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Current economic conditions
The Canadian dollar hit a 12-year high of 82 cents (US) late in October, while the US dollar fell against a wide range of currencies, hitting an all-time low against the euro.
The drop in the US dollar has intensified since May. Starting in that month, the recovery of US exports stalled, while soaring oil prices have driven up the bill for imports (every $1 a barrel hike in oil prices costs the US $4 billion a year). As a result its monthly trade deficit has risen from $47 billion in the spring to $54 billion in August (when oil prices averaged $36 a barrel, before surging above $50 in the autumn).
For Canada, the combination of strong commodity prices and a rising exchange rate helped swell our trade surplus to $7.5 billion in August, its second-highest level in three years. Last year, the stronger dollar boosted the trade balance by pushing down import prices more than export prices fell. This year, import prices have continued to fall, but export prices have turned up thanks to the boom in commodities.
Lower import prices have been a boon to buyers of consumer durable goods and machinery and equipment. Prices in these sectors have fallen steadily since the exchange rate began to appreciate early in 2003. Not surprisingly, the upturn of consumer spending in the last three months has been focused on durables.
But the rising dollar also dampens demand in some sectors. Manufacturers of non-resource products have seen earnings squeezed by lower prices for finished goods and rising costs of inputs. They have responded by sharply curtailing employment relative to output in a bid to raise productivity. The weaker US dollar also discourages Americans from travelling to Canada.
The commodities boom has pushed many industries close to their capacity limits. Capacity use in forestry is near a 17-year high, while manufacturing is set to break its record peak with rates exceeding 95% in refining, primary metals and lumber. Increased commodity trade was widely reported to be pushing the rail and water transportation and distribution system to its limit: in response, manufacturers of rail equipment have raised output every month this year.
Another indicator of an economy approaching capacity constraints is an unemployment rate of 7.1%, only slightly above its historic low set at the height of the boom in 2000. The business conditions survey gave mixed signals: the 15% of manufacturers reporting such shortages of skilled labour and raw materials in July was the most since 2000, before easing to 12% in October. And while the ratio of inventories to shipments is at a record low, only 4% of firms felt stocks were too low.
Employment continued to grow at a moderate pace, up 0.2% in October. The year-over-year increase has been stable at about 2% over the last six months. But unlike recent job gains, October’s was concentrated in part-time rather than full-time positions.
More part-time jobs were consistent with the sources of growth. Retail trade dominated the increase with its largest gain of the year, following a pick-up in consumer spending over the summer. Construction remained buoyant thanks to more house-building. But the high dollar appeared to be eroding manufacturing jobs, which fell for a third straight month. High commodity prices did not translate into more jobs in the primary sector, which has stalled since June after a good start to the year.
Regionally, the increase in retail jobs was concentrated in Ontario. Losses in manufacturing reduced employment in Quebec. More losses in the resource sector hampered Alberta and BC; this sector has lost jobs in both provinces over the past year. Instead, they relied on increasingly on construction for growth, while services rose 1%.
The composite index continued to slow to 0.3% growth in September, from 0.5% in August, 0.7% in July and a 2-year high of 1% in June. The sources of growth were the narrowest in 16 months. The slowdown reflects a marked deceleration for the US leading indicator and a levelling off of housing after unsustainable gains in the spring. Overall, six of the ten components rose, one less than in August as sales of durable goods turned down.
The growth of the US leading indicator stalled for the first time in 16 months. The components related to household demand all retreated. For new orders of consumer goods, this was the first drop in just over a year. Lower consumer confidence and construction interrupted a recovery that began early in the summer. This slackening followed several months of disappointing job reports, reflected in an upturn in initial demands for unemployment insurance. Meanwhile, factory prices for consumer goods rose sharply. Overall, only three of the ten components rose—new orders for capital goods and two related to financial markets. Unlike in Canada, the stock market continued to decrease. The outlook for exports is further complicated by the rise in the Canadian dollar and soaring commodity prices.
In Canada, the housing index posted a second straight drop, off 0.8%. Housing starts plateaued while the inventory of vacant units continued to increase, to their highest level since July 2001. The increase in inventories was especially marked in Quebec, notably Montreal. Quebec also recorded its first drop in existing house sales since February as house prices in August again rose at twice the national average. Conversely, housing starts strengthened on the prairies in September, buoyed by the booming resource sector. Canada-wide sales of furniture and appliances were slow compared with their peak rates of a year ago. Purchases of durable goods trended down due to slower auto demand.
