Section 1: Current economic conditions

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Overview ¹ 

The rapid contraction of demand starting in November appeared to be slowing in February and March, while employment turned up in April. Exports in February pulled out of a three-month tailspin, which had seen earnings fall by 25%. Auto and housing sales picked up towards the end of the first quarter. Housing starts also rebounded in March, although this was confined to multiple units in central Canada. Manufacturing output levelled off in February, led by autos which continued to recover slowly in March. Auto output in the US did not turn up until March. Still, industrial production overall continued to retrench in the US as a firming of sales initially was used to reduce inventories at a record pace in the first quarter.

A partial recovery also was evident in a number of financial markets that were at the centre of the turmoil that began in mid-September. The stock market rebounded in March and April (especially metals), driven by higher prices for commodities. The commercial paper market for non-financial corporations in the first quarter recovered one-third of its sharp drop in the last four months of 2008. Stock and bond issues also rose in the first quarter.

There are numerous measures that the current downturn was more severe in the US than in Canada. Real GDP in the fourth quarter fell twice as fast as in the US as Canada, and continued at a 1.6% rate in the first. The US has shed 4.2% of its jobs by cutting them every month since December 2007. In Canada, employment has fallen 1.9% since November 2008. Industrial production in the US has declined 15.7% since November 2007, the sharpest drop since World War II. In Canada, industrial output has fallen 9.6% since November 2007.

Also of note is that the drop in industrial production in North America has been less severe than overseas G7 nations. March output in Japan has tumbled by 34% from a year earlier, as the slump in export markets coincided with a sharp appreciation of its exchange rate. February output in the euro-zone was cut 18%, led by Germany which also saw its export demand shrink rapidly, especially for autos and capital goods. China leads all nations with an 8% increase in the year to March.

Labour markets

Employment increased 0.2% in April, its first advance in seven months. The monthly rate of job loss had moderated from a peak of 0.8% in January to 0.4% in March. After rapid increases in the first quarter, the unemployment rate was unchanged at 8.0%. After growing through most of 2008, the labour force peaked in October, after which it fell slightly through March in response to fewer job opportunities, especially in Alberta and BC. Labour force growth resumed in April.

All of the employment increase was in the self-employed, as payrolls were unchanged. Services accounted for most of the increase in jobs, notably business and information and recreation services. Jobs fell slightly in goods-handling services, but much slower than in the first quarter. Job losses also slowed markedly in construction and natural resources, especially in western Canada.

Alberta and BC led the employment gain. Services and construction buoyed Alberta, while manufacturing and construction lifted BC. These two provinces shed the most workers in the first quarter. Quebec continued to perform better than the other provinces. A 0.6% gain in April left employment almost level with a year earlier. Business services, health care and manufacturing continued to expand. Ontario’s employment levelled off after large declines in the first quarter, notably manufacturing.

Leading indicators

The smoothed composite leading index fell 1.3% in March after a 1.4% drop in February. The contraction in the manufacturing sector intensified as widespread cutbacks were implemented in the auto industry early in the new year. This was offset by a marked slowdown in the fall of the housing and stock markets.

All three manufacturing indicators fell in unison. The sharpest decline was for new orders, down a record 10.3% due to falling demand for autos. Falling shipments also lowered the ratio of shipments to inventories.

The financial indicators continued to improve. The money supply remained the only component to expand. The trend of the stock market fell 2.3%, after five straight drops averaging nearly 8% a month.

The rate of decline of the housing index also moderated to 4.3% in March from 7.7% in February. Both housing starts and existing home sales saw improvements after several months of retreat. Sales of other durable goods also posted a much lower rate of decline of 0.6%, as the rapid drop in auto sales late in 2008 began to level off early in the new year.

Output

After three months of rapid decline, real GDP was little changed (-0.1%) in February. The largest turnaround was in manufacturing, which edged up after three large drops. This helped stabilize goods-handling services, which also had fallen sharply in the previous three months. Construction remained the largest drag on output.

The levelling off of factory output largely originated in autos, which recovered about a fifth of their losses posted over the previous seven months (which totalled 58%). The rate of decline in capital goods industries also slowed markedly. With the flow of manufactured goods no longer shrinking rapidly, transportation and wholesale trade activity stabilized.

Other goods-producing industries continued to trim output. Construction posted a 2% drop, the most of any major industry group, largely due to lower home-building. Mining continued to decline slowly, as further gains for oil and gas were offset by large cuts for metal mines and potash.

