11-010-XIB
Canadian Economic Observer
December 2005

Summary Table - Key Indicators

Overview*

The economy accelerated in the second half of the year, with third-quarter real GDP posting its best increase of the year. The improvement should continue, according to faster growth in the leading indicator and strong job gains in October and November.

Unlike the housing-driven growth in 2004, all sectors of final demand participated in the third-quarter advance. Business investment accelerated further, while exports rebounded. Net exports and business investment contributed over half of growth in the third quarter, after only small gains last year. Conversely, the contribution of household demand (consumer spending and housing) fell from over 80% in 2004 to less than half. Household spending was mixed. New house construction fell again, but the market for existing homes remained strong. Retail sales were split between slumping auto demand and strong sales of other goods. Housing and autos remained slow in October.

Business investment’s 3% quarterly growth boosted the year-over-year advance to 10%, the first double-digit gain in volume since early in 1998. Machinery and equipment continued to rise steadily. The biggest turnaround has been in structures, which swung from declines as recently as late last year to annual growth of 9%. Both engineering and building have seen a sharp improvement.

Export earnings posted their second-largest quarterly gain so far this decade. The energy price boom was reinforced by agricultural goods (partly due to the re-opening of higher shipments of the US market to our cattle) and autos.

The upturn in nominal GDP was even faster than real output, doubling to 2.8% between the second and third quarters due to the surge in energy prices for exports. Meanwhile, the rising dollar dampened import prices. This boosted command-based GDP (which adjusts GDP for the terms of trade) by 2.8%, one of its largest increases ever. Command GDP measures what Canadians can buy, not what they can produce.

The pick-up in growth pushed unemployment to a 30-year low, while further straining capacity in many industries. But so far this has not been reflected in markedly higher prices outside of energy. The gap between energy and non-energy prices in the CPI approached a record high in October, reflecting the low impact of high energy prices on most other prices.

Corporate profits rose 5%, their fourth straight quarterly increase. Most of these gains were driven by higher oil and gas and metal prices. Manufacturing profits were squeezed for the fourth time in five quarters, with a total drop of 15%, notably wood and paper products.

While profits have risen, this has not been at the expense of labour income. It accelerated for a fifth straight quarter to 1.7%, keeping well ahead of consumer price increases of 0.6% despite the spike in energy prices. Alberta led the nation in labour income growth, up 9% in the past year, as a 16% gain in its mining and oil and gas industry overcame the faster gains in jobs in BC.

Labour Markets

Employment rose 0.2% in November after a 0.4% advance in October, the best back-to-back gains since May 2003. Full-time jobs continued to displace part-time positions. With the labour force falling slightly, the unemployment rate dropped from 6.6% to 6.4%, the lowest on record back to 1976.

Business services, education and construction continued to lead industry growth, each up about 7% over the past year. Together, they accounted for over three-quarters of all job growth since November 2004. The 4-month slide in factory jobs was partly reversed. Public sector jobs except education continued to trend down.

British Columbia again spearheaded the advance, extending its lead over the rest of Canada. In the past year, BC has added 4.3% more jobs, compared with 1.1% elsewhere. Manufacturing led November’s gain in BC, while construction and recreation continued to grow rapidly. BC’s unemployment rate edged below 5% for the first time on record.

Employment was little changed in the other provinces. The booming oilsands region of Athabasca saw the share of its population holding a job move to a Canada-high of 73.3%. And despite having the highest participation rate (75.2%), its unemployment rate was the lowest at 2.5% thanks to an 8% increase in jobs in the past year. These gains were partly offset by declines in some other parts of Alberta, reflecting the fierce competition in some industries for employees. Factories in central Canada continued to shed jobs, but construction and education remained strong.

Leading indicators

The leading indicator posted a solid 0.5% gain in October, up from a 0.4% advance in September. Recent months have seen a shift in growth from household spending to investment demand. Housing was the only one of the ten components to decline, compared with two in September.