Business spending remained upbeat. Capital spending drove an eleventh straight increase in new orders. The ratio of shipments to stocks rose by more than 1% for a fifth straight month, reaching its highest level in four years. These gains, however, were not reflected in manufacturers’ demand for labour, as the average workweek fell for the fourth month in a row and employment has been little changed since January. Services employment grew steadily over the last three months.
The stock market snapped out of a two-month slump. The greater role of resources explains why the stock market in Canada has outperformed the US.
Real GDP rose another 0.5% in August after gains totalling 0.7% in the previous two months, confirming the economy was back on a solid growth path after a stall in the spring. While housing and the primary sectors slowed after setting the pace early in the year, manufacturing and consumers have picked up the slack.
Factory output rose 1% in August, its third straight gain. The strength of manufacturing this year contrasts with its slump last year when the dollar first approached 80 cents (US). Part of the difference reflects buoyant demand for natural resources, as reflected in smelting and refining (which has risen over 15% this summer alone). Another key difference is an increase in auto assemblies every month this year, as US consumers remain unfazed by high gasoline prices. Meanwhile, heavy industries such as machinery and metal fabricating have expanded steadily after a retreat in 2003. Increased demand for rail cars across North America has raised the output of railroad rolling stock 20% so far this year.
Despite high prices, output fell in the primary and construction sectors. Metal mining was hamstrung by a one-third drop in iron ore due to a strike. Non-metallic minerals remain a bright spot, boosted by diamonds. The prairie grain harvest was larger than last year, with wheat matching its average for the last decade. However, quality was dampened by cold and rain.
Consumers led the growth of services. Retail sales rose for a third straight month. Computers and electronics drove the increase in wholesale trade. Gambling led a recovery in recreation spending, while dining out also increased. Broadcasting was boosted by large audiences watching the Olympic games. Tourism-related industries remained weak.
The volume of retail sales strengthened for the third month in a row with a 1.1% advance in August. Demand was concentrated in durable goods, where prices fell across the board. Computers led the way, with a resumption of sharp price cuts boosting sales. Lower prices also stimulated interest in vehicles. However, these discounts seem largely to have brought demand forward from the autumn, as vehicle sales slumped in September. High gasoline prices appear to be dampening demand for large vehicles, despite hefty discounts for trucks.
Elsewhere, furniture and appliances remained the most reliable source of growth, posting their ninth increase in ten months as housing remained at a high level. Clothing purchases gave back much of the ground gained in July.
Housing starts edged down 4% in September from August, but remained at their third highest level (238,000 units at annual rates) in the past year. Moreover, all of the drop originated in multiple units. Ground-breaking on single-family units rebounded 4% to regain its high for the year. For the third quarter, starts of singles rose 1%, unlike the dip in the US.
Construction was stimulated by a surge of new home sales in September to their highest level in two years. Such bursts in sales are not unusual when mortgage rates turn up after a long period of low rates—the peak of sales in 2002 was such an occurrence. This presumably reflects potential buyers jumping off the fence to take advantage of low rates. However, it is noteworthy that only short-term mortgage rates rose in September, as 5-year rates fell in line with bond yields.
The market for existing homes was more stable than for new homes, partly because the latter is driven more by first-time buyers. Existing home sales were flat in September after slowing over the summer. Resale home price gains remained steady at about 7% over the last year.
Export earnings dipped for a second straight month, largely due to lower shipments to the US where both the economy and the weather cooled. But imports fell faster, giving back all of their gain in July. This boosted the monthly trade surplus by over $1 billion to $7.5 billion, largely on the strength of a $10 billion surplus with the US, the third-highest ever.
Exports edged down 0.4%. Energy products fell 3%, as cool weather in the US dampened demand for natural gas (our largest energy export) and electricity. As well, the recent surge in oil prices was not yet been reflected in export earnings for oil. Other resource products continued to fare well. Forestry was buttressed by a 13% gain for lumber, boosted by hurricane damage. Industrial goods were buoyed by metals, notably nickel. And food exports picked up as the wheat crop was brought in after a wet July.
The value of machinery and equipment exports fell for a second straight month, largely due to lower prices. However, auto exports resumed their upward trend, as US sales remained brisk.
Imports fell across the board, with a total drop of 4%. Energy posted the largest declines, driven down by a 36% tumble for electricity during a relatively cool August. Slow auto sales in Canada dampened car and truck imports, although strong domestic production continued to raise demand for parts. Imports of machinery and equipment fell for a third straight month, largely because aircraft have returned to more normal levels after a spike in deliveries in May. As well, prices for machinery and equipment imports have fallen the most of any sector, with the downward trend for high-tech goods reinforced by the rising loonie. Prices for consumer goods have also fallen 4% since May.
