Section 1: Current economic conditions

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Overview ¹ 

Real GDP fell 1.4% in the fourth quarter, its largest decline since early in 1991. Exports continued to contract rapidly, driven by losses in the auto sector. Business investment posted its largest quarterly drop since 1982 as lower commodity prices severely squeezed profits. The first reduction of inventory levels since 2004 also subtracted from quarterly growth.

The rapid contraction of demand between November and January slowed noticeably in February and March. The drop in real GDP eased to a 0.2% average in these two months from 0.8% in the previous three months. This was followed by a levelling off of employment in April and May, after steep losses over the winter.

Household spending led the firming of demand as spring approached. Existing home sales rose for a third straight month in April, up almost a third from their January low. Retail sales posted a net increase over the first three months of the year, led by a partial rebound in auto sales. The upturn in credit-sensitive sectors such as housing and autos was symptomatic of an improvement in both consumer confidence and credit availability. Still, prices continued to fall for homes and autos, a reflection of the fragility of the recovery of demand.

Exports pulled out of their rapid decline that started in November with a small net gain in February and March. Again, these increases were tentative, as manufacturing employment fell sharply in May when a major auto manufacturer went bankrupt. The recovery of auto and housing demand was less pronounced in the US than in Canada.

Financial markets in the spring pointed to a gradual strengthening of the global economy. The Toronto stock market posted a third straight monthly advance in May. A rebound in commodity prices fuelled the increase, notably for oil and metals. The Canadian dollar rose sharply for the second straight month, reflecting both higher commodity prices and a drop in the US dollar against most major currencies.

Labour markets

Employment fell by 0.2% in May, offsetting April’s 0.2% gain. This followed a drop of 1.6% in the first three months of the year. April’s increase in self-employment was reversed in May, while there was a shift in payroll gains from the private to the public sector. A second straight increase in the labour force, after five months of little change, raised the unemployment rate to 8.4%.

Manufacturing employment dropped by 3.2%, almost all of which was in Ontario, notably the auto industry. With little offset from other industries, Ontario’s unemployment rate jumped from 8.7% to a 15-year high of 9.4%. At 61.0%, Ontario’s employment rate was nearly a full point below the national rate of 61.8%. Before 2008, Ontario’s employment rate had never fallen below the national rate.

Employment rose slightly in Alberta and BC for the second straight month, after leading the nation in cuts in the previous three months. Construction led the turnaround: after tumbling over 10% in the first three months of the year in response to lower housing starts, construction jobs rebounded in both provinces in April and May.

Employment also rose for a second straight month in Quebec. Manufacturing employment was steady in the spring, and was down only 1.2% from last May, easily the smallest drop in Canada. Services held on to most of April’s advance, notably in education.

Leading indicators

The rate of decline of the smoothed version of the leading indicator slowed from 1.5% in March to 1.1% in April. Both financial components increased in the month, as the money supply expanded steadily while the stock market turned up. The unsmoothed version of the index rose 0.5%, after seven straight declines. Five of the ten components rose in the unsmoothed version.

The indicators of household demand continued to descend. The drop in the housing index eased to 1.2%, the smallest decline in seven months as existing home sales firmed. Sales of durable goods continued to retrench. A levelling off of services employment originated more in personal than business services.

The manufacturing indicators fell less rapidly than the month before. New orders slowed to a 7.3% decrease. Lower inventories helped moderate the rate of decline in the ratio of shipments to inventories. Export demand benefited from a slower contraction of the US economy. The leading indicator for the US eased to a 0.3% drop, its smallest loss in six months.

Output

Monthly GDP in March fell 0.3% in volume, after a 0.1% dip in February. These drops represent a marked easing from the peak rate of decline of 1.0% in December. Output continued to fall in mining and manufacturing as well as in related goods-handling industries in the service sector. Most other services expanded in March.

Mining replaced manufacturing and construction as the weakest sector in the economy, with production down 2.5%. All of the decline originated in the energy sector, as both metals and non-metal mining slowly lifted output. Resource-based manufacturers led the drop in factory output, notably primary metals and forestry products. Capital goods also retrenched across the board in response to the large decline in business investment. Elsewhere, a further recovery in auto assemblies was offset by cuts in auto parts and aerospace. With goods output down 1.1%, related services such as transportation and wholesale trade contracted nearly 1%.

Non-goods handling services expanded for a third straight month. The gain was led by household spending on real estate and retail goods. An increased volume of loans, as well as stronger demand in stock markets, boosted financial services. Public services also continued to expand. Demand for business services remained weak, while travel-related services turned down.

Household demand

Personal incomes and spending fell at about the same pace, leaving the savings rate little changed at 4.7% in the first quarter (in contrast with the steady climb in the US from 1.4% in September to 5.7% in April). Still, households were able to cut net borrowing further by buying fewer homes over the winter. By spring, spending on homes and autos began to recover.

Retail sales rose 0.7% in volume in March, their second increase in three months as sales recovered about half of their 5.4% drop in November and December. Auto sales again led the way, rising 5% to cap their first quarterly increase in a year. Preliminary data for April show auto sales holding steady.

