Summary table - key indicators

Overview*

The Canadian dollar capped its 5-year appreciation by achieving parity against the US dollar late in September. The increase accompanied higher commodity prices, notably records for oil and wheat, and a cut in US interest rates. The latter was motivated by the turmoil in financial markets that began in mid-August, and renewed weakness in the US housing market.

In Canada, however, there were few signs that the disruption in some financial markets (notably asset-backed commercial paper) was affecting the real economy. Most importantly, employment jumped 0.3% in September, helping to send the unemployment rate to a 31-year low of 5.9%. Higher commodity and stock market prices in September also pointed to the underlying strength of the economy.

These signs of con­tinued economic growth in September followed a solid performance over the summer. Auto sales and housing starts both rebounded in August. Real GDP posted a third straight gain in July, bolstered by strength in exports and business investment after household spending had driven growth in the first half of the year.

Labour markets

Employment jumped 0.3% in September, after slowing to 0.1% growth in both July and August. About two-thirds of the increase was full-time positions, despite a sharp drop for youths. The unemployment rate dipped below 6% for the first time in the current survey dating back to 1976.

Most of the increase in jobs was in the public sector, notably education and public administration. The latter has posted the largest year-over-year growth (6.4%) of any major industry in the past year except construction. Quebec and BC led this gain with increases of about 10%. Education returned to its June level, after a large drop in July that may reflect more term positions being ended over the summer. Most other services posted steady increases, especially professional services. Conversely, most goods-producing industries decreased. Employment in natural resources posted its first year-over-year decline since October 2004.

Regionally, job growth was driven by Ontario and the prairies. Ontario’s service sector buttressed job growth against more losses in manufacturing, helping to send its unemployment rate to 6.2%, its lowest of the year. Employment growth on the prairies was more evenly-split between goods and services. At 3.8%, the unemployment rate in Saskatchewan rivalled Alberta’s 3.6% for the lowest in the nation.

Leading Indicators

The composite leading index rose 0.3% in August, equaling its average monthly gain over the last three months. Household demand remained the engine of growth, led by robust housing market conditions. Financial market conditions softened over the summer, but manufacturing activity firmed.

Household demand advanced across the board. Housing starts rebounded in August, offsetting a dip in sales of existing homes. The underlying strength in housing demand was reflected in steady growth for sales of furniture and appliances. Outlays for other durable goods continued to post healthy gains, although not at the same pace as in the spring when pay equity fuelled a surge in spending in Quebec.

After a strong start to the year, manufacturing activity slowed in the second quarter. The leading indicators related to manufacturing suggest that demand was firming as summer began. The rate of decline of new orders slowed appreciably, reflecting increases for capital goods. This firming of demand was reflected in a slight upturn in shipments, although not quite enough to offset higher inventories. The average workweek was steady for the third straight month, and manufacturing employment rose on balance in July and August after a lengthy period of decline.

Output

Real GDP rose 0.2% in July, its third straight month of solid growth. Services were buoyed by steady gains in business services, while goods-handling industries profited from the rebound in the volume of international trade. At 2.6%, year-over-year growth was the most since last July.

Construction output rose 0.6%, its third straight month of comparable growth. This marks the best three-month stretch for construction since last fall. Non-residential building and engineering continued to lead growth, fuelled by gains in western Canada. Residential building rebounded from a slow start to the year.

Manufacturing output grew 0.4%, continuing its slow recovery from deep cuts last fall. Autos led the increase, after assemblies fell for three straight months. Aerospace and ICT goods continued to perform well this year.

The primary sector took a break from its recent expansion. Mining was depressed by lower oil and gas output, which outweighed a third straight gain for metal mines. Dry crop conditions on the prairies and Ontario continued to depress farm output, while forestry fell sharply as the west coast industry was shut down by a strike late in the month.

Household demand

Retail sales volume in July slipped nearly 1% for the second straight month, after large advances in the spring. The drop was concentrated in the auto sector, where sales in August recouped these losses. Despite high gas prices, demand for trucks strengthened relative to passenger cars. By August, trucks accounted for half of all vehicle sales in Canada.

Non-automotive retail sales in July were dampened by higher clothing prices. This reduced clothing purchases by over 2% after two months of sharp increases. Spending on non-automotive durable goods remained robust. Furniture and appliances led the way. Lower prices continued to entice consumer interest electronic goods.