The consumer price index edged up 0.2% between August and September, reversing a slight decline over the summer. The year-over-year increase slowed to 1.8%, less than half its peak early in 2003.
The cost of durable goods fell again, especially for autos and computers. Prices of durable goods have fallen steadily since December 2002 when the loonie began its rise. The dollar also played a role in reducing clothing prices over the past year.
Elsewhere, drivers saw lower prices when filling up at the pump over the summer. The respite was only temporary, as soaring prices for crude oil inevitably pushed up gasoline. Housing remained the major source of upward pressure on the cost of services.
Commodity prices jumped again in October, fuelled by a record $55 (US) for a barrel of oil. The price of crude oil futures for the next two years was above $40. Lumber and metal prices backed off from their recent highs. Copper and nickel both finished the month lower after hitting 15-year highs early in October. Gold, a traditional safe haven, was an exception, nearing its 16-year peak of $430 an ounce.
Prices for manufactured products finally buckled, down 0.6% in September under the increasing weight of the rising Canadian dollar. Prices had levelled off over the summer as the dollar strengthened, after recovering 6% in the first half of the year from a drop in 2003.
The decline in September was driven by a wide range of exported goods whose prices are quoted in US dollars. These include autos, metals and forestry products. Without the 1.8% rise in the exchange rate, factory prices would have been little changed. Only oil refiners were able to post higher prices in the month.
The Toronto stock market continued to outperform its US counterpart thanks to its larger resource sector. A 3% gain in October extended its winning streak to three months. So far this year, Toronto is up 8%, versus a small decline for the S&P 500 in the US. In the last five months, energy stocks have risen 16% and metals 24%.
The dollar hit a 12-year high of almost 82 cents (US) in October, rising 3 cents in each of the last two months. The US dollar fell even faster against some other major currencies, notably the euro which closed near an all-time high.
The Bank Rate rose a quarter of a point for a second straight month. But 5-year mortgage rates were unchanged, partly because bond yields edged down (Government of Canada rates fell below 5% for the first time since March). The increase in short-term rates did not slow the outflow from money market to other funds in September. The rally in short-term business credit in the first half of the year was partly reversed over the summer, only partly offset by more fund-raising on stock and bond markets.
The strength of exports dominates all the provincial economies. Exports are driving the Ontario economy, with a 19% surge over the last year producing the largest increase in shipments since May. This is the seventh increase in a row, after the drop originally published for July was revised upwards. Autos led the way. Shipments of auto parts are at record highs. Together with more capital spending and output planned by Ford and DaimlerChrysler, this is encouraging for more production over the coming months. Toyota is also considering the possibility of increasing capacity. The strength in manufacturing also reflects gains for capital goods and metals, which are making almost as big a contribution to growth as autos. Shipments related to housing and consumer demand have also risen. After trailing for most of the year, retail sales growth of 1.7% led the nation in August.
Exports are surging again in the West after levelling off in July, when energy output was hampered by some plants closing for maintenance. Household demand, however, did not drive the national trend as it had earlier in the year. In fact, the West was the only region to record lower retail sales in August. Housing was mixed. Housing starts fell 11% in British Columbia, but sales of existing homes firmed after four sharp drops. The opposite happened on the prairies, where starts increased slightly to their second-highest level for the year. Construction goods reinforced the upturn in manufacturing shipments for the prairies.
Quebec was the only region to show a drop in shipments in August. The weakest sectors were textiles and clothing, which are slipping back into the slump they experienced early in the year, and forestry, where two major plants closed at the end of the month because of a dispute with aboriginal groups. Metals were steady. Transportation equipment kept pace with its best growth in more than two years. Machinery and computer supplies also contributed, reflecting continued strong exports. Domestic demand was mixed. Housing lost some of the strength it showed in recent months. With vacancy rates rising, housing starts recorded their third drop in as many months, down 25% from their peak of last March. Sales of existing homes retreated 4.6%, after a 2.4% drop in August. However, retail sales were up.
In the United States, third-quarter GDP rose 0.9%, a slight improvement from the second quarter. Consumer spending accelerated, largely due to a rebound in auto sales. With real incomes slowing, most of the rise in spending was financed by a drop in savings. Business investment continued to grow rapidly, while housing slowed over the summer. Some of these increases in spending were offset by a run-down of inventories and another sharp jump in imports rather than more domestic production.
