for final domestic demand in Canada rose 0.9%, and were 1.4% higher than a year earlier.

Consumer prices rose 0.3% between June and July, a marked slowdown from increases of 0.7% in May and 0.8% in June. Higher food and energy prices continued to boost prices; excluding food and energy, other prices were 1.2% higher than in July 2007.

Energy prices rose another 2.3%. While the increase for gasoline eased to 1.2%, natural gas jumped 8.8% in response to the increased cost of gas produced earlier this year. Food prices were driven by a 1.7% hike for bakery and cereal products. The cost of housing was the largest source of increase for services.

The cost of durable goods continued to drop. Autos led the way, with prices 9% below last July. Prices also fell for furniture and sporting equipment. Prices for most other goods and services were little changed.

Commodity prices fell 10% in August, after a slight dip in July had snapped a 52% run up over the previous 10 months. Energy led the drop. Crude oil dipped below $120 a barrel, while natural gas fell faster, to below $9. Food prices edged down for the third straight month. Lower metals prices dampened industrial goods. Despite the summer slide, most commodity prices remain at historically high levels.

Financial markets

Net lending by the corporate sector hit a record $71 billion at annual rates in the second quarter, up from its previous high of $64 billion in the first and nearly double the $38 billion when the global financial crisis began last summer. The increase reflected the combination of record profits and slower business investment. Despite their large financial surplus, firms continued to issue both stocks and bonds at a high rate into July.

The stock market edged up 1.3% in August after a net decline of almost 10% over the previous two months. Lower prices for mining and financial companies were offset by small gains elsewhere, including energy despite lower prices for oil and gas.

The Canadian dollar declined against the US greenback for a third straight month. The drop below 95 cents (US) brought the total decline to over 5%, after seven months of hovering around parity.

Regional economies

Housing starts continued to slump on the prairies, notably Alberta. After declines in June and July, starts were down about 40% from their peak in the summer of 2007. This retrenchment has accompanied a levelling off of new house prices in Alberta, up less than 1% in the past year after rising 40% early last year. The prairies also were the only region where nominal retail sales slipped (-0.1%) in the second quarter, largely due to slower auto sales. Again, the slowdown was concentrated in Alberta.

The energy boom continued to inflate Alberta’s exports and manufacturing sales. Just over half of the 9% gain in sales in the second quarter originated in refined petroleum, while capital goods remained robust. Still, Alberta’s energy exports underperformed its neighbours in the second quarter, rising 42% from a year earlier versus 55% in BC (almost all natural gas) and 75% in Saskatchewan (mostly oil).

June’s increase in energy exports from BC marked an historic transition, surpassing forestry products as BC’s leading export. At $1.0 billion, energy accounts for nearly one-third of BC’s $3.1 billion of exports. December 2000 was the only other month when forestry products were not BC’s leading export (reflecting a spike due to California’s electricity crisis).The ongoing weakness in forestry products continued to dampen manufacturing sales, down 2% in June to cap the poorest performance of any region in the second quarter. Retail sales growth also was the slowest in Canada in the first half of the year, while housing starts were steady.

Exports from Quebec in the second quarter hit their highest level since the peak of the ICT boom in 2000. The increase was led by industrial goods (notably metals) which hit a record $6.1 billion, surpassing machinery and equipment as Quebec’s leading export (despite strong growth in the latter due to aerospace). These gains were reflected in higher manufacturing sales. Retail sales growth in the second quarter continued to be the strongest in Canada, while housing starts have been steady so far this year.

Ontario’s manufacturing shipments rose for the third straight month in June, their first quarterly gain in a year. The increase reflected a recovery in autos, steady gains in capital goods, and higher prices for refined oil and metals. While auto exports were still 18% below last November, overall exports from Ontario were down only 2.7% due to gains in other manufactured exports. Retail sales growth continued to lag slightly the Canada average. After rising in the first half of the year, housing starts dropped 39% to their lowest level since December. This volatility reflects how multiple units have dominated new construction in Ontario, especially condos in Toronto.