Home sales dipped in August when the turmoil in the global financial system dominated headlines. Existing home sales fell 5% after a strong upward trend in the first half of the year. As well, prospective homeowners in Alberta appear to be balking at higher prices: Calgary and Edmonton were the only major cities to post year-over-year declines. New home sales fell for a second straight month reversing all of their gains in the first half of the year. Builders boosted housing starts by 5% in August, partly in response to sharp declines in the number of unsold vacant units in the previous two months.

Merchandise trade

Weaker export values during the spring months halted in July despite a further appreciation of the Canadian dollar again dampening prices. With import growth more than double the 1.4% rise in exports, the trade surplus narrowed to $3.7 billion, its lowest level since October 2006.

Exports to the United States rose 1% and were up 3% to the rest of the world in July, driven by continued strength in industrial goods, notably metals. Industrial goods emerged as the highest value export sector in 2006 and have driven growth in 2007, posting 20% gains year over year and a 7% rise in July alone. After hitting a plateau of $9.1 billion for three months, a jump in volumes moved the sector to a new record high of $9.7 billion in July. Copper, nickel and gold all registered large gains.

Autos also contributed to the gain in exports, with levels pushing back up to $7.1 billion, moderating the sector’s downward trend. The growth in industrial goods and autos more than offset a drop in energy exports, the result of reduced US demand despite low inventories of both crude oil and gasoline.

Imports advanced in July, rising 3.5% to reach a record high of $35.7 billion. Volumes advanced 5.0%, the largest increase since September 2003 when they jumped 6.1% following Ontario’s blackout. Passenger cars were the main contributor to the rise in imports, with Canadian auto sales in August the highest on record for that month. This increase followed three consecutive declines in car imports. Consumer goods and machinery and equipment also boosted volumes in July. Rising pharmaceutical imports from Ireland and Canadian airlines expanding fleets explained these increases. 

Prices

The CPI fell 0.1% between July and August, largely due to lower gasoline prices. As a result, the annual inflation rate slowed substantially to 1.7% from the 2.2% posted in each of the previous four months.

Much of the drop in gasoline prices reflects an easing in the cost of crude oil over the summer (before surging to new record highs in September). But part of the drop also reflects the stronger Canadian dollar: gasoline prices in Canada fell 7.7%, more than the 4.9% drop in the US. This continues a trend that began when the loonie began its appreciation in 2003: since then, gasoline prices have risen 42% in Canada while US drivers are paying 90%. While Canada imports little gasoline directly from the US, the North American market is fully-integrated, ensuring that any savings from the exchange rate are passed on to drivers in Canada. Most studies of the impact of the exchange rate on import prices ignore this effect, which has saved Canadians $10.2 billion or $823 per household on average over the last five years.

Prices continued to fall for durable goods, mostly due to model year-end clearance sales for autos. The recent drop in the cost of home entertainment equipment and clothing was at least temporarily interrupted. The rising cost of owning a home continued to exert the most upward pressure on services prices.

The surge in the Canadian dollar in September accompanied a significant gain in commodity prices. The increase was led by energy, with crude oil soaring to an all-time high of $82 (US) a barrel. Most metals also strengthened, notably gold, copper and nickel. Wheat prices also set new record of over US $9 a bushel. Lumber remained a notable exception, as the weakness in US housing demand sent prices to their lowest level so far in 2007.

Industrial prices fell 1% between July and August, their fourth straight decline. Unlike these earlier decreases, the August drop was not driven by the lower dollar. Instead, lower prices for metals and oil were the main cause, although these declines were short-lived. The drop was not widespread, as autos and capital goods posted increases.

Financial markets

The Canadian dollar briefly traded at par with the US dollar late in September for the first time since 1976. This marked a leap of over 5 cents in the exchange rate in less than a month, and capped an appreciation of nearly 60% from its record low set in 2002. Some of the increase against the US dollar reflected the latter’s weakness after the Fed cut interest rates in mid-month. But the loonie also rose against most other currencies in late summer.

The flight to quality in money markets starting in August sent the spread between the rates on 3-month commercial paper and treasury bills to near record highs. The paralysis in segments of the market for asset-backed commercial paper did not have any conspicuous effects on corporate demand for paper. Short-term credit growth was steady, as more bank loans made up for a drop in commercial paper. Bond issues subsided to less than $1 billion in August, well below their average in the first half of the year.

Households also appear unperturbed. Household credit demand at banks grew steadily. And investors switched from money market to non-money market funds in August.

The stock market rebounded 3.2% in September from three straight months of small losses. The recovery was broadly based, with no component standing out.