Retail sales rebounded 1.5% in September from a dip in August. Auto sales fuelled the advance, up nearly 5%. Producers in Canada have added extra shifts to keep up with auto exports to the US. Non-auto sales posted a solid 0.6% gain. Building materials continued to sizzle, raising annual growth to over 14%, helped by extensive hurricane damage. Conversely, furniture and appliances sales weakened for a second straight month as housing slowed.
Housing starts fell 6% in September, giving back their advance in August and leaving starts slightly below their 2004 average to date. Weather was probably not a large factor, as the South was the only region where starts were stable (the Northeast plunged 27%). Similarly, building permits and homes authorized but not started were steady in the South. Overall, building permits held at 2.0 million units, showing no sign of a continuation of the drop in starts. New and existing home sales rose 3% in September, ending two months of slower sales, while mortgage rates hit a 6-month low in October.
After narrowing in July from its record shortfall in June, the trade deficit widened sharply to $54 billion in August. Exports have stalled since May, after rising 17% in the previous year. Meanwhile, imports rose steadily, largely due to higher oil prices. The average price of a barrel of imported crude was $36 in August. The US imports about 4 billion barrels of oil a year, so every $1 hike in oil prices costs about $4 billion annually. Imports of services were boosted by a one-time payment for Olympic broadcasting rights.
Despite the rising price of oil, inflation moderated to an annual rate of 2.5% in September from its peak of 3.3% in May. While crude oil prices have risen over the summer, consumers are paying less for gasoline than in the spring when a shortage of refining capacity sent margins soaring. Since then, a return to more normal margins for refiners has offset the rising cost of crude.
The recovery of industrial production slowed over the summer, with no net gain in the last two months. Manufacturing output slipped 0.3% in September, partly due to slower auto assemblies. Hurricanes curtailed oil and gas operations in the Gulf of Mexico. New orders in September suggest that demand remained firm, with increases in two of the last three months leaving orders 12% ahead of a year ago. Nondefense capital goods and metals led the way, while defense and autos lagged with growth of only 5%.
Output slowed in the euro-zone in August as industrial production fell 0.6% following a slight gain the month before. Every sector retrenched, led by a large drop in consumer goods. New orders were also down, as declines in textiles, machinery and transport equipment more than offset gains in chemicals and metal products. The external trade surplus narrowed sharply as imports expanded while exports were flat. Consumers reined in spending after a spurt early in the summer. Real retail sales fell 1.3% from July. Inflation eased to 2.1% in September and the unemployment rate was steady at 9%.
Growth eased in Germany as consumer spending failed to offset slowing exports, which had led growth earlier in the year. Industrial production remained weak, off 0.9% in August, while new orders dropped 1.6%. Exports and imports both stalled in the month. Retail sales were down 2.4% from a year-earlier level as consumers remained hesitant in the face of ongoing collective bargaining. The unemployment rate inched up to 9.8% while inflation remained in check at 1.9%.
French consumer spending rebounded in August, boosting imports while exports continued to fall. Retail sales rose for the third straight month, as consumer confidence picked up. Consumers have led growth since early 2003, the reverse of Germany’s reliance on exports. Output fell almost 2%, however, after being flat the month before, although new orders recovered from two consecutive declines. Inflation eased to 2.2% in September.
Economic growth slowed in the UK in the third quarter to 0.4%, just half its pace in the first two quarters of 2004. Industrial production fell 1.1% while services boosted growth, buoyed by continued strength in consumer spending and a booming housing market. Inflation eased to 1.1% in September, one of the lowest rates in the euro-zone.
Japanese industrial production fell in September leading to a 0.8% drop in output for the third quarter. The trade surplus contracted as exports slowed due to declining demand in both the US and China, while surging oil prices boosted imports 2.5%. Japan is wholly dependent on oil imports but companies have been unable to pass on higher fuel costs due to fragile domestic demand. Consumer prices continued to fall in August, down 0.2% from a year earlier.
China’s economy grew 2.3% in the third quarter on a year-over-year basis, down slightly from its pace earlier in the year. Business investment rose 28%, down from a 43% gain in the first quarter. Rising commodity prices have boosted import costs and inflation, which hit an annual rate of 5.2% in September. Singapore’s economy contracted 2.3% in the third quarter, after double-digit growth rates for four straight quarters, as exports slowed.
* Based on data available on November 5; all data references are in current dollars unless otherwise stated.