11-010-XIB
Canadian Economic Observer
November 2006

Summary table - key indicators

Overview*

There were increasing signs that the recent slowdown in the economy was at least temporarily coming to an end. Both GDP and employment posted back-to-back gains after several months of little change. Meanwhile, commodity prices rebounded in October, with metals setting new highs while energy firmed. This helped the stock market rally for the third time in four months, recovering most of its losses in the spring. The upturn in commodity and stock market prices did not prevent the exchange rate from easing slightly, providing some relief to the beleaguered manufacturing industry.

Wholesale and retail trade led the upturn in output over the summer. Some of these gains may reflect a delay of purchases until after the cut in the GST, which would explain part of the weakness in demand in the spring and the subsequent rebound after July 1. Other sectors, notably mining, also turned up sharply over the summer.

The housing market in Canada remained at a plateau near its recent highs. This was in marked contrast with the US, where a fourth straight drop in housing was the major reason behind the slowdown in GDP growth in the third quarter. Still, consumer spending seemed unaffected by the housing slump, while lower gasoline prices boosted consumer confidence in September and October. The slide in housing showed signs of easing in September.

Shortages persisted in western Canada, according to the October business conditions survey. One-third of manufacturers in Alberta reported shortages of skilled labour, versus about 20% in the other three western provinces, and about half that said unskilled labour was in short supply. But the real shift was in the Atlantic provinces where nearly a quarter reported shortages of skilled labour and over 10% experienced a shortfall of unskilled labour. These were more than double the number a year earlier in the case of PEI and Nova Scotia, and quadruple in Newfoundland. This reflects the outright drop in the population of the Atlantic provinces in the past year, as people moved to western Canada. Compounding this loss, labour force participation rates fell in three of the four Atlantic provinces (Newfoundland was the exception).

Labour markets

Employment grew 0.3% in October, after a 0.1% gain in September snapped three months of no growth. Full-time jobs continued to supplant part-time ones, especially in Alberta and BC where employers faced acute shortages. Employment growth was concentrated in youths.

By industry, natural resources and construction returned to their place at the head of the pack, as they had been in most of 2005. The bulk of these gains were in Alberta. Finance also posted strong growth, especially in Ontario where it offset renewed losses in manufacturing. Business services and education bolstered growth in most regions.

Alberta’s unemployment rate tumbled to another record low of 3.0%, with the rate for adult men down to 1.8%. Two-thirds of Alberta’s gain of 109,000 jobs in the last year occurred in Calgary, as its economic centre of gravity shifted south from the oilsands in the north which led growth last year. One reason for the pick-up in Alberta’s growth this year was an acceleration in its population. October’s increase of 12,000 adults was greater than Ontario’s, and lifted year-over-year growth to 4%. This contributed to growth by filling labour shortages and by boosting demand for housing and other consumer products.

Alberta’s neighbours continued to post solid job growth, with Saskatchewan up 4.5% and BC 3.0% from October 2005. Saskatchewan was led by mining (including uranium and potash as well as oil and gas) and construction. BC also relied on these two industries, as well as business services and education.

Job growth in Quebec continued to outstrip Ontario, despite more severe losses in construction and resources (especially forestry). Instead, growth shifted to business services, which expanded 8% in the past year compared with declines in Ontario. The public sector also grew faster in Quebec, notably education. Ontario’s unemployment rate remained above the national average for the third time in four months.

Leading indicators 

The composite leading index rose 0.4% in September, after an upward-revised gain of 0.3% in August. The composite index has risen steadily by an average of 0.4% a month over the last two years, with the exception of a brief spurt up to 0.6% this spring. The upturn from March to May was led by the housing and stock markets, which have since slumped to become in September the weakest components of the index. In their place, consumer spending has improved while manufacturing has stabilized.

Consumer demand continued to strengthen, led by sales of durable goods. Auto purchases increased sharply over the summer, spurred by lower prices. Spending and other durable goods also rose steadily, despite a softening of housing demand. Growth in services employment was led by the personal sector, replacing business services which had driven growth earlier this year. 

