Section 1: Current economic conditions

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Overview ¹ 

The economy continued its upturn, with output posting a second straight gain while employment held on to its November increase. Household demand continued its year-long advance, reinforced in recent months by a turnaround in exports.

Existing home sales continued their recovery that began in February, which has lifted sales to a record high in November. Retail sales also rose steadily in October, to recoup all of its 5.0% drop late in 2008. Household debt posted its largest increase of the year, as the growth of consumer spending outpaced the gains in jobs and incomes.

Exports reinforced the recovery of household spending with their fourth increase in five months in October. All of the 10% advance since May reflected higher volume, notably for autos, metals and energy products. Import volumes also have risen 10% since the spring, reflecting a broad-based increase in domestic demand.

The year-long rally in the stock market and commodity prices continued in December. The increase in resource prices was led by natural gas, a laggard for most of the year, and metals. Resource stocks have led the stock market rally since March. Higher energy prices also boosted consumer prices in October and November, after four declines on a year-over-year basis.

Labour markets

Employment was unchanged in December, after increases in three of the previous four months. There was no change in the mix of full-time and part-time jobs. With the labour force also unchanged, the unemployment rate was stable at 8.5%, slightly below its high reached during the summer.

Services added slightly to November’s large advance. Professional and business services reinforced their upturn, after lagging the recovery in most other services in the autumn. Health care also continued to expand. However, transportation fell for a second consecutive month while finance and real estate ceded some of the ground gained in November. Goods were hampered by a retreat in manufacturing and resources, which offset an increase in construction.

Regionally, employment continued to grow in western Canada while it retreated in central Canada. Alberta led the increase in the west, notably services as the resource sector continued to shrink. Unemployment in Alberta fell below 7% for the first time in six months. The drop in central Canada originated in Ontario, although jobs remained above their low set in May. Goods-handling services and finance led the decline, as manufacturing held on to its gain in November. Services buoyed jobs in Quebec against losses in manufacturing.

Leading indicators

The composite leading index rose by 1.3%, equalling the largest of its six straight increases. The advance was led by household demand, while the recovery of demand in the United States gave a boost to manufacturing in Canada. Growth was widespread, as for the first time in over two years none of the 10 components posted a decline.

Household spending strengthened across the board. The housing index grew by 2.5%, its seventh straight gain. Existing home sales showed renewed vigor after slowing over the summer, while housing starts continued to recover. Consumer demand for furniture and appliances and other durable goods both rose faster than the month before.

The US leading indicator advanced 0.7%, its sixth straight increase. The recovery in housing and financial markets began to seep into the labour market, with a steady drop in initial claims for unemployment and a levelling off of jobs in November.

Manufacturing in Canada continued to improve in response to the gradual upturn in export demand. New orders rose for the second time in four months. The ratio of shipments to inventories increased for the fourth consecutive month, with an upturn in shipments reinforcing a steady decline in inventories.

Services employment increased 0.3%, its first advance in over a year. Business and personal services turned up in unison, symptomatic of the broad-based advance of employment in November.

Output

Real GDP rose 0.2% in October after a 0.4% advance in September, and is 0.7% above its low in May. In the spring, the economy began to level off as services grew slowly, construction stabilized while mining and manufacturing continued to contract. Over the last two months, services have been joined by construction in rising 0.2% a month, while other goods industries (mostly manufacturing and mining) tentatively have turned up after falling 2% a month in the winter and 1.5% in the spring months.

Services grew by 0.2%, matching their average over the last four months. The real estate industry again led the way with a 7% hike. Consumer spending also fuelled the gains in retail, recreation, and accommodation and food services. Goods-handling industries benefited from the upturn in goods output over the last two months. Most notably, professional and business services eked out their first increase of the year after lagging other services in 2009, led by legal services.

Construction rose for the third straight month, matching the 0.2% average gain in services. Residential construction led the recovery with its fourth consecutive increase. Non-residential building remained hampered by the large amount of empty offices and factories.

Manufacturing output was unchanged, holding on to its gain of nearly 1% over the previous three months. The auto industry spearheaded this advance, with spillover effects on plastic, rubber, metalworking and iron and steel. Output in most capital goods industries rose slowly, with the exception of declines for machinery and aerospace.