Excluding autos, demand was unchanged in March, and was slower than autos to recover in the first quarter. Spending on non-automotive durable goods was particularly weak, with furniture and appliances unresponsive to the upturn in house sales. Clothing sales also gave back some of their gains in the previous two months.

Existing home sales rose 11% in April, their third straight increase. The recovery was led by Canada’s three largest cities. The sharp drop in home prices late in 2008 also has been partly reversed so far in 2009.

The improvement in the housing market was less pronounced for new homes than for existing houses. New house sales retreated in April after a tentative upturn in March, and were 15% below last autumn’s high. The large stock of unsold homes kept the downward pressure on new house prices in March. Builders responded by cutting housing starts again in April, to a 13-year low of 117,400 units (at annual rates). So far this year, starts of both single and multiple units were averaging about half their level of a year earlier.

Merchandise trade

Canada ran a second straight large current account deficit, which expanded to $9.1 billion in the first quarter. The surplus in goods fell below $1 billion for the first time in three decades. The current account deficit accompanied large net inflows of funds into Canada, especially non-resident purchases of government debt.

Exports dipped 1.8% in March after a 5% gain in February ended three months of steep decline. Imports dropped 4.4% after a slight rebound in February, led by lower energy imports. The monthly trade surplus rose to $1.1 billion, the highest since October 2008. The monthly trade balance had fallen briefly into a deficit in December and January.

Industrial goods held on to all their gains in February, due to further gains for metal exports. Copper exports were particularly strong, an encouraging sign for global industrial demand, while gold benefited from rising prices.

Exports of autos and machinery and equipment gave back some of their February gains. Aircraft accounted for all of the see-saw movement in machinery and equipment, which otherwise were flat between January and March. Auto exports fell 3% after a 19% rebound in February, as steady gains for cars accompanied renewed losses for trucks and auto parts.

While export demand for some sectors showed signs of bottoming out, forestry and energy exports hit new lows. Energy was checked by a sharp drop in natural gas prices, which offset a second straight increase in oil exports. Forestry exports remained weak across the board.

Energy imports fell 18% to their lowest level since October 2004, mostly due to falling prices. Non-energy imports declined 3%, led by a drop in machinery and equipment and industrial goods. Auto imports rose for a second straight month, a reflection of the recovery of auto sales in Canada.

Prices

The implicit price index for GDP fell almost 2% in the first quarter after a 3% decrease in the fourth, the fastest declines on record. Over half of the drops reflected lower energy prices, which led declines of 4% and 7% in export prices over the two quarters. Price increases for spenders in Canada slowed to just 0.2% in the first quarter.

The CPI fell 0.3% between March and April, the sixth decline in the last seven months as energy prices continued to retreat. This lowered the year-over-year inflation rate to 0.4%. The source of lower energy prices shifted from gasoline to natural gas. Food prices were the only major source of upward pressure on prices.

The stability of prices over the past year was not just the result of lower energy costs offsetting higher food prices. Five of the eight major components of the CPI contributed 0.1 percentage point or less to the growth of the overall index (these components include clothing; shelter; alcohol and tobacco; health and personal care; and recreation and education).

Commodity prices rallied in May, after levelling off over the previous two months, with hikes for energy, food and industrial materials. Energy led the increase, as the price of a barrel of oil jumped $15 to US$65. Metals again drove the advance in industrial goods, notably copper and nickel. Wheat led an increase in agricultural prices.

Financial markets

The sectoral pattern of net lending continued to shift rapidly in the first quarter. Household borrowing fell sharply for the second straight quarter, driven by steep cuts in outlays for homes and durable goods. Firms were able to stabilize their net lending after a sharp drop in the fourth quarter, by slashing spending faster than profits fell—the latter recording another drop of over 20%. Government borrowing doubled to $47 billion (at annual rates), while Canada posted a second straight trade deficit.

The Canadian dollar surged 8 cents against the US greenback in May, its largest monthly gain since 1950, after a 4 cent increase in April. Some of the advance reflected a weakening of the US dollar against most major currencies: since early April, the loonie has risen twice as fast against the US dollar as the overall CERI index.

Increasing confidence in financial markets was evident in a number of measures. Investment in non-money market funds rose in April for the first time since last September. Corporate bond issues in April rose by over $1 billion for a second straight month, while net new equity issues continued to thrive as the stock market recovered. The Toronto stock market rose 11% in May, after consecutive 7% gains in March and April. While metals rose further, energy also posted a double-digit gain in May. Still, the market remains one-third below last year’s record highs.

Regional economies

The rapid contraction of BC’s economy began to slow in the spring. Housing starts posted their first gain of the year in April, although the 1% increase kept the level of starts below 10,000 units. Manufacturing shipments also rose 1% after five straight declines. Non-durable sales firmed (notably for paper), while lumber and non-metallic minerals fell further. Retail sales declined 1.4% in March, capping a weak first quarter.

The prairie economy continued to contract across the board. Housing starts fell for the sixth consecutive month. Retail sales dropped for the fifth time in the last six months, and the 4.5% decline in the first quarter was the sharpest in Canada and the only region where the drop in sales accelerated between the fourth and first quarters. Manufacturing sales fell 3% in March, as a levelling off for petroleum was offset by continued rapid declines for Alberta’s machinery industry (down a third since November, after demand from the energy sector dried up).

