Section 1: Current economic conditions

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Overview ¹ 

Economic activity continued to be uneven over the summer months, with output and employment growth pausing after modest gains the month before.

Household spending dipped in July, after leading the recovery through most of 2009 and the first half of 2010. Auto sales also fell in August, before recovering in September, while existing home sales in August posted their first sizeable gain of the year.

The recovery of exports sputtered over the summer, with small declines in June and July. The slowdown was concentrated in energy and auto products. However, retail sales and industrial production in the US continued to expand slowly but steadily over the summer, while housing showed signs of recovering from several months of decline after the expiry of tax incentives to purchase.

The firmer footing of the global economy late in the summer was reflected in commodity and financial markets. Commodity prices rebounded in September, led by metals. This helped send the Toronto stock market to a new high for the year, while the Canadian dollar recovered the ground lost in August.

Labour markets

Employment was unchanged in September, leaving the third quarter up 0.9%. Full-time jobs regained some of their losses over the summer, but part-time jobs for youths fell sharply. The labour force shrank 0.1%, its first decline after a gain of 1.6% in the first eight months of the year. Due to the drop in the labour force, the unemployment rate also fell to 8.0%.

Employment rose slightly in the goods-producing sector and dipped in services. Construction and manufacturing led goods, but the primary sector contracted. Business services led the drop in services, but remained about 7% ahead of last September.

Ontario posted the only notable drop in employment, reflecting declines in business services and trade. Quebec continued to lead growth with a 3.2% year-over-year gain, with transportation driving September’s advance. At 7.7%, Quebec’s unemployment rate was the lowest since December 2008 and a full point below Ontario’s (Quebec’s rate had never been lower until January 2009).

Leading indicators

The leading index rose 0.5% in August, matching its average increase over the previous two months. The sources of growth were little changed, as manufacturing posted the largest gains while housing continued to retrench.

New orders for durable manufactured goods continued to strengthen, rising 5.2%. The steady advances in new orders since November 2009 continued to support higher shipments, which led the increase in the ratio of shipments to inventories.

Household spending was mixed, with declines for the housing-related components and increases for other durable goods. The rate of decline of the housing index levelled off at 4.0%, entirely due to the housing starts component. With existing home sales continuing to decline, furniture and appliance sales dropped for the second straight month. Spending on other durable goods rebounded 1.0% after five straight decreases.

Output

Real GDP dipped 0.1% in July after a revised 0.3% gain in June. Goods production fell 0.3%, its first decrease since June 2009, while services levelled off.

Manufacturing led the drop in goods. Large exporting industries such as autos, aerospace, lumber and paper all posted declines in response to lower sales in the US. Lower home construction also dampened output of non-metallic minerals (notably concrete) and furniture. The drop in goods output was reflected in a dip overall in goods-handling services.

Elsewhere, services were dampened by declines for a wide range of household spending, including retail sales, existing home sales, recreation (mostly gambling) and restaurants.

Financial and business services and mining all posted large gains. Business services, which include professional services and administrative and managerial services, posted their largest back-to-back gains since before the recession. Mining was buoyed by large gains for both metals and non-metals, which outweighed a drop in oil extraction.

Household demand

Retail sales volume dipped 0.2% in July after a 0.9% increase in June. Much of the decline originated in the furniture component, after several months of lower home sales. Demand for non-durable goods also retreated in the face of price hikes for food and gasoline. However, gasoline consumption remains near May’s record high level, after a 9% drop in prices fuelled higher demand. While households consumed more gasoline so far in 2010, this has been offset by lower demand for home heating and cooling, continuing a downward trend that began in the spring of 2009. This includes a slight increase in utility demand in July in response to a heat wave in central Canada.

Elsewhere, consumer spending was mixed. Outlays for semi-durable goods recovered slowly for a second straight month, as a string of price increases in the spring were reversed over the summer. Auto sales were little changed after a solid advance in June. Spending on computers dipped, but this follows three straight quarters of gains averaging 5% in volume. Conversely, demand for home entertainment equipment (notably TVs) continued to sputter so far in 2010 after a marked recovery in the second half of 2009 from the recession.

The housing market was mixed in August. Housing starts fell 4%, continuing their slow retreat from their high of about 200,000 units (at annual rates) early in the year to 183,000 units in August. All of the drop in new construction has been in single-family homes, as starts of multiple units continued to trend upward from the depth of the recession early in 2009. Meanwhile, sales of existing homes rose by 4% in August, a tentative sign that demand was levelling off after a drop of nearly one-third in the first 7 months of the year.

Merchandise trade

The monthly trade deficit in goods widened to a record $2.8 billion in July, as exports dipped for a second straight month while imports hit their highest level since December 2008. The slowdown in exports since May was driven by autos and energy products. The increase in imports was broad-based outside of consumer goods.

Exports slipped 0.7% in July, due to declines of about $100 million each for forestry products, consumer goods and machinery and equipment. The retreat for forestry and machinery and equipment followed several months of growth. Exports of industrial goods consolidated their place as Canada’s leading export with a 2% gain. Most other exports were little changed in the month.

Energy led the 2% increase in imports, mostly crude oil. Autos and machinery and equipment also advanced, reflecting recent gains in consumer and business spending. Imports of consumer and industrial goods retreated, after hitting their highest levels in nearly two years in June.

