11-010-XIB
Canadian Economic Observer
October 2004

Summary Table - Key Indicators

Overview*

Canada’s net national worth rose 2.7% in the second quarter, its largest increase in three years. This boosted year-over-year growth to 8%, the largest ever except for early 2000 at the peak of the stock market bubble. While the latest increase was widespread, the driving forces were high commodity prices, housing and stock markets.

The increase in wealth originated in all four major sectors of the economy. Our external debt fell over $10 billion to a 20-year low, reflecting a large increase in our assets due to the largest takeover of a foreign company in Canadian history. From a peak of 44% of GDP in 1994, our net external debt has fallen steadily to an all-time low of 13.7%. Meanwhile, governments continued to pay down their debt, which as a share of GDP is also at a 20-year low.

Elsewhere, the net wealth of households and corporations continued to rise about 2%. Households again benefited from the rising value of homes. Firms used their record financial surplus to restructure their balance sheet, while cash holdings of non-financial firms are up 21% from a year ago. The debt-to-equity ratio fell to an all-time low, but debt itself increased in the first half of the year after declining in 2003. This is consistent with increased corporate spending in the second quarter.

Industry growth has been fairly evenly distributed over the last year. Only wholesale trade (notably building materials), transportation and manufacturing posted above-average gains. This summer marks the first time manufacturing has exceeded average growth in nearly two years. Meanwhile, some of the recent industry leaders have slipped back into the pack, notably mining and construction. As recently as May, these sectors were expanding twice as fast as the rest of the economy. Utilities and recreation services were the only sectors to contract over the past year.

Canadians travelled less abroad in the second quarter, preferring to spend more on tourism at home. The total volume of tourist spending in Canada has recovered all the losses suffered in the first half of 2003, when SARS and the Iraq war depressed travel. A pick-up in domestic tourism offset lower spending by foreign travellers.

International travel to Canada has recovered steadily from its SARS-induced crash in 2003. Foreign travel spending in Canada has risen 17% over the past year, to within 5% of its peak late in 2002. This recovery continued despite a drop in foreign visitors in the second quarter, when same-day trips from the US fell but overnight visits rose. The appreciation of the Canadian dollar since late 2002 helped reduce cross-border shopping by Americans by 25%, on top of the slump following September 11. But there has been little loss to Canadian retailers from Canadians shopping south of the border, which remains 23% below its pre-9/11 peak, possibly due to heightened security at the US border.

Labour Markets

Employment rose 0.3% in September, after a lull in August ended a string of four consecutive increases. Just as importantly, all of the advance again originated in full-time positions, which have risen 1.8% so far this year to more than offset a 2.4% drop in part-time. As a result, hours worked have grown faster (+2%) than jobs (+1%) in 2004.

September’s job growth was concentrated in the public sector, led by education after a dip over the summer. Some consumer-related industries also expanded, notably trade and accommodation and food. But goods industries weakened. Construction posted its first loss since the winter. Manufacturing shed jobs for a second straight month, leaving its workforce the same as at the start of the year.

The western provinces continued to set the pace for job growth, notably Alberta and BC. Alberta’s booming resource sector was reinforced by trade, while construction has propped up BC with a 38% gain in the past year. While losses in construction dampened Ontario and Quebec, the former was compounded by a drop in manufacturing. Overall, the unemployment rate edged down to 7.1% in September, largely due to a drop in Ontario’s labour force and job growth in the west.

Regional economy

In the West, as elsewhere in Canada, exports stalled after an exceptional second quarter performance. In their place, household spending regained the lead role in the growth of final demand. It was British Columbia’s turn to dominate in the growth of housing starts and retail sales, after the Prairies led growth for several months. Housing starts reached a 10-year high in August. Retail sales jumped 1.2% in July, bringing the increase since January to 7%. However, it was capital goods that stimulated the growth of manufacturing. Machinery shipments surged by more than a quarter to an all-time high, led by engines, energy conversion equipment and materials-handling equipment. This followed higher building permits in the commercial and industrial sectors in recent months. On the Prairies, shipments growth was attributable to metals and chemical products. Petroleum remained at the record level reached in June, despite a few plant closures for maintenance.

