Section 1: Current economic conditions

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Overview ¹ 

The economy was contracting towards the end of 2008. Output slipped in October, followed by a drop in jobs in November and December as the slump in all major industrialized nations intensified. Credit flows were much less impaired in Canada than in the US.

Much of the slack in Canada’s economic activity originated in housing and autos. Existing house sales tumbled by 25% in October and November, while housing starts in November hit a 7-year low, mostly due to declines in western Canada. While retail sales held steady in October, new vehicle sales fell sharply in November and December. Meanwhile, manufacturing output was hampered by a third straight drop in auto assemblies, with even steeper cuts being implemented at the turn of the year.

The slump in auto assemblies already was reflected in lower volumes of cross-border trade flows in October. The slump in industrial demand around the globe also saw commodity prices continue to tumble through year-end. However, the Canadian dollar stabilized in November and December after its record drop in October, while the stock market remained above the lows it touched in mid-November.

Household net worth in Canada shrank 3.2% in the third quarter from its peak in the second, mostly due to the falling the stock market. Household balance sheets remain much stronger in Canada than in the US, where net worth has fallen nearly 12% in the past year due to losses in both the housing and stock markets (Canada fell 1% over the same period). And while US household credit growth came to a halt in the third quarter, it grew 2.3% in Canada. Business and consumer credit in Canada continued to expand early in the fourth quarter, although mortgage demand fell due to the slump in home sales.

Labour markets

Employment fell 0.2% in December, half the rate of November’s decline when the layoff of election workers amplified the retreat. These were the first consecutive job losses since May 2003, and the largest since 1991. All of the drop originated in full-time positions, especially among youths. With the labour force rebounding slightly, the unemployment rate rose to 6.6%, the most since January 2006.

Construction bore the brunt of job losses in December, after manufacturing led the November drop. The downturn in construction follows two months of sharply lower home sales, which helped send housing starts tumbling in November. The weakness in construction jobs was evident in all the major regions.

Employment outside of construction rose slightly. This reflected a small rebound in factory and service jobs. Transportation recouped almost all of its November losses, while the public sector grew slowly. The trade industry shed workers in both months, perhaps in anticipation of slower Christmas sales for retailers.

Alberta posted the largest drop in jobs and increase in unemployment. The sudden downturn was led by professional services, as several large energy projects were scrapped. Lower energy prices also led to fewer jobs in natural resources. BC was hamstrung by a third straight drop in construction jobs, after housing starts plunged by nearly two-thirds since last winter. While construction hampered both Quebec and Ontario, the latter was buoyed by a slight recovery in manufacturing. However, extensive shutdowns in the auto industry loom in January.

Leading Indicators

The composite leading index fell by 0.7% in November, its third straight retreat and the largest since January 1991. The decline was dominated by a large drop in the stock market and in the housing index. The other eight components remain about evenly-balanced between increases and decreases.

Stock market prices continued to slump in November, the culmination of their worst three-month loss on record back to 1952. Metals suffered the largest declines as global demand tumbled.

The housing index turned down by 5.9%. This reflected both a sudden retreat in existing home sales in the autumn and a drop in housing starts in November. This was the largest decline for the housing index since a 5.4% drop in 1995.

Consumer spending remained supportive of growth. Sales of both furniture and appliances and other durable goods continued to advance in October. However, preliminary data point to lower auto sales in November, at the same time as employment turned down.

The manufacturing indicators remained steady, despite the deepening slump in the US economy. New orders were buoyed by gains in aerospace. Firms were quick to cut production as sales slowed, preventing a decrease in the ratio of shipments to inventories in the last two months. Firms also trimmed the workweek in factories, and laid off workers in November.

The money supply posted the largest increase of any component. This is the most obvious difference between the current slowdown and previous episodes in 2001, 1990, and 1981, when the money supply stalled or contracted. The leading indicator for the United States also showed large gains in the components related to monetary policy. This reflects the substantial stimulus coming from central banks in North America, along with most major nations around the world, in response to the squeeze in credit availability.

Output

Real GDP dipped 0.1% in October, reversing its gain in September. Output fell in manufacturing and construction, which reverberated in goods-handling services industries such as wholesaling and shipping.

Autos led the retreat in manufacturing with a 9% drop in assemblies, its largest in a string of three straight declines. Just in the past year, auto assemblies have fallen by one-third. The level of auto output fell below $10 billion (at annual rates) for the first time since 1998, while overall manufacturing output totalled $176 billion (total GDP is $1.2 trillion). The drop in auto output was reflected in feeder industries such as rubber and plastic and iron and steel. Output in most other manufacturing industries was little changed, with the notable exception of more losses in paper and lumber.

Construction activity fell by 0.3%, its third straight decline. The drop in residential building intensified in October. However, non-residential building turned up, especially for hospitals and schools, after six consecutive declines.

