Section 1: Current economic conditions

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Overview ¹ 

Real GDP in December posted a fourth straight sizeable advance. Employment continued to rise in February, but at a more subdued pace than the recent gains in GDP.

Household spending continued to lead the growth in aggregate demand. Both housing and consumer spending posted their third straight quarterly gains. These increases were reinforced by an upturn in exports, as commodity prices and the US economy strengthened.

Business spending remained a drag on domestic demand. Business investment dipped in the fourth quarter, offsetting a small gain in the third. And firms continued to reduce inventories for the fourth straight quarter, especially manufacturers. As a result, the overall ratio of stocks to sales has retraced about two-thirds of its increase during the recession.

While profits have recovered about one-third of their 45% drop during the recession, the restraint in business spending has allowed firms to rebuild their financial surplus, leaving then able to plan a cautious increase in investment spending in 2010 and to slowly resume hiring.

Business investment plans for 2010 rose 4.4%, recovering a quarter of their record drop in 2009 according to the annual survey of investment intentions. Over 90% of the $7.5 billion increase for 2010 was concentrated in mining and manufacturing, the sectors that bore the brunt of cuts in 2009.

Within mining, the oil and gas industries plan to boost outlays $3.7 billion, a fraction of their $19 billion drop last year. Investment remained cautious in both the oilsands and conventional sources. Other mining industries were more confident, raising investment plans $1.3 billion to offset all of 2009’s decline, led by a rebound for gold mines.

Manufacturers plan to boost outlays $2.0 billion after a $6.3 billion drop. But there was no recovery in transportation equipment, where investment fell $2.1 billion last year, while most resource-based and capital goods manufacturers remained cautious.

Elsewhere, there were little changes in the trend. Utilities and telecommunications continue to expand steadily, while finance and business services retrench slowly. Transportation turned up, as further cuts to pipelines were offset by increases for urban transit.

Labour markets

Employment rose 0.1% in February, its fifth gain in the past seven months. Full-time positions rose 0.4%, but this was partly offset by a decline in part-time work. With the labour force little changed, the unemployment rate dipped to 8.2%. It hit its high of 8.7% last August.

The source of job growth switched from services in January to goods in February. Natural resources and manufacturing led the gain. Construction shed jobs, despite the absence of major storms. Services were dampened by large declines in trade and finance, which offset gains in the public sector and accommodation and food.

Central Canada posted modest employment gains for a second straight month. In Quebec, increases for services offset more losses in manufacturing. Conversely, in Ontario manufacturing offset a decline in services, notably finance. Employment in BC rose slowly, as the beginning of the Olympics accompanied a sharp shift from part-time to full-time employment. Employment in Alberta fell for a second straight month. While natural resources grew strongly so far this year as energy prices firmed, services weakened, notably trade and education.

Leading indicators

The composite leading index rose 0.9 % in January, about equal to its average increase over the last eight months but less than the 1.5% gain in December. Eight of the ten components rose, while the two that declined were related to manufacturing.

Household spending remained the leading source of growth in the overall index. The housing index advanced another 1.3%, with solid gains in both existing home sales and housing starts. Spending on durable goods continued to increase, despite a temporary deceleration in auto sales. Personal and business services contributed about equally to the growth in the services employment component.

The leading indicator for the United States rose about 1% for the fifth straight month. Real GDP growth in the fourth quarter hit a 6-year high. These gains in Canada’s primary export market were reflected in the largest hike in the ratio of shipments to inventories since April 2002. The increase was driven by both a strengthening upturn in sales and steady declines in inventories. However, new orders for manufactured goods remained highly volatile, as consecutive gains of 7% were followed by a 1% decline. Most of this volatility originated in aerospace.

The stock market rally slowed, from peak rates of increase of over 5% in the trend to just 0.4% in January.

Output

Real GDP rose 0.6% in December after three straight increases averaging 0.4% a month. As a result, the year-over-year change in GDP was flat, after falling 4.3% as recently as July. Goods-producing industries led this resurgence, which has benefited services that handle goods. Growth in other services has been slow but steady.

The upturn in goods output was led by mining, where a 1.6% advance in December brought its total hike since August to 7%. Oil and gas led this gain, especially exploration and development. Metal and non-metal mines also lifted output in response to higher prices.

Construction output rose 0.5% in December, for a cumulative increase of nearly 3% since August. Housing led this turnaround. Manufacturing grew 1.0% in December, leaving its four-month gain at 2.3%. Autos and resource-based manufacturers (notably metals and petroleum refining) have led the rebound. By year-end, growth had spread to a number of capital goods industries, such as machinery (notably construction and mining machinery).

With the circulation of goods increasing, it is not surprising that demand for wholesaling and transportation also has rebounded in recent months. Excluding these goods-handling industries, however, and services still rose 0.3% in constant 2002 dollars, matching January’s high-water mark for growth in 2009. Most of these gains reflected higher household spending, notably for housing. Government services advanced steadily. Demand for business services and information (especially telecommunications) remained weak.