Apart from the West, Quebec was the only other place in Canada to register higher shipments, following a June in which it posted one of its best increases in more than two years. Resources and non-automotive transportation equipment continued to dominate. Most industries producing consumer goods also shared in the growth, as household demand strengthened. Even textiles were up, having lost ground earlier this year to imports. Furniture also rebounded with the end of strikes at two major plants. Consumers benefited from a third consecutive decline in prices in August.

By contrast, Ontario registered a drop in manufacturing shipments, the first since January. Ontario shipments are dominated by autos exports, which weakened after leading growth last spring. Retail sales advanced, but only enough to offset June’s decline. The tourism sector was also weak, with employment in accommodation and food services falling nearly 4% in August. The number of Americans travelling to the province remained exceptionally weak with a decline of 2.3% in July, the fourth in five months as they approached 30-year lows.

Leading indicators

The growth of the leading indicator continued to moderate in August, to 0.5% after slight downward-revised gains of 0.6% in July and 0.9% in May and June. The slowdown over the last two months reflected housing and the US leading indicator backing off from unsustainable gains. Growth remained widespread, however, with eight of the ten components rising, the same as in June and July. The two components that fell remained the stock market and the average workweek in manufacturing.

The housing index slowed for a second straight month, from 2.9% growth in June to 1.2% in July and 0.4% in August. The weakness shifted to the single-family sector last month. The volatile multiple unit sector turned up, despite rising vacancy rates. Furniture and appliance sales slowed in tandem with housing. Sales of durable goods continued to trend up, bucking the slowdown elsewhere in household spending.

Business spending continued to strengthen. Investment drove a tenth straight increase for new orders. Stronger demand raised the ratio of shipments to stocks by over 1% for a fourth consecutive month, reaching its highest level since the technology bubble burst in 2000. These gains, however, were not reflected in the average workweek, which shrank for a third straight month while factory jobs have changed little since January.

Jobs outside of manufacturing were boosted by more business spending. Services employment firmed for a second month in a row, led by the professional, scientific and technical industry which has contributed one-third of all job growth since the start of the year despite accounting for only 6% of overall employment. Growth in services was checked by another drop in the personal sector, which was hindered by the recent drop in Americans travelling to Canada.

In the United States, the growth of the leading indicator slowed from 0.3% to 0.2%. As in Canada, however, gains remain widespread, with eight of the ten components advancing. The stock market and the average workweek also were their weakest sectors. Consumer confidence and housing picked up over the summer.

Output

Monthly GDP edged up 0.1% in July, its third such increase in four months, after a 0.4% advance in June. An upturn in manufacturing over the summer offset a slowdown in housing and primary industries, the pacesetters in the first half of the year.

Manufacturing output rose 0.3% on the heels of June’s 1.6% hike. Motor vehicles continued to lead the way with back-to-back gains of about 3%. Boosted by wireless products, computers and electronics expanded for a third straight month, matching their best stretch since the high-tech boom peaked in 2000. Strong demand for resources was reflected in lumber and metals output, while capital goods remained robust.

The primary sector was dampened by strikes and inclement weather. A labour dispute in iron ore helped pull down metal mining, while weather delayed the harvest of the prairie grain crop. These declines were reflected in transportation, notably rail. Construction fell for the fourth straight month, as housing plateaued at a high level while declines intensified in non-residential building.

The dip in mining, one of the largest consumers of energy in Canada, helped curb energy output. As well, oil refineries curbed output after gasoline consumption fell for a fourth straight month. More surprising is the failure of exploration for oil and gas to respond to higher prices: part of the weakness reflects disappointment with results from drilling off the East Coast.

Most services, apart from transportation, grew steadily. The ICT sector led the way, notably telecommunications. Lower prices also sparked more consumer demand for these goods. The public sector continued to recover from provincial strikes in the spring, although some federal public sector employees began to walk off the job in September.

Household Demand

Retail sales volume improved modestly for a second straight month with a 0.6% gain in July, after back-to-back declines in April and May. Auto sales led the increase, although they quickly gave it back in August.