For the first time in 2006, none of the manufacturing components fell. New orders turned up, led by demand for capital goods. The average workweek eked out an increase. The ratio of shipments to stocks was unchanged, as steeper cuts to inventories accompanied a slower rate of decline for shipments.

Output

Monthly GDP grew 0.3% in volume in August, after a 0.2% gain in July. These increases exceeded the cumulative gains in the previous four months. Mining output turned up, wholesale and retail trade grew rapidly, while tourism-related industries rose strongly. These outweighed a softening in housing, continued stagnation in manufacturing and the winding down of Census operations (which alone shaved 0.1% points off overall growth).

The mining sector expanded across the board in response to record prices for oil and metals. Both oil and gas and metal mines grew for a second straight month, after a series of technical problems curtailed output in the first half of the year. Non-metallic minerals also increased, led by export demand for potash.

Wholesale and retail trade also rose strongly for a second straight month, following the cut in the GST rate. A wide range of travel-related industries advanced, helped by a global Aids conference in Toronto. The increased movement of people and goods across the country boosted transportation demand, especially for air and water transport.

Construction slowed for a fourth straight month, as small declines for home-building offset increases in non-residential construction. Weak housing demand in North America spilled over into lower output in related manufacturing industries such as lumber, non-metallic minerals and even steel. Lower auto exports also led to fewer auto assemblies for the second month in a row. However, overall factory output was buttressed by gains for aerospace and resource industries such as smelting and refining (including gasoline) and chemicals.

Household Demand

Retail sales volume rose 1.2% in August, its second straight strong gain after a brief slowdown in the spring. As in July, the increase was broadly based. Autos posted the largest increase, fuelled by discounts from firms anxious to clear out inventories. All of this summer’s increase in sales was concentrated in trucks and SUVs, as passenger car sales were flat. Some of the gain was at the expense of lower demand in September, although sales remained well ahead of last year.

Falling prices helped boost demand for non-automotive goods. TVs and home electronics posted their fifteenth straight increase, a testament to the popularity of the big screen and high definition formats. Furniture and appliance demand rebounded from a rare slip in July. Clothing purchases remained sluggish over the summer despite price discounts in August.

The housing market has remained steady so far in 2006, after three years of rapid growth. Housing starts edged down 3% in September to an annual rate of 211,300 units. However, all of the drop was in multiple units. Ground-breaking on single-family dwellings rose for a third straight month, led by increases in Alberta. Still, house construction in Alberta is not close to keeping up with demand. As a result, new home prices in August soared 60% in the past year in Calgary. Edmonton’s housing shortage also worsened, and prices jumped 38%. Existing home sales dipped in September, but so far this year have remained 4% ahead of 2005 while price increases were steady at 12% in August.

Merchandise trade

Exports eked out a small gain in August, extending their string of consecutive monthly increases to four. Since March, export earnings have risen 4%, offsetting about half their losses at the start of the year. Most of the recovery in exports has been driven by a rebound in prices. This reflects record prices for metals and the levelling-off of the exchange rate. Meanwhile, a drop in imports helped send the monthly trade surplus above $4 billion.

Exports inched up, as increased shipments overseas overcame a 0.8% drop in exports to the US. Exports overseas have risen 7.5% in the past year, reflecting stronger growth in Europe and Japan and the greater orientation of their demand to food and industrial products, where prices have been strong. Conversely, exports to the US are down 2%, reflecting weakness in energy, lumber and autos.

Agricultural goods led the monthly increase in exports. Wheat jumped nearly 20%, and prices subsequently hit a 10-year high in October. Industrial goods continued to strengthen. Metal ores rose 12%, led by nickel and iron ore (Canada’s largest ore export). Nickel exports doubled over the summer, possibly in anticipation of the strike at Voisey Bay in September. Fertilizer exports also shot up in response to an agreement on prices between producers and China.

Most other exports retreated. Energy exports were dampened by lower oil prices. Slumping housing demand in the US shaved 5% off lumber exports, pulling down the forestry sector. Lower aircraft exports crimped machinery and equipment, after three consecutive increases. Other manufactured goods were mixed, with consumer goods down while autos rallied.