Manufacturing sales in Quebec posted the largest retreat in Canada, falling 6% in March. This was the fifth straight decline, as the drop in shipments by manufacturers in Quebec reached 20% since their high last autumn, equalling the national average. The decrease was concentrated in primary metals and aerospace, both of which have receded over 40% from last year’s peak. Retail sales remained the most buoyant in Canada, up 2.0% in March, and Quebec was the only province to post a year-over-year gain.

Retail sales in Ontario rose 0.6% in March, their third straight increase after a 10% drop late in 2008. Housing starts fell by nearly half in April, after a burst of new condo construction in March. Manufacturing sales gave back part of February’s increase. While autos levelled off, their steep decline in January drove Ontario’s 15% drop in first-quarter shipments, the largest in Canada.

International economies

In the United States, household demand continued to stabilize in the spring, while the drop in industrial activity slowed markedly. Retail sales were little changed in April, and remained above their December lows. Auto sales declined in April, when Chrysler declared bankruptcy. The housing market continued to stabilize. The trend of existing home sales has been steady so far this year, although some of these sales were foreclosures at distressed prices. Starts of single-family homes were unchanged between January and April, although total starts fell as multiple units retreated after more than doubling in February. Looking forward, consumer confidence continued to recover in May, returning to its level before September’s financial meltdown.

Industrial production fell 0.5% in April, after five months of declines averaging 1.7%. Output of consumer goods stabilized, buoyed by a small gain in auto assemblies. The cuts in both business equipment and construction materials were less than a quarter of their recent rates of decline. New orders rose 2% in April for the second time in three months, with increases in every industry except computers. Corporate profits posted their first quarterly increase in almost two years.

The sharp drop in trade flows at the turn of the year also slowed markedly in February and March. Exports levelled off over these two months, after three straight monthly drops of 6%. Imports fell 1%, as higher oil prices braked seven months of declines that saw imports fall by one-third. Despite a slight increase in March, the quarterly trade deficit fell by one-third from the fourth quarter and was half its high in the third quarter of 2008.

Euro-zone real GDP contracted a record 2.5% in the first quarter. Industrial production continued to fall in every major sector in March, but the rate of decline in new orders began to ease considerably, particularly for capital goods which had recorded double-digit drops last fall. Consumers remained hesitant to spend despite low inflation as unemployment steadily mounted in the wake of layoffs. In an effort to ease credit, the central bank cut rates again in April.

German GDP shrank 3.8% in the first quarter, its largest fall since reunification in 1990. Sharp drops in exports and business investment led the decline, while consumer spending picked up slightly, aided by government incentives that boosted new car sales. In March, both exports and industrial production began to recover, and new orders posted their first gain in 6 months. Business confidence strengthened and prices rose, pushing the annual inflation rate to 0.8% in April.

In France, real GDP declined 1.2% in the first quarter following a 1.5% drop in the fourth. GDP was revised to a 0.2% fall for the third quarter (from a 0.1% gain), resulting in GDP now having contracted for the past four quarters. Industrial production remained weak in March, while new orders reversed their gain from the month before. Consumer spending brightened as retailers deepened their discounts, lowering inflation to an annual rate of 0.1% in April.

Britain’s economy continued to contract, falling 1.9% in the first quarter for its third successive drop. The ongoing decline in industrial production eased slightly in March, while consumer spending rose again, after a one-month drop in February broke a 4-month string of increases. Trade remained hamstrung by weak external demand.

Real GDP fell 2.4% in Italy, its fourth straight quarterly decline. Industrial production continued to contract in March and new orders gave up their slight gain from the month before. Consumer spending remained dormant, as it has since last summer.

The Japanese economy decreased by 4% in the first quarter, its largest fall since records began 54 years ago. Weak domestic demand led the decline, as business investment plunged and consumer spending continued to slide. However, industrial production expanded in March, its first increase in six months, as inventories began to run down and exports stabilized. Consumer confidence climbed to a 10-month high in April. Boosted by steep discounting, retail sales rose in April for their first monthly gain since last August.

Eastern European economies continued to be hampered by the lack of demand from Western nations. GDP fell 11.2% in both Slovakia and Latvia in the first quarter, while Hungary’s economy fell 2.3% for its fourth straight decline.

India’s economy grew steadily by 5.8% year-over-year in the first quarter, led by strength in services and agriculture.

GDP in Mexico fell 5.9% in the first quarter, led by a sharp decline in auto production and falling exports to the US which accounts for about a fifth of the economy. The recent flu outbreak is expected to dampen tourism, which is the country’s third largest source of foreign income and employs 2 million people.

Taiwan’s economy contracted by a record 10.2% year-over-year, led by declining exports, business investment and consumer spending. To increase consumption, the government in January issued shopping vouchers valued at $2.61 billion (US). In April, a $4.5 billion (US) economic stimulus spending plan was approved for 2009 as part of a four-year $15 billion (US) package.

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