The resource industry (including utilities) posted its first increase of the year. Cold weather boosted demand for utilities, while forestry and potash continued to step up production. Lower oil and gas output offset some of these gains.

Household demand

The volume of retail sales rose 0.6% in October, continuing the steady recovery than began in January that has seen sales recover all the 5.0% drop posted in November and December 2008. Auto sales continued to lead the recovery with a fourth straight increase. However, the rally in vehicle sales was interrupted by a retreat in November.

Demand for non-automotive goods rose 0.2% after a 0.8% advance in September. Spending on semi-durable goods increased 1.1%, matching their largest gain of the year. However, outlays for non-automotive durable goods fell, notably for electronic goods despite sharply lower prices. Higher gasoline prices discouraged consumption of non-durable goods.

House sales and housing starts both rose 0.8% in November, continuing their recovery. For existing homes, the volume of sales was the highest on record. The upturn of housing starts has been less robust, with their level of 158,500 (at annual rates) still nearly one-third below their highs in the fall of 2008. The slow recovery of starts reflects the weaker turnaround in new home sales, which only hit bottom in September. However, the inventory of unsold new homes has fallen steadily since the spring, and new house prices rose for a fourth consecutive month in October.

Merchandise trade

Led by the fourth increase in five months for exports, Canada posted a trade surplus of $0.4 billion in October, after deficits in five of the previous six months. The terms of trade continued to increase, as the rising exchange rate dampened import prices, which have fallen 10% so far this year. Higher commodity prices helped lift exports in the last two months.

Exports rose 3.4% in October, bringing their total advance since May to 10%, all due to more volume. Natural resources drove October’s gain. Metal exports rose 14%, to stand 43% above their low in May (notably precious metals and copper). Energy exports relied almost exclusively on crude oil for their increase. Agriculture and forestry eked out small gains, and were barely above their recent lows.

Autos continued to lead the rebound in manufacturing exports with a 1% increase in October on top of a 40% advance in the previous three months. Machinery and equipment remained the weakest part of exports with a 2.5% drop from September, reflecting soft demand for airplanes and computers.

Imports decreased 0.8% in October due to lower prices, as volumed edged up. This was the third straight decline in import values, mostly due to lower prices. October’s drop was concentrated in machinery and equipment, which fell for a third straight month to near its low for the year. These declines originated equally in lower volumes and prices. Lower prices dampened imports of autos and consumer goods, as volumes rose in response to the strengthening of retail sales. Imports of energy and food products rebounded from declines in September.

Prices

Consumer prices rose 0.6% between October and November, the largest of the six increases in the last seven months. As a result, the CPI was 1.0% higher than its level a year-earlier, the most since March 2008.

The monthly advance in prices reflected widespread gains for goods. Energy prices led the way as gasoline rose over 3%. Higher vehicle prices also lifted the cost of durable goods. And food prices rose for the second straight month, as the effects of a poor harvest offset the drop in import costs from a higher exchange rate. Lower mortgage rates dampened the cost of housing services.

Commodity prices in December resumed their year-long rally. Energy led the increase, as a cold snap gave a boost to natural gas prices, which at $6 (US) per mbtu was its highest since early 2008 and double its recent low. The price of crude oil hovered around US$80 a barrel. Prices for metals continued to rise slowly, led by copper which reached its highest level since August 2008. Food prices retreated slightly, after a poor grain crop lifted prices in October and November.

Prices for manufactured goods rose 1.0% in November, their largest increase so far in 2009. Prices had fallen 1.5% in the previous ten months. Prices in November received a boost from large increases for gasoline and metals, and relief from the rising exchange rate which helped depress prices for much of the year.

Financial markets

The stock market rose a further 2.2% in December, its fifth increase in six months leaving it 45% above its low in March but still 20% below its peak in the summer of 2008. The December increase was broad-based, with the largest gains in real estate and industrial stocks.