Output rebounded in October, led by energy. Oil and gas extraction recovered from a dip in September, while drilling activity has not yet been affected by the sharp drop in oil prices. The precipitous fall in metals prices accompanied a 5% cut in metal mine output in the past two months.

Most services industries continued to expand slowly. Heavy trading (mostly selling) in financial markets raised their volume of output. Most other business services grew marginally. Consumer demand for services remained buoyant, apart from real estate. Government services received a temporary boost from hiring by Elections Canada.

Household demand

Retail sales volume edged up 0.1% in October, after a 0.8% gain in September. Autos led the increases, with demand for used vehicles stronger than for new vehicles. However, new auto sales fell sharply in November.

Gasoline consumption responded immediately to lower prices, rising 2% in September and October. Gasoline demand has see-sawed all year: it fell 1.7% last winter, more due to poor driving conditions than high gas prices. This was reflected in a 1.1% rebound in demand in March. Gasoline sales then fell 2.7% over the summer in response to record-setting prices. With its upturn in the autumn, the volume of demand is only 0.7% below its 2007 average. The quick recovery of driving in Canada is in marked contrast with the US, where lower gas prices have not sparked a turnaround in demand.

Sales of non-automotive durable goods remained robust. While slower house sales hampered demand for furniture and appliances, TVs and computers remained popular. Deep price discounts for clothing did not boost demand, which had been strong in the first three quarters of the year.

Existing home sales fell 12% in November on the heels of a 15% drop in October. These declines mark a pronounced acceleration of the drop of sales that began in mid-2007. Significant drops in demand were evident in all major cities across the nation. National sales were 42% below a year-earlier, led by losses of 70% in Vancouver and 50% in Toronto.

The slump in house sales accompanied a steepening slide in housing starts. Starts fell 19% in November to 172,000 units (at annual rates), their lowest level in seven years. The largest decline was for multiple units, which is somewhat surprising in light of the drop in the vacancy rate for apartments to 2.2% in October (from 2.6% in October 2007). This may reflect the increased difficulty for condo projects to raise credit. Starts of single-family homes fell for a third straight month to a 10-year low.

Merchandise trade

The value of both exports and imports in October was inflated by the record monthly drop in Canada’s exchange rate. The volume of both exports and imports fell, a better measure of the underlying trend of demand both here and abroad.

Nominal exports rose 2.5%, as receipts rose in all sectors except autos. Agricultural exports led the way as a good harvest replenished the grain distribution system. Machinery and equipment was buttressed by gains for industrial machinery. Oil and gas exports continued to fall as prices slump. The drop in auto exports was the third straight, and left exports below $5 billion, equalling an 11-year low. Auto exports peaked at $9.3 billion in January 2000.

Imports rose 4% in value, as a sharp jump in prices outweighed a nearly 4% decrease in volume. Prices were boosted by the 11% drop in the average value of the Canada/US exchange rate. As well, energy imports rose 22% in response to disruptions at several domestic refineries. So far, imports of consumer and investment goods have not fallen in response to slowing domestic demand.

Prices

Consumer prices fell 0.3% in December, after a 0.6% drop in November. These monthly declines slowed the year-over-year rate of inflation to 2.0%. Most of the slowdown reflected the rapid decrease in the cost of filling up at the pump.

Vehicle prices posted the largest monthly hike, followed by the cost of food. Food and auto prices also have a large import content, and these increases follow the record drop in the value of the Canadian dollar in October. The price of services (most of which are non-tradable) was little changed.

Commodity prices continued to decline in December, led by the falling cost of crude oil. Oil dipped below $40 (US) a barrel, over a $100 below its mid-summer peak. The drop was more orderly for most other commodities. Natural gas fell below $6 per mbtu, while copper hit a multi-year low.

Financial markets

The Bank of Canada expanded its monthly balance sheet by almost $12 billion or 20% in November. The increase reflected term purchase and resale agreements. As a result, the year-over-year growth of the monetary base reached a record 49%, exceeding its previous peaks set in the late 1930s and early 1940s.

The Bank of Canada also lowered the Bank Rate 75 basis points to 1.75%, its lowest since the 1950’s. Interest rates fell across the spectrum of maturity. The Canadian dollar hovered above US80 cents for a second straight month.

Residential mortgages at banks fell over 4% in November, after an abrupt drop in October. These declines reflect the sharp slide in existing home sales in these two months. The origin appears to be lower demand by households, as banks continued to expand personal loans. Short-term business credit also increased steadily in November. This helped offset the drying up of stock and bond issues in October and November, and kept overall business credit growing nearly 1% in both months.

The stock market began to stabilize at year-end, closing 3% below November, its smallest loss in four months. Mining stocks turned up, after bearing the harshest losses over the previous three months. Industrials also firmed, while consumer staples recouped all of their small declines in the autumn. However, these gains were outweighed by double-digit declines in energy and financial stocks. Overall, the TSX rose over 10% from its low early in December and 18% from its intra-day low in November.