Some of the other advances in consumer spending appear to have a more solid footing than autos. Demand for electronic goods continued to rise at a double-digit annual rate, driven by steady price declines. Sales of furniture and appliances were only slightly less brisk. Clothing snapped out of a prolonged slump, as retailers heavily discounted their seasonal fashions after cool wet weather dampened demand all summer.

Housing starts rose to an annual rate of 241,500 units in August, their second highest since March. All of the increase originated in multiple units, which rebounded 35% after a sharp drop depressed overall starts the month before.

The market for single-family homes showed signs of cooling off. New home sales in August fell to their lowest level so far this year. A rising trend in unsold new homes since the spring was reflected in starts: ground-breaking on new homes fell in August for the second time in three months, touching its lowest level since January’s deep freeze. Existing home sales have also fallen slowly every month since April.

The 2003 Household Internet Use Survey found that Canadians spent $3.0 billion on e-commerce, equivalent to 0.44% of all consumer spending, versus 0.37% in 2002. This compares with 0.7% in the United States.

Merchandise trade

Exports’ string of consecutive increases was snapped at five in July, but boisterous demand for natural resources augurs a quick resumption of growth. Meanwhile, import demand has strengthened over the last three months, up 7.5% from the previous three-month period.

Exports slipped 1.2%, after rising 3.5% to a record high in June. The booming resource sector took a breather, after all commodities had risen in unison by nearly one-third over the previous year. Food shipments were checked by the delay in the grain harvest. Metals were hampered by supply disruptions arising from maintenance and labour disputes. Forestry was undercut by lower lumber exports to the US, despite strong housing demand over the summer. Energy alone maintained its upward momentum, with natural gas fuelling a fourth straight increase in prices.

Auto exports finally succumbed to the levelling-off of US demand, with a 5% drop snapping an unbroken string of increases dating back to January. Auto plants closed for longer than usual vacations and model year changeovers. Machinery and equipment was pulled down by widespread losses outside of aircraft (the latter rallied by over 50% in the last six months).

Imports rebounded nearly 3% to recover most of their June swoon. Autos and energy led the way with increases of nearly 10%. Passenger cars drove the former and crude oil the latter as firms rebuilt stocks. Industrial materials also posted a sixth straight increase, with higher prices pushing iron and steel to a record high. Consumer goods were buoyed by strong housing demand, especially for furnishings. Machinery and equipment was an exception to the bucolic state of domestic demand due to declines in aircraft.

Prices

Consumer prices fell 0.2% between July and August: prices have subsided over the last three months, after an energy-led surge in the spring. As a result, the annual inflation rate has slowed from a high of 2.5% to 1.9%. Averaging 1.7% so far this year virtually ensures that for all of 2004, inflation will be below 2% for the first time since 2000, despite high oil and house prices and government-mandated hikes to tobacco taxes and tuition fees. But prices for durable and semi-durable goods have fallen over the past year, and the rising loonie will continue to dampen the cost of these import-intensive goods.

Autos led the drop in prices in August, with dealers raising incentives to move stock at a time of weak demand. Operating a car also was cheaper, as gasoline prices dipped despite the surge for crude oil. Discounts intensified for a wide range of computer and electronic equipment. While beef prices have recovered to their level before last year’s BSE shock, travel prices remained below last year’s already depressed level after the SARS crisis crippled demand.

Commodity prices in September retreated slightly from their all-time high in August. Energy led the decrease at mid-month, but late in the month crude oil prices hit a record high of $50 (US) a barrel on continuing uncertainty about the stability of supplies.

Industrial prices were little changed in July and August. Strong demand continued to push up the price of intermediate goods, notably lumber and petroleum. But the rising Canada/US exchange rate lowered prices received for exports of finished goods, such as autos, machinery and communications equipment. Manufacturers were also squeezed by a 21% jump in the cost of raw materials over the past year.

Financial markets

The Canadian dollar rose to an 11-year high of 79 cents (US) at the end of September, surpassing its previous high for the year set in January and recouping all of its drop to near 72 cents in the spring. The dollar also strengthened against the euro and yen, as the Bank Rate rose and commodity prices remained high.