Household demand

Residential construction remained the fastest-growing segment of demand, rising nearly 7% in the fourth quarter. Consumer spending posted a third straight gain, partly in response to a 1.4% increase in labour income, its largest quarterly advance since early 2008. As well, household net borrowing hit its highest level of the year.

Retail sales volume rebounded 0.6% in December, capping a third straight quarter of growth that saw sales surpass their pre-recession peak in 2008. Outlays rose the most for non-automotive goods, notably home entertainment goods and computers. Clothing sales also rebounded, as consumers responded to hefty price discounts and more seasonable weather. Utilities demand reflected the see-saw pattern of weather, from a balmy November to a mostly normal December.

Auto sales recovered only a part of November’s retreat, and remained stalled in January amid a large recall. Higher prices continued to dampen consumption of food and energy.

The housing market started the new year on a mixed note. Existing home sales fell slightly from their record pace at the end of 2009, even before house finance conditions were tightened in February. However, the market for new homes continued to improve. New home sales hit their highest level in nearly a year. As a result, the inventory of unsold homes continued its steady decline, despite developers building more homes to meet demand. Housing starts rose 6% in January, led by a ninth straight increase for single-family homes which have doubled from their low in the spring of 2009. Starts of multiple units were just one-third above their low in the spring of 2009, as the overhang of vacant apartments and row homes remains high.

Merchandise trade

The current account deficit narrowed to just under $10 billion in the fourth quarter, as exports rose faster than imports. While the volume of exports and imports both rose about 2%, the terms of trade shifted in Canada’s favour.

Surging auto demand continued to buoy overall exports (+1.7%) and imports (+1.8%) in December, accounting for two-thirds of the increase in exports and over half of the growth in imports. Auto exports rose 8.1% to $4.5 billion, a 50% increase over June’s low (volumes were stronger, up 66%). Auto imports rose 6.4% to $5.8 billion while nominal auto imports have nearly matched exports since the spring, export volumes have outpaced imports.

For exports, machinery and equipment and energy products also posted gains in December while consumer goods, industrial goods and energy products contributed to the increase in imports.

There was an overall trade deficit in goods for the first time since 1975 as exports fell 25% and imports were down 16% in 2009. Though all sectors posted declines, the main contributors to the drop in exports were energy products (-37%) and industrial goods (-29%). Automotive exports also fell 29%; however, autos accounted for only 14% of the drop in exports in 2009, while energy explained nearly 40% of the decline and industrial goods a further 27%.

The drop in imports was spread relatively evenly, with energy products, automotive products, industrial goods and machinery and equipment each contributing about one-quarter to the decrease. Imports of agricultural goods rose 2.9% and consumer goods were stable. The decline in trade in 2009 largely accounted for the shift from an overall current account surplus of $8 billion in 2008 to a deficit of $41 billion in 2009.

Prices

The implicit price index for GDP rose 1.1% in the fourth quarter, its third straight acceleration after back-to-back declines during the worst of the recession last winter. Housing prices continued to recover, up 1.5%. Export prices rebounded after four consecutive declines. Import prices continued their year-long decrease as the exchange rate strengthened, and this was reflected in lower prices for consumer durables and investment goods.

Consumer prices rose 0.4% between December and January, their third such increase in the last four months. As a result, the year-over-year increase in prices reached 1.9%, the most since November 2008.

Energy prices continued to exert the most upward pressure on the CPI. Durable goods prices broke from their recent downward trend, largely due to a hike to vehicle prices. And higher house prices continued to boost the cost of shelter.

Commodity prices edged down during February, mostly due to energy products. While crude oil hovered around $80 (US) a barrel, natural gas prices retreated to below $5 per mbtu as the winter heating season unwound. Industrial goods price continued to rise slowly, led by copper.

Financial markets

The stock market rebounded by 4.8% in February after a 4% setback in January. Financials and mining led the rebound. Energy stocks recovered little of their January loss, as natural gas prices weakened.

The Canadian dollar strengthened noticeably in February. The dollar rose to near 97 cents (US), after hovering around 95 for several months. The increase was even more marked against the yen and especially the euro, where the Greek budget crisis led the euro to a 29-month low (and 14% below its high a year ago).

According to monthly Bank of Canada data, household credit demand in the last three months of 2009 grew at about the same pace as the previous three months. However, business credit firmed after a decline in the third quarter. A pick-up in stock and bond issues offset further declines in short-term credit, and stock and bond issues continued to increase in January and February.

Regional economies

In the prairies provinces, labour income posted its first quarterly advance of the year, up 1.0%. Buoyed by the upturn in incomes, retail sales capped their best quarter of the year with a 1.4% gain in December. Manufacturing sales also rose 2.6%, the most in Canada, after three straight quarterly declines, led by petroleum.