Households and firms continued to diverge in their acquisition of debt. Total household credit rose by 0.9% in October, its largest increase of the year as steady growth for mortgages was reinforced by a sharp increase in consumer credit. Meanwhile, short-term business credit fell for the eleventh consecutive month in November (for a total decline of 15% over this period). Higher bond and stock issues left overall business demand for funds steady in the month.

Regional economies

The BC economy strengthened across the board. Retail sales led the way, up 1.9% in October to reinforce similar gains in the previous two months. Housing starts in November rose to 17,000 units, their high for the year (although still only half their peak in 2008). Manufacturing sales increased 0.8%, their third straight gain as paper shipments have risen 12% since July.

Manufacturing and retail sales in Ontario continued to recover in October. Retail sales increased 1.3% for their fourth straight gain. Manufacturing sales eked out their third gain in four months, as autos continued to rebound. Housing starts dipped 8% after three months of double-digit growth.

Housing starts in Quebec rose 10% in November, and is on pace for the smallest drop in the country for all of 2009. Manufacturing sales recovered the ground lost over the previous two months, mostly due to aerospace. Retail sales held on to their gains in the previous two months. Quebec was the only major region where nominal labour income has risen so far in 2009, with a 0.6% gain through September.

In the prairie provinces, housing was the only sector clearly recovering. Housing starts rose another 8%, to their highest level since July 2008. Retail sales posted a marginal gain for the third month in a row, but remained 7% below their 2008 peak. Manufacturing sales fell 1.7% due to weakness in capital goods, and were nearly one-third below their high in 2008 (versus a shortfall of less than 20% in the rest of the country).

International economies

In the United States, exports and consumer spending continued to propel the recovery of industrial production, while housing stalled.

Retail sales in November rose over 1% for the second straight month, although the source of growth shifted from the auto to the non-automotive sector. New home sales fell nearly 11% due to the impending expiry of the tax credit for first-time home buyers (this program was extended and expanded by Congress late in the month). As a result of slower sales, housing starts levelled off at just below 600,000 units (at annual rates) in recent months.

International trade continued its recovery, with both exports and imports rising again in October. Total trade flows (the sum of exports and imports) have risen 13% from their April low, although they remain 22% below their July 2008 peak. Exports led growth in October with a 3% gain, their sixth straight, driven by capital goods and autos. These sectors also buttressed imports against a drop in energy imports.

Industrial production increased 0.8% in November after a brief lull in its recovery in October. Manufacturers led the advance, as shipments rose for the third month in a row while inventories fell steadily. While motor vehicle orders slowed from their rapid rebound in the third quarter, new orders for capital goods continued to strengthen.

The pace of recovery slackened in the euro-zone in October as industrial production posted its first decline in six months, due to a drop for consumer goods. Consumer spending was stable in the month however, but remained far below its level of a year-ago. Construction continued to retrench, dampened by weakness in eastern European countries. Inflation rose to an annual rate of 0.5% in November, after a decline the month before, while the October unemployment rate remained stable at 9.8%.

Industrial production retreated in Germany in October, falling 1.8% after two months of strong growth. Foreign demand remained strong, however, boosting exports a further 2.5% in the month. Consumers ventured out in October as the unemployment rate eased and prices stabilized.

Industrial output in France contracted for the second consecutive month in October, as both foreign and domestic demand remained weak. A brief pickup in construction was short-lived, dampened by harsh weather. Consumer spending remained lacklustre as the unemployment rate climbed again in October.

Industrial production in the UK continued its see-saw pattern of late, falling slightly in October after a gain the month before. Construction contracted for the first time in six months, buoyed by low interest rates. Consumer spending was hesitant as prices rose at year-end.

Real GDP growth in Japan for the third quarter was revised down to 0.3% from 1.2%, due to a large decline in business investment. Exports posted their smallest fall in 14 months in November, boosted by robust Asian demand. Shipments to both the US and EU continued to fall, while demand from China and Taiwan expanded, primarily for autos and machinery.

China’s recovery strengthened in November, with solid gains in industrial production, retail sales and investment, buoyed by government stimulus spending. Consumer prices rose 0.6% after nine months of decline, while exports posted their smallest year-over-year decline since November 2008.

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