Imports dipped 0.6% in August, but remain a healthy 7% ahead of last year’s pace. The monthly drop was largely confined to autos, which had risen sharply in the previous two months in anticipation of the summer rebound in sales that followed the cut in the GST and in list prices. Machinery and equipment continued to lead growth, notably aircraft and excavating machinery. Metals drove the increase in imports of industrial goods, coal and oil fuelled the hike for energy, while tobacco and coffee led the increase in agriculture.

Prices

Consumer prices fell 0.3% between August and September, matching their largest monthly drop in the last five years, mostly due to a sharp drop in gasoline prices. With gasoline prices falling this September, unlike their sharp post-Katrina spike last September, the annual rate of inflation tumbled from 2.1% in August to 0.7% in September.

The 17% drop in gasoline prices was their largest monthly decline on record. There also were small price drops for clothing and recreation equipment.

Housing remained the major source of upward pressure on prices. Mostly, this reflects higher prices in August. As well, mortgage interest costs were up 3.3% in the past year. Auto prices rose as incentives to buy last year’s models expired.

Commodity prices in October recovered some of the ground lost in September. Crude oil prices levelled off at just under $60 (US) a barrel, after retreating from their peak of $78 early in August. Natural gas prices also firmed. Wheat hit a 10-year high after Australia reported drought will slash its crop. Metals prices set new records, led by lead, nickel and zinc.

Prices for manufactured goods fell 1.6% in September. However, all of the drop reflected lower gasoline prices: elsewhere, prices edged up 0.1% as the downward pressure from the rising exchange rate continued to dissipate. Overall, prices rose for 7 of 21 commodities, while 7 fell and 7 were unchanged.

Financial markets

The stock market resumed its rally, rising 5% in October after a small setback the month before. The increase lifted prices in every sector. Metals recovered their lustre with a 16% increase, in tune with higher prices on commodity markets. Energy also rebounded from back-to-back declines.

The strong stock market encouraged an upturn in new equity issues in September, after a lull over the summer. And an increasing number of firms converted to trust units, which shift taxes from corporations to investors.

Interest rates and the exchange rate were little changed. The dollar drifted lower, remaining near 90 cents (US) for a sixth straight month.

Regional economies

All regions shared about equally in the growth of retail sales in July and August. This supports the notion that the increase was driven by factors that affected all regions, notably the GST cut, rather than jobs or incomes which had large regional differences.

Still, growth in Alberta continued to be head and shoulders above the other provinces. Retail sales in August were 18% ahead of August 2005, the largest annual gain ever posted by any province. Most of the increase represented a higher volume of demand, as prices for retail goods in Alberta are rising at about the Canada average. Overall consumer prices are up more in Alberta (3.7% versus the national average of 0.7%) because of soaring house prices.

Growth in BC remained stellar by any standard other than Alberta’s. BC was the only major province where housing starts improved in the third quarter, including September’s 2% gain. It also led the country with a 5% hike in manufacturing shipments, more than offsetting July’s drop. While lumber continued to retrench (leaving wood shipments down over 20% so far this year), this was offset by increases for capital goods and pulp and paper.

Ontario posted a second straight drop in housing starts in September, leading to consecutive quarterly declines. However, while its housing sector struggled, manufacturing continued to rebound. Shipments edged up for a third straight month in August, recovering nearly half of their 5% drop in the first five months of 2006. The upturn since May included a slight majority of industries, in contrast with the widespread losses earlier this year. Growth was led by food, transportation equipment and capital goods. Still, manufacturers continued to shed workers to boost productivity.

House construction in Quebec also continued to slow. Together with a dip in non-residential building, this dampened shipments of capital goods. Wood and paper shipments also fell again in August, bringing their losses so far this year to 15% each. Still, the overall value of manufacturing shipments has risen almost 3% to date in 2006, driven by gains of over $250 million in both primary metals and petroleum refining. Higher prices and substantial investments in aluminum and gasoline refining have doubled the share of these two industries in Quebec manufacturing from 13% in 1999 to 26% in August. This offset a decline of 11 points in the share of the forestry and clothing-related sectors.