International economies

Housing demand in the United States appeared to be responding to deep cuts in home prices. Sales of both new and existing homes rose 3% in July. Existing home sales have hovered around 5 million units (at annual rates) since last November, while new home sales have levelled off at 0.5 million units since March (still well below their 0.8 million pace in July 2007). Even steeper cuts in new home construction is gradually chipping away the overhang of inventories, from a peak of 11.2 months in March to 10.1 in July. As a result, housing starts are stabilizing around 1 million units (a sharp drop in July reflected a change in the building code in New York that caused a spike in multiple units in June). The firming of housing demand has been reflected in a slight slowing of the rate of decline of house prices over the last four months.

Nominal retail sales dipped 0.1% in July, after three straight gains in response to stimulus checks from the federal government. The drop was concentrated in autos, where sales hit a 15-year low of 12.6 million units (at annual rates). Auto sales have fallen 22% so far this year, mostly due to a drop of one-third for truck sales.

Non-automotive sales posted a fifth straight gain. Furniture and appliances and building materials both increased, which is consistent with the slight pick-up in house sales. There was little evidence that high gas prices were giving a boosted to E-commerce, where year-over-year sales growth slowed from 22% last summer to 9.5% in the second quarter.

Industrial production rose 0.2% in July, its second straight increase after four consecutive declines. Mining remained the fastest growing sector, led by an 8% in the past year for natural gas (in contrast with the slump in Canada). Manufacturing output posted its first back-to-back gains of the year. Business equipment again led the way, and new orders remained strong. Consumer goods were boosted by autos, while construction materials posted their second gain in three months. Demand for utilities continued to be very volatile, with cool weather leading to a 2% drop in July.

Real GDP in the euro-zone contracted by 0.2% in the second quarter of 2008, its first decline since the early 1990s. Industrial production was flat in June, as gains in energy offset further declines in capital and intermediate goods. New orders fell 0.3%, on the heels of a sharp drop in May, due to slack demand for machinery and transport equipment. Housing remained weak, particularly in Britain where home prices continued to retreat as credit tightened. The external trade deficit narrowed in June with robust exports to Russia, Brazil and China. Retail sales volumes fell for the fourth time in five months. The annual inflation rate eased slightly in August to 3.8% from 4% in July, but is still up from 1.8% a year earlier. But with wages indexed to inflation in many of the euro-zone countries, hourly pay to date has kept pace. The July unemployment rate was stable at 7.3%.

The German economy shrank in the second quarter with real GDP down 0.5% after a 1.3% gain in the first. Industrial production recovered slightly in June after a large drop in May. The decline in new orders accelerated to 3.5%, their sixth straight monthly drop. External demand remained upbeat for machine tools and luxury cars, however, boosting the trade surplus in May. Consumer spending waned in June, giving back all the gains made in the previous two months. Inflation continued to mount in the wake of rising commodity prices, hitting an annual rate of 3.5% in July.

Real GDP fell 0.3% in France, after a 0.4% rise in the first quarter. Industrial production dipped further in June. Output has been down in three of the last four months, although new orders levelled off following a steep decline in May. With France producing many consumer products that compete directly with Asian goods, demand for exports has dwindled, resulting in the third largest external trade deficit in the euro-zone in May. Inflation was stable in July at 4%, and the unemployment rate eased to 7.3%.

Growth stalled in Britain in the second quarter following a 0.3% gain in the first, the first quarter without growth since 1992. The services sector continued to buttress growth as industrial production fell in June for the fourth consecutive month. Housing stagnated and consumer reined in their spending anticipating summer discounts for clothes and household goods. Rising food prices boosted inflation to 4.4% in July, more than double the Bank of England’s target rate.

Real GDP in Italy fell 0.3% in the second quarter, after a 0.5% rise in the first. Industrial production stabilized in June, after a drop in May. Consumer confidence and spending remained weak, although inflation was stable in July at 4%.

The Japanese economy contracted by 0.6% in the second quarter, its largest decline in seven years, after a 0.8% gain in the first. Both consumer and businesses cut spending in the wake of rising commodity costs, particularly oil as Japan imports most of its energy. Exports fell 2.3% in the quarter, as emerging Asian nations began to be squeezed by the spreading global credit crunch, dampening demand.

Real GDP in Hong Kong fell 1.4% in the second quarter, its first fall in five years, as turbulent global financial markets weakened demand for financial services and exports. China’s exports continued to surge, however, pushing its trade surplus to $25.3 billion (US) in July.

Note

* Based on data available on September 5; all data references are in current dollars unless otherwise stated.