Most services saw demand stabilize in February. Consumer services mostly posted small gains, while house sales rose for the first time in five months. Business services were little changed, after several months of decline, while financial activity also levelled off. Public services were flat.

Household demand

Retail sales volume in February held on to most of its 2% gain in January, edging down only 0.4%. This represents a levelling off of demand after rapid declines totalling nearly 6% in November and December. The stabilizing of demand was most evident in auto sales, which rebounded by 10% in January (when prices fell sharply) and sustained most of this gain into February. Unit auto sales improved again in March, and have recouped half of the 18% drop posted in November and December.

Non-automotive spending dipped 0.2% in February after a 0.5% rebound in January. Clothing added to its increase in January. However, outlays for furniture and appliances turned down, while spending on computers and electronic goods had a weak start to the year. Higher food prices dampened food purchases.

The housing market also revived somewhat in late winter. Existing home sales in March posted a second straight increase (although, like auto sales, they remained about 14% below their levels of a year earlier). The sales upturn was led by the three largest cities. Meanwhile, housing starts rose 14%, their first increase since last August, after which starts fell by a third. The advance was concentrated in multiple units in central Canada. Ground-breaking on single-family homes remained subdued, a reflection of continued slow new home sales and the high number of vacant units.

Merchandise trade

After three months of rapid decline, both exports and imports rebounded in February. Exports recovered 5% after shrinking by over one-fifth between October and January. With imports up only 1%, this resulted in a small trade surplus after two months of deficits.

All sectors expanded their exports. The largest contribution came from machinery and equipment, notably aircraft. Auto products posted the fastest gain, up 20%, but this followed a drop of nearly one-half in the previous year (which lowered their share of exports below 10%). Metals accounted for all of the increase for industrial goods, while oil buttressed energy exports against a sharp decline for natural gas.

Import growth was largely driven by machinery and equipment and autos. The 4% gain for machinery and equipment followed a 10% drop over the previous two months, while a similar increase for autos followed much larger declines. Parts led the recovery in autos, as higher vehicle sales in Canada were used to reduce inventories. These increases were largely offset by lower crude oil imports.

Prices

Consumer prices fell 0.3% between February and March, reversing most of their 0.4% increase the month before. This lowered the year-over-year inflation rate to 1.2%.

Autos led the drop in prices, as firms cut prices sharply for the second time in three months to boost demand. Home heating costs also declined.

Food remained the major source of upward pressure on prices. Their 7.9% hike in the past year was led by double-digit gains for fruit and vegetables, whose large import content was affected by the sharp drop of the dollar late in 2008.

Commodity prices retreated in April after a small recovery in March. Energy led the drop, notably natural gas which sank below $4 per mbtu due to weak industrial demand and a warm winter in the US. Metals and food continued to recover slowly, led by copper which has risen by a third since the new year.

Industrial prices rose 0.3% in March after a 0.5% increase in February. These represent a slight recovery after a 6% drop over the previous five months. Prices were helped by the rally in primary metals and the lower exchange rate.

Financial markets

The Toronto stock market rose another 7% in April after an initial upturn of 7% in March. While the increase was broad based, metals again led the way, advancing by over one-third in both March and April.

The Bank Rate was lowered by another quarter point to just 0.25% in April. Despite record low interest rates, investors continued to invest more in money market funds (up 11% between October 2008 and March 2009) and less in non-money market funds.

Household credit grew 0.6% in February, with consumer credit growing faster than mortgages. Conversely, short-term business credit in March fell for the third straight month, as firms switched to the bond and stock markets to raise funds. Commercial paper issued by non-financial corporations rose by $1.6 billion in the first three months of 2009, recouping some of its $4.4 billion drop in the last four months of 2008.

Regional economies

Household demand firmed in central Canada, with housing starts and retail sales posting gains in both Ontario and Quebec. Conversely, the slump in housing starts continued across western Canada, while retail sales turned down anew.

Ontario led the rebound in housing starts with a 34% gain in March. Condos led the upturn, which left overall starts about one-third below their peak last August. Retail sales rose 1% on top of a 4% increase in January, recouping about half of their losses late in 2008. Manufacturing shipments rose 7% after six straight declines, buoyed by a rebound for autos.

Growth in Quebec was slower than Ontario. Housing starts rose 23%, but are closer to their 2008 highs than in the other region. Retail sales grew 1.1% after levelling off in January. Manufacturing sales were hampered by a dip in aerospace shipments.