International economies

Growth in the United States slowed to 0.4% in the third quarter, its smallest advance so far this year. Most of the easing originated in a sharp drop in housing, its fourth straight for a total loss of 8%.

However, so far the contraction in housing has not noticeably affected other sectors of the economy. Consumer spending grew steadily, helped by a 0.9% gain in real disposable income. Nor did consumer spirits appear dampened by weakness in housing: consumer confidence in October hit its highest level in over a year, driven by lower gasoline prices. Business investment rebounded from a lacklustre second quarter.

Housing starts rebounded 6% in September after three straight declines. New home sales rose 5% after an upturn in August. This helped reduce the backlog of unsold homes. Lower prices may have helped sales, although much of the recent drop in prices reflects changes in the composition of sales (such as a shift in sales from the Northeast to the South, where prices are lower, and a trend away from large homes). Homebuilder confidence and mortgage applications also began to level off in the autumn.

While the housing market showed signs of stabilizing in the fall, most other sectors slumped. Retail sales slipped 0.4% in value, largely because of lower gasoline prices. Demand for housing-related items (such as building materials and furniture and appliances) remained robust. Clothing demand jumped 3% from August, to leap past building materials as the fastest-growing sector. Auto sales slowed for a second straight month.

Industrial production dipped 0.6% in September, mostly because of a sharp drop in utilities output as the record summer heat abated. Manufacturing output fell 0.3%, its first drop since May. Consumer goods led the retreat, notably auto assemblies. Business equipment posted a rare decline, but still managed a fourth straight quarter of double-digit growth (at annual rates). New orders point to strong underlying demand, with aircraft and capital goods leading a sharp gain in September.

The trade deficit for goods and services ballooned to a record $69.9 billion in August. While export growth exceeded 2% for the third time in four months, imports grew faster. Although the oil import bill continued to rise (before prices fell in September), most of the increase reflected higher imports of consumer and investment goods.

Economic growth rebounded strongly in the euro-zone in August, with industrial production expanding 1.8% after a pause the month before. Led by durable consumer goods, every sector posted robust gains except energy. New orders also accelerated, up 3.7%, almost double their previous gain, boosted by transport equipment. External trade fell into a deficit as the rising cost of energy imports outweighed rising surpluses for chemicals, machinery and autos. Consumer spending picked up for the fourth straight month, while inflation continued to ease in September to 1.7% as gas prices relaxed. The unemployment rate inched back up to 7.9%.

The German economy powered forward in August with industrial output rising 2%, its fastest pace in almost three years. Orders also accelerated buoyed by strong business investment. With stronger business confidence, companies began to hire staff after five years of downsizing. Consumer spending remained stagnant, however, while inflation fell to an annual rate of 1% in September.

French industrial production rebounded in August, although its 0.8% gain was just over half of its drop the month before. New orders retreated, continuing their see-saw pattern. Consumers suddenly reined-in spending in September, with outlay reversing sharp gains over the summer. Hardest hit were textiles and leather goods as warm autumn weather dampened demand for winter clothing. Inflation eased to 1.5% in September, while the unemployment rate fell to 8.8% in August.

Industrial production in Britain was essentially flat for the third straight month in August. Consumers resumed spending after a one-month hiatus, further fuelling import demand. With exports dampened by the strength of the pound sterling, Britain continues to have the largest trade deficit in the euro-zone.

Business confidence in Japan continued to improve in September, fuelled by brisk trade and recovering consumer spending. Exports were buoyed by overseas demand for autos and electronics, particularly in the US and China. Deflation continued to abate with consumer prices rising 0.3% in August after a 0.2% gain in July.

China’s economy expanded by 10.4% in the third quarter of the year, down slightly from its 11.3% pace in the second as government credit controls reined in fixed asset investment. Exports, however, continued to surge with the trade surplus rising by 70% year-over-year and consumer spending picked up. Inflation remained in check at an annual rate of 1.5% in September.

Note

* Based on data available on November 3; all data references are in current dollars unless otherwise stated.