Regional economies

Ontario’s economy weakened across the board. Housing starts in November fell by nearly a third: after declines in the previous two months, this left starts near their low for the year. Retail sales fell 0.5% in October, erasing all of their gain in the third quarter. Manufacturing sales shrank for the third straight month, led by the contraction of its auto industry.

Housing starts fell sharply in western Canada. In BC, a drop of over 50% in two months left starts at 18,000 units (at annual rates), their lowest level since January 2003 and almost two-thirds below their peak set last winter. Retail sales fell 2%, after posting the only decline in Canada in the third quarter. On the prairies, the drop in housing starts was not as pronounced as in BC, but still left starts at a new low for the year. Retail sales remained positive, partly a reflection of the underlying strength of employment and incomes before November.

Quebec was the only area where housing starts remained steady after the financial crisis intensified in September. Its manufacturing sector also continued to grow in September and October, led by gains in aerospace. Retail sales in October gave back their 2% advance in September.

International economies

In the United States, the housing slump worsened in November. Starts tumbled 19% to their lowest level on record back to 1959. Despite the cuts to new building, the overhang of unsold homes continued to grow, and the drop in house prices deteriorated to 12% from a year ago. However, after mortgage rates hit 5% late in December for only the second time in two decades, mortgage applications tripled.

Retail sales in November fell 1.8%, and this fifth straight decline left them 7.4% below November 2007. Unlike October’s broad-based drop, however, November’s weakness was largely confined to autos. Lower gas prices gave a boost to consumer confidence in December. Energy prices accounted for all of the record 1.7% drop in the monthly CPI in November, lowering the year-over-year rate of inflation to 1.0% (it peaked at 5.5% in July).

Industrial production fell 0.6% in November, as manufacturers were set to post their largest back-to-back quarterly declines since 1982. Autos led the retreat, while the settlement of the Boeing strike gave a boost to capital goods. A sharp drop in aircraft shipments and lower oil prices dampened both exports and imports in October.

Long-term capital flows into the US fell to a trickle in October. A flight to safety amid the deepening global crisis was reflected in the purchase of $35 billion of Treasury bills. This was offset by a sell-off of corporate bonds and equities.

The euro-zone economy continued to contract in October with industrial production down 1.2%, on the heels of a 1.8% drop in September. Every sector retrenched, with the exception of a slight rise in non-durable consumer goods. New orders fell for the fifth time in six months, as demand for machinery and equipment plummeted. Tight credit and mounting job losses dampened both consumer confidence and spending. The external trade surplus narrowed in October as exports to the US and Japan weakened further. Inflation slowed to an annual rate of 2.1% in November, due to falling oil prices.

German industrial production fell for the second straight month in October, while new orders also retrenched. Both domestic and external demand have been hamstrung by credit restrictions and rising unemployment. Consumers reined in spending in October, the fourth decline in five months, despite a rapid fall in prices. Inflation fell to 1.4% in November, the lowest in the euro-zone.

In France, industrial output dropped 2.7% in October, its fifth decline in six months. New orders plummeted 11% after a brief respite the month before. Consumers remained optimistic, however, and spending picked up slightly in September.

The UK economy remained in a downward spiral. Industrial production fell 1.6% in October, its eight straight decline. Weak external demand and falling oil prices further dampened exports. Construction recovered slightly in October as credit restrictions eased. Consumer spending picked up slightly as heavy price discounting continued. Inflation of 4.1% in November remained one of the highest rates in the euro-zone due to the high cost of food and housing.

Japan’s economy contracted further in November. Industrial production plunged 8.1% from October, its biggest monthly fall on record, led by slowing export demand from the US and Europe, particularly for autos. Domestic demand also stagnated as firms cut back on capital investment and consumers tightened their purse strings. Auto sales tumbled 22% in December, leaving sales for all of 2008 at a 34-year low. The unemployment rate climbed to 3.9% in November from 3.7% the previous month, while inflation slowed to 1% from 1.9% in October.

China’s economy continued to slow, as industrial production in November rose 5.4%, down from 8.2% the month before. Industrial goods led the slowdown, particularly for steel, as both domestic and external capital investment eased. Exports fell 2.2% in November from a year earlier, the first decline since 2001 and a sharp reversal from their 19% gain in October. Imports followed suit, down 17.9% from last November, after a 15.6% rise in October. The consumer price index fell from 8.7% to 2.4% in just ten months. Auto sales dropped 10% in November from a year earlier, their third decline of the year. House sales also plunged, dampening prices and construction. Despite the slump in autos and housing, retail sales in November were up 21% from a year-earlier.

Russia’s industrial production fell 10.8% in November, its biggest drop in 10 years. Metal and energy producers slashed output as worldwide demand eased, while the financial and service sectors began cutting jobs as consumer spending waned.

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