Housing starts fell below 10,000 units (at annual rates) in both Alberta and BC, leaving them 80% below their peak in 2008. Retail sales on the prairies and BC fell 1% after a slight recovery in January. Manufacturing sales in BC fell 2.5%, their fourth straight declines, reflecting steady losses for forestry products. Manufacturing sales in Alberta and BC have fallen 18% since last September, matching Ontario for the largest drop in Canada.

International economies

In the United States, real GDP fell by 1.6% in the first quarter, matching its fourth-quarter decrease. Consumer spending turned up after two straight declines. However, housing continued to contract rapidly. More importantly, business investment fell nearly 10%, its largest quarterly decrease on record back to 1947, while inventories also posted their largest decline ever. The sharp drop in domestic spending deflated imports faster than exports.

Housing appeared to be treading bottom by the end of the first quarter. New and existing home sales both dipped in March, but remained above their January lows. The February gains were inflated by unseasonably warm weather (most evident in a 62% jump in starts of multiple units). The downward pressure on home prices also moderated slightly. Mortgage applications increased markedly after rates fell below 5%.

Retail sales dipped 1% in March, after consecutive gains to start the new year. While unit auto sales edged up, their value fell as discounting proliferated. Spending at electronic stores slumped, after bankruptcy sales had boosted demand at the start of 2009.

Industrial production fell another 1.5%, lowering its year-over-year drop to a post-war record of 12.8%. While consumer goods benefited from a slight recovery in auto assemblies, construction and capital goods continued to contract rapidly. The capacity utilization rate fell below 70% for the first time on record back to 1966. However, the ratio of inventories to shipments of durable goods stopped rising in March, and new orders for capital goods posted a second straight increase.

The sharp 24% contraction in exports since last August ended with a 1.6% gain in February. Consumer goods, autos and food led the increase. However, imports continued to decline rapidly, off 5% to bring their drop since last July to 34%. The trade deficit fell sharply for a seventh straight month.

The euro-zone economy contracted further in February, as industrial production fell 2.3%, its sixth consecutive monthly decline. Output shrank in every sector, led by durable consumer goods. Consumer demand remained weak as firms continued to cut jobs, pushing the unemployment rate to 8.9% in March. To boost demand for autos, many governments began offering incentives to trade in older vehicles for new, cleaner ones. Inflation fell to 0.6% in March, just half of its 1.2% pace the month before, as the cost of both autos and fuel eased.

German industrial production fell 3.2% in February and was down 21% from a year-earlier level, dampened by weak export demand. New orders continued to contract, falling 39% from last year. Despite one of the lowest inflation rates in Europe at 0.4% in March, consumer demand remained stagnant amid rising job losses. The unemployment rate rose to 7.6% in March.

Industrial production continued to retrench in France in February, albeit at a slower pace. Output was down 0.5%, its sixth straight decline. New orders rebounded to break a five-month slump, as demand for capital goods strengthened. Exports continued to languish, pushing the trade deficit to the second highest in the euro-zone. Despite government incentives to boost auto sales, retail sales slumped in February, after an upturn to start the year. Inflation eased to 0.7% in March, while the jobless rate hit 8.8%.

The British economy continued to contract, with real GDP down 1.9% in the first quarter. Lower worldwide oil prices dampened exports despite a lower exchange rate. Domestic demand reflected falling consumer and business confidence. Retail sales volumes fell 1.7% in February after steep discounting boosted demand to start the year. To spur demand and lending, the Bank of England cut rates again in March.

Japan recorded its first annual trade deficit in almost three decades in the year to March, boosted by the sharp rise in commodity prices earlier in the year. After 10 consecutive monthly declines, exports rose 2.2% in March, giving a slight boost to business confidence. However, some manufacturers have started to shift production overseas to save on costs. Partly as a result, the unemployment rate hit a three-year high of 4.4% in February.

GDP increased 6.1% in China in the year ending in the first quarter of 2009, boosted by household demand. Consumer demand rebounded, aided by low mortgage rates and tax cuts on autos which spurred sales by 5% in March to a record 1.11 million units.

Singapore’s economy contracted 11.5% in the first quarter from a year ago as exports posted their 11th straight monthly decline. Falling demand, particularly for electronics, pharmaceuticals and chemical, led to sharp cutbacks in manufacturing.

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