New orders for durable goods saw the largest increase since January, driven by Western Canada. Primary metals, metal fabricating, machinery and transportation equipment all hit their highs for the year in response to the investment boom in the oilpatch. These orders have begun to show up in shipments, which turned up after trending down over the previous five months. This left the ratio of shipments to inventories unchanged for only the second time this year. The average workweek held on to its recent gains. The investment surge also continued to boost employment in business services.

Household demand softened after leading growth most of the year. The slowdown was concentrated in central and eastern Canada, areas hard-hit by the jump in gasoline prices. As a result, vehicle sales tumbled in these provinces, reining in the overall growth of durable goods sales from a 3-year high. The housing index registered its first drop since March, led by lower housing starts in Ontario. However, existing home sales continued to trend up, especially in the Western provinces. Calgary posted the biggest annual increase (21%) among the 25 largest metropolitan areas. Furniture and appliance sales edged up another 0.3%.

The US leading indicator eked out only a 0.1%, partly slowed by the effects of Hurricane Katrina. Excluding the interest rate spread, the US index has essentially been little changed all this year. The contrast between the stability of the US index and the upturn of the Canadian leading index was reflected in the relative performance of the two economies: US growth has been little changed all year, while it has accelerated in Canada.

Output

Monthly GDP was unchanged in September, after five solid straight increases averaging 0.4%. Most of the slowdown was concentrated in autos, where lower vehicle sales hampered retailing and fewer assemblies curtailed manufacturing. House construction also stalled, before a sharp drop in starts in October.

The resource sector and trade-related services remained pillars of growth. Energy output rose another 0.6%, led by exploration and development. Forestry output rose for the seventh consecutive month (despite weak lumber and paper demand), driven by the need to cut trees infested by the pine beetle in the Rockies. Farmers reaped a good crop in most areas. Continued warm weather kept utility demand high. Rising international trade and travel were reflected in solid gains for both wholesalers and transportation.

Non-residential building remained a beehive of activity. Travel-related services had a good month. Demand fell for ICT products and public services. Consumer demand was also slow for recreation services and movies.

Household demand

Household spending slowed in the third quarter. Most of the deceleration originated in housing. Lower mortgage demand led to the first drop in household borrowing in over a year.

The volume of retail sales fell 1.6% in September, slightly more than the drop in August and completing the weakest quarter for growth (+ 0.1%) since late 2003. Unlike August’s widespread loss, however, the September retreat was confined to autos.

Vehicles sales fell 8%, with the less fuel-efficient truck category again posting double-digit losses as gas prices soared. The slide in auto sales was partly reversed in October.

Sales of other durable goods rose steadily, led by the fourth straight gain for furniture and appliances and home electronics. Elsewhere, demand recovered most of its losses in August. Clothing posted the largest increase, despite higher prices. Gasoline consumption was curbed by record high prices.

Housing starts in October fell 10%, giving back all of the ground gained in September. Starts of new single-family homes dropped 16% below last October’s pace. The cutback in starts has kept the backlog of unsold homes from rising. The market for existing homes also slowed for a second straight month, although it remains well ahead of last year’s pace.

Merchandise trade

The current account surplus nearly doubled to $9.3 billion, its third highest quarterly level ever, driven by our burgeoning surplus for energy products. There was also a slight drop in the travel deficit, partly as the number of overseas visitors continued to grow rapidly.

Fuelled by soaring energy prices, exports rose at twice the pace of imports in September, sending the merchandise trade surplus to $7 billion, its highest since June 2004. The increase for exports was the seventh straight, with growth accelerating over this period as energy prices accelerated.

Two-thirds of the 2.8% increase in exports reflected higher prices, notably a 10% hike for energy. Metals prices also rose, notably for iron ore. Prices for manufactured goods and forestry products fell as the exchange rate rose.

At $9.0 billion, energy exports easily surpassed machinery and equipment ($7.8 billion) and autos ($7.6 billion) as our largest export. As recently as January, energy exports stood at just $5.5 billion. Energy exports moved into first place in August, when they were revised up from $7.2 to $7.5 billion. The estimates for energy are often revised, partly because they are shipped mostly by pipeline and therefore do not have the US import documents that are used to estimate most of our exports.