The strength of commodity prices was also a major factor in boosting the Toronto stock market. It rose 4% to its highest level since April. Virtually all of the increase originated in energy and mining, both up 10%. This year the Toronto market has outperformed the US market, reflecting the greater weight of resource stocks.

International economies

The United States current account deficit soared from $147 billion in the first quarter to a record $166 billion in the second. A rising import bill, especially for energy, a falling surplus on investment income and more defense spending abroad prompted the increase. The deficit was financed by issuing $100 billion of government debt (especially to central banks in Asia) and selling off corporations, especially to Canada. The trade deficit narrowed slightly to $50 billion in July from $55 billion in June, as exports increased while imports fell as oil eased before skyrocketing in August. So far this year, the increase in imports has been driven in roughly equal parts by energy, capital and consumer goods: pharmaceuticals are the largest consumer import, with a 15% share so far this year. Canadian pharmaceutical exports jumped 60% in June from a year earlier to about 7% of US imports, before receding in July.

Retail sales dipped 0.3% in August, pulled down by slower auto demand. Auto sales were below the level of last August, their first year-over-year retreat in almost 2 years. Non-auto sales eked out a 0.2% gain. Housing-related sales continued to soften, with furniture, appliances and electronics up only 6% in the past year. Clothing purchases remained very weak this summer. Higher prices for food and energy siphoned off an increasing amount of consumer spending.

Housing starts edged up to 2.0 million units at annual rates in August, matching their high for the year set in March. Starts so far this year are running 10% above last year’s record pace. The backlog of housing starts authorized but not yet undertaken began to ease in August after rising steadily all year. New permits issued fell sharply in August, especially in the South, which was hard hit by hurricanes as summer ended. Re-building should boost starts in the autumn, just as it did in California after last year’s forest fires. New home sales rebounded from a slump in July, recovering to their average level so far this year.

Industrial production edged up 0.1% in August, as cool weather continued to dampen electrical generation. But manufacturing continued on a solid growth path, up 0.5% after a 0.9% gain in July. Auto assemblies drove a gain in consumer goods, while construction materials rose steadily. But the recent slowdown of orders for capital goods showed up in a 1.2% drop in output of business equipment, their first loss in 2004. New orders continued to soften in August, despite a rebound for computers and electronics, while inventories rose.

In the Quarterly Services Survey— its first new economic survey in 40 years - - the Census Bureau found that revenue for information, professional and administration services all accelerated sharply in the second quarter to over 4% growth (not seasonally adjusted).

Euro-zone industrial production rebounded in July, gaining 0.4%. Durable consumer goods led the recovery, but new orders fell slightly as gains in capital goods could not offset declines elsewhere. External trade with China, Turkey and Russia continued to expand at double-digit rates. Surpluses for machinery, autos and chemicals rose strongly, while the energy deficit decreased. Retail sales grew 1.1% in July, matching June’s advance, buoyed by household goods and clothing. Inflation remained stable at 2.3% in August, with higher prices for fuel, alcohol, tobacco and health offset by declines in food and communications.

Industrial output in Britain fell 0.7% in July, matching its June decline. Imports continued to outpace exports, leading once again to the largest external trade deficit in the euro-zone. Consumer spending waned in July after being upbeat for most of the spring. Inflation remained far below the zone’s average at 1.3% in August.

German industrial production rebounded 1.7% in July, more than offsetting a drop in June. New orders maintained strong gains since last winter, driven by exports. July consumer spending was robust for the second month in a row.

Output in France slowed to 0.2% in July, but remained strong on a year-over-year basis. New orders retreated again, after a surge in May due to transport equipment. The external trade surplus narrowed as export demand fell faster than imports. Consumer spending was upbeat in July, while the inflation eased to 2.5% in August.

Second-quarter GDP in Japan was revised down to 0.3%. Business investment strengthened, while cuts to public spending deepened and business inventories were revised downwards. Industrial production rose only 0.3% in August after two months of decline, as manufacturers continued to work off inventories. The trade surplus shrank for the first time in over a year in August when rising oil prices increased imports and export growth slowed. Chinese industrial production rebounded in August, up 16% year-over-year, after decelerating for five straight months. Auto output rose only 4% versus 33% in May, while steel expanded 23%.

Note

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