Prices

The consumer price index rose 0.1% in August after a 0.6% increase in July. The cost of services dipped in August, after the shift to an HST in Ontario and BC led a 0.7% hike for services in July. Energy prices also retreated after rising sharply in July.

Elsewhere, the cost of food rose for a second straight month, reversing small declines in the spring. Conversely, the price of durable and semi-durable goods levelled off after a large drop in July.

Commodity prices rebounded in September after declining over the summer. Metals led the increase, notably gold, nickel and copper, with the latter nearing a 2-year high. Food prices also hit their highest level of the year, having risen about 25% in 2010 as the global grain harvest declined. Energy prices remained little changed after declines in July and August. While oil hit $80 (US) a barrel, natural gas prices remained weak.

Prices for manufacturing goods rose 0.4% in August after declining in June and July. The increase was led by metals and food, as prices for finished goods dipped 0.1%.

Financial markets

The Toronto stock market rose by 3.8%, its third consecutive increase and enough to lift it above its previous high for the year set at the end of April. September’s gain was led by a 20% jump for metals, a month after a similar hike for materials. However, growth was broad-based.

The Bank Rate rose a quarter of a point for the third time this year. However, longer-term bond and mortgage rates were unchanged, after easing over the summer. The Canadian dollar moved above 97 cents (US), recouping its decline in August.

Household credit demand continued to expand at a steady rate in July. Business credit growth slowed in August, with short-term borrowing down after three straight increases.

Regional economies

Retail sales in Ontario and BC fell in July, continuing the downward trend in both provinces that began in April. However, housing starts rose in both provinces in August, returning to about their average so far in 2010. Manufacturing sales also fell 3% in BC, reversing gains in the second quarter, led by a drop in paper. Shipments were flat in Ontario, as a dip for autos was offset by an increase in metals.

Conversely, retail sales rose in both Quebec and the prairie provinces, but housing starts fell about 20%. This left starts in both regions at their lowest level of the year. Retail sales rose 0.5% in both regions, an improvement from declines posted in the second quarter. Manufacturing sales edged up on the prairies, led by increases for petroleum and machinery in Alberta. However, shipments fell 3% for Quebec as aerospace hit a new low for the year and petroleum refining fell for a sixth straight month (with a total loss of 20%) as a major refinery moved towards closing permanently.

International economies

In the United States, In the United States, household demand firmed over the summer. Retail sales rose 0.4% in August, its second straight gain after consecutive declines. Consumption of non-durable goods rose, while auto sales were sluggish, before hitting their high for the year in September. Housing also began to level off, after several months of sharp decline after a temporary tax credit expired. Existing home sales rebounded in August, while new home sales levelled off. Housing starts rose 11% in August after stabilizing in July, including an upturn for single-family units.

Industrial production continued to recover slowly with a 0.2% gain in August. Auto assemblies fell after rising 10% in July when GM kept many of its factories open instead of the traditional post-July 4 shutdowns. Capital goods continued to expand steadily, and new orders recovered almost all of their drop in July. Strong demand for capital goods and grains helped lower the trade deficit in July.

Industrial production was stable in the euro-zone in July as slight gains in capital and non-durable consumer goods offset declines elsewhere. New orders retrenched, reflecting slower external demand. Construction contracted as pent up demand due to harsh winter weather abated. The external trade surplus narrowed despite double-digit gains in exports to Brazil, China and Turkey. Consumer spending remained weak in the face of new tax hikes and pension reforms. Inflation eased slightly to an annual rate of 1.6% in August, while the unemployment rate was stable at 10.1% for the fourth straight month.

German industrial production was flat in July after a 0.6% contraction in June. New orders also retreated after steady gains all year. Slowing global demand has dampened exports, although Germany continues to maintain the largest external trade surplus in the euro-zone. Consumers reined in spending for the fourth time in five months, despite reductions in both the inflation and unemployment rate.

Industrial production rebounded in France in July, while new orders posted their third straight gain. Construction growth resumed after a two month hiatus and consumers spent more, after reining in demand in June. The unemployment rate edged up to 10.1% in August from 10% in July.

Industrial production in the UK continued its recent see-saw pattern, rising slightly in July after a dip the month before. Construction powered forward, posting its fourth straight monthly gain. Imports continued to outweigh exports for the largest external trade deficit in the euro-zone. Consumers ramped up their spending in July for the fifth gain in six months. Inflation was stable in August at 3.1%.

Real GDP growth in Japan in the second quarter was revised up slightly to 0.4%, boosted by business investment. Export growth slowed for the sixth month in a row in August, prompting the Bank of Japan to intervene to lower the yen, which has strengthened by 40% against the US dollar and almost 50% versus the euro since 2008.

China’s industrial production accelerated in August after a gradual slowdown from its rapid pace to start the year. To slow growth, the government had instituted measures to close inefficient factories, clamped down on property speculation and pushed banks to rein in spending. Domestic demand picked up, however, as the government sped up approvals of infrastructure projects and the disbursements of investment funds. Imports grew at a faster pace than exports, aided by autos as government subsidies for energy-efficient vehicles spurred demand. Inflation in August rose at its fastest pace in two years when severe floods and unusually hot weather destroyed crops and drove food prices up.

Brazil’s economy grew 8.8% in the second quarter from a year earlier, despite higher interest rates, the end of government stimulus spending and the expiration of tax breaks for consumer goods. The Brazilian Central Bank, in a series of increases this year, has pushed its base interest rate to 10.75%.

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