Regional economies

Household demand in Quebec softened over the summer, after pay-equity settlements had fuelled strong gains in the spring. Housing starts fell steadily over the summer, while retail sales in June and July gave back all of their 5% gain in May. The underlying determinants of growth remained strong. Employment grew 0.4% in the third quarter, and unemployment remained at its lowest level on record. Manufacturing shipments dipped early in the summer due to temporary declines in oil and metals prices. Since these industries represent 25% of its shipments, Quebec remains well-positioned to profit from the recent rebound in their prices.

BC’s resource sector continued to hamper growth. In particular, its forestry products, which account for one-third of its shipments, was hit by a province-wide strike late in July. This was the latest blow to the lumber industry, which has seen shipments tumble 22% in a little over a year. Still, overall employment growth of 2.9% in the past year remained the second-strongest of any major province (behind only Alberta’s 4.8%), led by construction. This helped buoy housing starts and retail sales over the summer.

Ontario also continued to shift away from its traditional manufacturing base. It was shed 60,000 factory jobs in the past year. Nevertheless, employment growth has remained close to the national average due to services. Business services led the way with gains of nearly 10%. Education and accommodation and food also have boosted employment at a double-digit rate. Housing starts remained steady into August, but retail sales in July were the weakest in Canada.

International economies

In the United States, housing market turmoil prompted the Federal Reserve to lower its target interest rate one-half point to 4.75% in mid-September. This contributed to the US dollar falling to a record low against the euro and to parity with the Canadian dollar as investors purchased these currencies in their search for higher rates.

While weakness permeated housing, with sizeable declines registered for permits, starts and sales, consumer spending and industrial production continued to show moderate growth and the string of monthly export gains persisted. Housing permits were down a further 6% in August. The rate of decline for housing starts eased in August, down 3% in August, half the size of July’s drop as a rise in multi-family units partially offset the slide in single family homes. New home sales were down 8.3% to a decade low while existing sales dropped 4.3%, their sixth monthly decrease and the largest decline since March. Despite the drop in home-building, construction spending rebounded in August thanks to gains in non-residential.

Consumer spending posted a 0.6% increase in August. Retail goods were up only 0.3%, with strong auto sales accounting for the advance, aided by growth in furniture and electronics sales. Gasoline sales receipts were depressed by weaker prices, which gave consumers a temporary break at the pumps. Industrial production edged up 0.2% in August, its third consecutive rise, this time on the strength of utilities. Business equipment, which had been driving growth, fell back for the first time since January following stellar increases most of this year.

The trade deficit narrowed to $59.2 billion in July, as a result of exports outpacing imports. This was the fourth consecutive month in which export growth surpassed that of imports, yielding a shrinking deficit. Export gains in July were concentrated in autos and capital goods. Capital goods, in combination with industrial supplies, accounted for most of the year-to-date gains.

Real GDP in the euro-zone grew 0.3% in the second quarter, less than half its first quarter gain as business investment stalled. Industrial production rebounded in July when almost every sector recovered from their June slump. However, new orders fell 4%, dragged down by a reversal in transport equipment. The continued strength of the euro further dampened exports, which fell again in July, while imports picked up speed.  Overall trade with China and Russia remained brisk and exports to the US fell. Inflation eased to an annual rate of 1.7% in August and the unemployment rate was stable at 6.9%.

German growth eased to 0.3% in the second quarter, down from 0.5% in the first.  Industrial production was flat again in July, while new orders lost almost all their gains in the previous two months. Export demand remained upbeat, compensating for weak consumer spending. Both inflation and the unemployment rate were stable.

Output in France also slowed to 0.3% in the second quarter. Production rebounded in July, continuing its see-saw pattern of late, while new orders fell for the first time since February. Consumer spending picked up slightly over the summer months as unemployment continued to fall.

Britain accelerated in the second quarter, with real GDP rising 0.8% on the heels of a 0.7% gain in the first. Industrial production was flat over the summer, however, as export demand continued to languish due to the ongoing strength of the pound.  Imports were upbeat, however, as consumer spending picked up over the summer months when price discounts deepened. Inflation fell to 1.8% in August, its lowest level in over a year.

Japan’s GDP shrank 0.3% in the second quarter, after a 0.7% rise in the first. Although consumer spending picked up, business investment was weak, along with export demand.  Business investment fell year-over-year for the first time in four years, as spending in the leasing industry plummeted due to a decline in new contracts amid high leasing prices.

China’s annual growth hit 11.9% in the second quarter, its fastest pace in over 12 years, as exports continued to soar. China has now eclipsed Canada as the main exporter to the United States over a 12-month period.

Note

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