Labour income in BC also strengthened 1.4% in the fourth quarter, after stabilizing in the third. As a result, retail sales growth was the largest in Canada in the quarter, despite a levelling off at year-end. Manufacturing sales remained the slowest of any region due to persistent weakness in the forestry sector.

Like BC, labour income in Ontario rose 1.8% in the fourth quarter after levelling off in the third. Retail sales kept pace with a 1.7% quarterly gain, despite a slowdown at year-end. The pace of the recovery of manufacturing in the third quarter slowed in the fourth, as rapid growth in autos and primary metals was not sustained.

Growth in Quebec was the most stable during 2009, avoiding the large declines elsewhere in the first half of the year but less rapid recovery in the second half. The net result was the smallest drop in housing start and retail sales of any region (retail sales fell 1% in Quebec in 2009 versus 2.5% in Ontario and 6% in BC and the prairies). Labour income rose 0.9% in the fourth quarter, the only slowdown in Canada. Retail sales also moderated to 1.5%, about half their gain in the third quarter. Manufacturing sales posted the largest quarterly gain in Canada, as increases for petroleum offset a levelling off for aerospace.

International economies

In the United States, employment stabilized in January and February. Service jobs posted small gains for the third time in four months. Weather-related losses in construction and transportation dampened goods-producing industries, although these losses remained half the rate of decline last fall. Overall, 48% of industries increased employment, the most since March 2008. The unemployment settled at 9.7%, below its peak of 10.1% last October.

Manufacturing continued to recover gradually. Output rose 1% in January, led by a 9% gain in motor vehicles and a recovery from December’s storms in the Midwest. New orders continued to increase overall, despite a setback for capital goods after two months of growth. Notably, inventories were stable in January, after steady declines since December 2008. The upturn in industrial demand was reflected in a steady widening of the trade deficit, to $40.2 billion in December (it was as low as $26 billion in May). Higher oil prices raised import prices in January.

Consumers in January also bounced back from the effect of heavy snow in December, and retail sales rebounded 0.5%. Consumer credit increased in January for the first time in 12 months. Auto sales fell slightly in February, when heavy snow blanketed much of the eastern seaboard.

The housing market was mixed. Mortgage delinquencies edged down in the fourth quarter, their first drop in nearly three years. Housing starts rose 2.8%, remaining near 0.6 million units (at annual rates) for seven of the last eight months. However, much of the increase appears related to work authorized in December but delayed by poor weather, and permits fell 5%. New home sales in January hit a record low with a third straight decline following the end of the initial tax credit for new home buyers.

Economic growth in the euro-zone slowed to 0.1% in the fourth quarter of 2009, dampened by weak business investment and consumer spending amid high unemployment. Industrial production fell 1.7% in December as waning demand for intermediate and capital goods offset a pick-up in energy output. Construction rose for the first time since August, while retail sales volumes were stable after dipping in November. Trade with major partners continued to fall, with the exception of a 2% gain in exports to China. The unemployment rate was unchanged at 9.9% in January, while the annual rate of inflation inched up to 1%.

Real GDP was flat in Germany in the fourth quarter, after growth was boosted in the third by government-financed car scrappage deals. Exports continued to be upbeat, while both consumer spending and business investment retreated. Industrial production fell in December, mirroring a decline in new orders. Construction resumed its downward trend after a brief hiatus in November, hampered by severe weather. Consumers ventured out as the holiday season approached and both the unemployment rate and inflation were stable at year-end.

Real GDP in France posted a 0.6% gain, buoyed by consumer spending and inventory changes. Industrial production stalled in December, although new orders surged. Construction continued to retrench, dampened by bad weather. Consumer spending was upbeat, however, even as both unemployment and inflation crept upwards.

Britain’s economy grew 0.1%, boosted by manufacturing and the services sector. Industrial production rose in December, even as imports continued to outpace exports. Consumer spending retrenched in the new year, after sales were strong in December in advance of an increase in the sales tax that took effect in January. The year-over-year inflation rate rose a full point to 2.9% in December, the largest monthly hike on record.

Real GDP in Japan grew 1.1% in the fourth quarter, after being flat in the third. Overall, GDP fell 5% in 2009. Consumer spending strengthened in the quarter, aided by incentives on cars and home appliances, while business investment rose for the first time since the beginning of 2008. Exports rose in January, their second consecutive gain since late 2008, boosted by Asian demand for autos and electronics. China surpassed the US to become Japan’s biggest export market in 2009.

Industrial production in China slowed in February, amid government measures to curb bank lending and excess capacity in some industries after government subsidies and tax cuts had spurred demand for autos and home appliances. Both exports and imports accelerated in January. Exports in South Korea saw their biggest gain in January in over two decades, buoyed by demand for auto parts, semi-conductors and consumer electronics.

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