Natural gas led the export increase, up 27%. This solidified Canada’s position as the world’s third largest producer and second largest exporter of natural gas.

Higher oil prices also boosted our import bill. While Canada runs a large surplus in energy products, several large refineries in Atlantic Canada and Quebec find it cheaper to import crude oil from overseas than from Western Canada. As well, Ontario imports some coal and electricity to feed its power stations. Energy imports may grow with the construction of two liquefied natural gas terminals in the Maritimes, with conventional natural gas output slowly declining as the Sable Island field matures.

Non-energy imports were boosted by a 3% increase for consumer goods, with retailers loading up after the strike ended at the Vancouver part. The mining boom raised imports of excavating machinery almost 10%. The volume of auto imports was steady, with increases for vehicles offsetting fewer parts needed in domestic assemblies.

Prices

The GDP price index jumped 1.9% in the third quarter, led by a 5% gain for export prices. Prices for domestic spenders rose steadily at 1%, with higher energy prices offset by lower import costs and slowing house prices.

The CPI fell 0.3% between September and October, lowering the annual rate of inflation from 3.4% to 2.6%, the same rate as in August. Most of the see-saw movement in the last two months originated in gasoline prices, which jumped 11% in September (when hurricanes caused shortages of refinery capacity) and then fell 9% in October. Gasoline prices are still 17% higher than last October. Along with higher prices for other energy products (notably natural gas), energy accounted for almost half of the annual increase in the CPI.

The gap between the CPI and the CPI excluding energy rose to 1.8 points in October (3.4% versus 1.6%), the second highest ever. Surges in energy prices have been less likely to be reflected in non-energy prices over time. The gap between the two has grown: during 1974, the CPI excluding energy rose at 90% the rate of the overall CPI (10.4% versus 11.5%). This fell to 85% in 1981, 80% in 1990 and to 47% in 2000 and in 2005. This gap shows that the 2-year old surge in energy prices has not reverberated in the rest of the economy.

Non-energy prices were stable in October. Import-intensive components fell after the dollar rose, notably furniture and appliances despite strong demand. Clothing, computers and home electronics also posted notable declines. Autos were an exception, as manufacturers cut back on financial incentives. Services prices were driven by the second largest increase in property taxes since 1997.

Commodity prices eased for a second straight month, largely because oil prices retreated from their late-summer spike of $70 a barrel to around $50. Oil production in the Gulf of Mexico has returned to about 60% of its 1.5 million barrels per day norm after hurricanes dampened output. However, non-energy prices rose to new highs for the year. Metals led the way. Gold hit an 18-year high of over $500, while copper set a new record, and is up one-third this year. Zinc rose to an 15-year high, while aluminum set a 10-year peak. Food was led higher by orange juice, after groves in Florida were damaged by hurricanes.

Financial markets

Firms continued to post huge net savings in the third quarter, as income rose faster than they could spend it (especially with import prices and inventories falling). Meanwhile, Canadians invested $17 billion abroad (mostly in bonds), the most in almost five years. Foreign direct investment and foreign purchases in Canada’s stock markets were stimulated by interest in our energy sector.

The stock market resumed its upward course in November, hitting a 5-year high after a brief dip in October. The October dip accompanied the largest issue of new equity so far this year. Investors continued to shift money out of money market funds in search of higher returns.

Mining led the increase in stock values reflecting record prices for several products. Energy also bounced back from a double-digit loss the month before. Financial and real estate stocks improved as interest rates were stable. The Canadian dollar retreated below 85 cents (US) for the first time in three months.

Regional economy

Household demand in Ontario continued to lag behind the rest of the country. Retail sales posted a second straight decline of more than 1%. Housing starts fell to their lowest level since 1998. Shipments were down again, led by the auto industry. Prospects nevertheless remain good in the automotive sector. Layoffs were announced by North American automakers, but demand was firmer for Japanese models, which now account for more than 40% of the province’s auto output, compared with 25% five years ago. Shipments were also sharply higher in the petrochemical industry. Investment remained a source of strength, as the annual growth in permits was slightly above the national average.

In Quebec, manufacturing was sustained by the resource sector. Refineries were responsible for the bulk of the 1.6% jump in shipments, due to soaring prices and a surge in exports caused by the shortages following Hurricane Katrina. After ranking eighth in the value of industry shipments in 2000 and sixth in 2004, refineries climbed to second place in September, not far behind the food industry. Close to 30% of Canada’s refining is in Quebec. Rising gasoline prices continued to dampen auto sales again, while housing starts were off their peak for the year. Lumber shipments increased for reconstruction in the US.

Retail sales in the West finally succumbed to the upswing in gasoline prices, but the decline in demand was less pronounced and less widespread than in other parts of the country. Since January, British Columbia and the Prairies have posted much higher retail sales growth than Ontario and Quebec, keeping the national average at 3.2%, close to last year’s pace. Migration to the West has increased, but much less than it did in the early 1980s. Shipments surged another 2% on the Prairies. They held onto the 4.5% gain reported in British Columbia in August, as a result of strong advances for investment goods.

International economies

Industrial production in the United States rebounded 0.9% after hurricanes caused a 1.5% drop in September. All of the increase originated in manufacturing, with business equipment up 7% after the end of a strike at Boeing aircraft. Auto assemblies fell again, while neither mining (especially oil and gas) nor utilities recovered from their hurricane-related losses the month before.

Retail sales were essentially flat for a second straight month in September and October. Sharply lower auto sales offset a 1% gain in non-auto demand. The latter was buoyed by increases for clothing and building materials.

Helped by lower gas and clothing prices, inflation for consumers eased to 4.3% in the year to October, down from its average of 4.9% so far this year.

The housing boom also lost some of its edge, with starts off 6%. Work fell in all regions except the South, which was rebuilding after hurricanes. The slowdown in construction was reflected in a lower backlog of units authorized but not yet started.

The US trade deficit widened to a record $66 billion in September, shattering the previous record of $60 billion set in February. The increase was due about equally to lower exports and higher imports. Export losses affected capital goods the most, partly due to the Boeing strike. Crude oil accounted for less than a third of the growth of imports, partly because the volume of oil imports fell as prices jumped. A modest drop in the cost of imported oil in October was offset by a 20% jump in natural gas prices.

Read GDP grew by 0.6% in the euro-zone in the third quarter, double the previous quarter. Still, year-over-year growth remained below 2%, as it has since 2000. Industrial production contracted in September, led by a drop in consumer goods, while both energy and capital goods pulled out of a two-month slump. New orders rose 1.1% on the strength of electronics and transport equipment. Textile orders fell 4.3%, the largest of four declines in the last five months. The external trade surplus narrowed as the energy deficit widened, offsetting a rise for machinery and vehicles. Consumers continued to spend, with retail sales volumes in September gaining 0.9% after a 1.4% hike in August. Annual inflation eased slightly to 2.5% in October, while the unemployment rate dropped to 8.4%.

The French economy accelerated in the third quarter, with real GDP growing 0.7% after only 0.1% in the second. Growth was led by business investment and the strongest gain in exports in three years. Industrial production advanced again in September, on the heels of a large rebound the month before. Consumer spending continued to recover and the unemployment rate was stable at 9.4%.

Third-quarter GDP in Germany rose 0.6% and was up 1.4% year-over-year. Exports remained upbeat, sparking higher industrial production and new orders in September. Retail sales volume fell for the third straight month, while inflation eased to 2.4% in October.

Japan’s economy expanded by 0.4% in the third quarter, its fourth straight gain. Business investment and consumer spending were upbeat, while the trade surplus shrank, partly due to a higher bill for oil imports. Consumer confidence continued to rise as the unemployment rate fell to 4.2% in September.

Note

* Based on data available on December 2; all data references are in current dollars unless otherwise stated.