Section 1: Current economic conditions

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Overview ¹ 

Real GDP capped a fifth straight quarterly increase with a 0.1% dip in September, while employment growth resumed with a 0.1% gain in November. Hours worked jumped 0.7%, their largest increase since April.

The third-quarter 0.3% gain in real GDP was driven by domestic spending. Household outlays were led by consumer spending, as housing posted its first drop since early 2009. Business spending increased for both fixed investment and inventories. Exports were slowed by declines for energy and autos.

Business investment in structures and equipment continued to recover. After bottoming out late in 2009, it has accelerated from about 3% growth in the first quarter to 4% in the second and 5% in the third. Business investment has risen by 12% so far this year, after a 20% drop during the recession. Machinery and equipment led this rebound with an 18% advance, while the recovery for structures (dominated by the energy sector) has totalled only 3%. This strengthening trend was not hampered by a levelling off of profits over the last two quarters. The steady increase in business spending as incomes softened led to another drop in net lending by corporations from its record high at the turn of the year.

Not coincidentally, other measures of business spending improved in tandem with investment in the first three quarters of 2010. After declining throughout 2009, inventories also have accelerated in the first three quarters of 2010. The increased willingness of firms to spend also was reflected in private sector payrolls. After bottoming out late in 2009, they rose 2.6% in the first three quarters of 2010.

Labour markets

Employment grew by 0.1% in November. All of the gain was in part-time positions while full-time fell, a reversal of the pattern in the previous two months. A large exodus of youths saw the labour force shrink by 0.2%, lowering the unemployment rate to 7.6%, its lowest since January 2009.

Services and construction accounted for almost all job growth. For services, this mostly represented regaining its October losses, especially in trade. For construction, this was the sixth straight increase, with a cumulative gain of 4.8%, easily the most of any industry. Manufacturing jobs in November gave back all of their recent gains.

Ontario led job growth in November, returning to its June peak after a weak summer. Services dominated the increase, notably trade. Alberta held on to almost all of its gain in October, reflecting strength in natural resources and construction. A drop in the labour force pushed the unemployment rate below 6% for the first time since 2008. Employment in BC picked up after two months of little change, led by manufacturing which has expanded by 18% in the past year. Conversely, jobs fell in Quebec. Factory employment fell 5%, and its 10% year-over-year loss was by far the most in Canada.

Leading indicators

The composite index rebounded 0.2% in October from a 0.2% dip in September. Six of the ten components advanced and three fell, versus four increases and five decreases the month before, while one was unchanged in both months. The financial components posted the largest gains, led by the stock market, while housing remained the weakest sector.

The smoothed version of the Toronto stock market rose 1.5% in October, its largest monthly gain since the spring. Natural resources have led the recent rally, notably metals, reflecting rising prices on commodity markets. As well, the money supply expanded at a steady pace.

Manufacturing was mixed. The ratio of shipments to inventories eked out a small gain after no change the month before, when inventories rose for the first time since 2008. The rate of decline of new orders slowed markedly. The average workweek was unchanged after a drop in September.

Housing continued to dampen household spending. The housing index fell for the sixth straight month, as renewed weakness in housing starts offset a levelling off of sales. The slump in housing was reflected in the fourth consecutive decline for furniture and appliance sales. Demand for other durable goods rose slowly, led by autos.

Output

Real GDP dipped by 0.1% in September, after a 0.3% gain in August. The slack originated in goods-producing industries, which posted their first decline of the year.

Mining led the retrenchment in goods with a 2.0% drop, notably oil and gas. Manufacturing output fell 0.6%, as auto assemblies fell 6% and the recent strength in capital goods was slowed by losses in machinery and non-metallic minerals. Construction was checked by a drop in home-building.

Services output continued to recover from its mid-summer lull. The goods-handling industries of wholesale trade and transportation fell in response to lower goods production. Household demand rose on balance, with gains in retail, accommodation and real estate outweighing a drop for recreation services. Business and government services posted modest gains.

Household demand

Consumer spending recorded its sixth straight gain in the third quarter, partly in response to a 0.9% increase in labour income. Housing remained mixed as the market continued to adapt to more moderate housing demand.

The volume of retail sales rose 0.4% in September, following a revised 0.5% increase in August. Sales of durable and semi-durable goods both rose while non-durable goods fell, its second drop in 2010. New vehicles led the increase, reinforced by gains in furniture, electronics, and clothing. Food and gasoline sales were down as prices continued to increase. Excluding these items, non-durables rose.

Housing starts in October fell 9% to just under 168,000 units. Starts had steadied at 200,000 units monthly (at annual rates) through the first half of 2010 but have been falling in more recent months. Multiples accounted for most of the monthly drop. This was a departure from the third quarter during which multiples hovered at about 100,000 units (at annual rates), while ground-breaking on single-family homes was falling. New home sales were little changed, as a 3% drop in October erased the gains of September. Vacancies rose slightly, continuing a gradual upward trend that started in March.

Existing home sales, in contrast, rose 4.6%, led by higher sales in Toronto and Vancouver. Resale activity had dropped throughout the spring but has been recovering since July. Prices have steadied, edging up only slightly year over year.

Merchandise trade

The third-quarter current account deficit widened to $17.5 billion from $13 billion, almost entirely due to trade in goods where exports dipped while imports rose steadily.

Exports in September fell 1.7% to $33.1 billion. Exports have hovered around $33 billion for eight of the last ten months. On two occasions, in May and August, they rose to near $34 billion, but returned to $33 billion the following month. Lower export prices have offset higher export volumes so far this year. Meanwhile, imports rose 1.2%, continuing their year-long upward trend and widening the monthly trade deficit to $2.5 billion, close to the record high set in July. All of the 17% gain in imports over the past year was due to higher volumes, as prices were flat.

The retreat in export earnings was led by consumer and industrial goods, after a spike totalling $800 million in August. Elsewhere, exports continued on their recent trend, with increases for machinery and equipment offsetting declines for automotive products. Energy products were little changed at about $7.0 billion for the fourth month in a row. Agricultural and forestry products have hovered around $3.0 billion and $1.8 billion, respectively, all year.

Import demand in 2010 has been driven by business spending on machinery and equipment, where imports posted an eighth straight increase in September. Machinery and equipment have contributed $2.9 billion of the $3.5 billion increase in total imports since January. Consumer and industrial goods have reinforced the growth of imports, with increases of $1.1 billion and $0.3 billion so far this year. Energy imports remained little changed at about $3.4 billion, while auto imports in September hit their lowest level of the year.

Prices

The consumer price index rose 0.7% between September and October, its fourth straight increase and the largest monthly gain since January 2006. This raised the year-over-year rate of inflation from 1.9% to 2.4%, the most in two years. Energy led the year-over-year growth with a 9.1% increase, notably for gasoline which accounted for about half the acceleration of prices between September and October.

Of the 0.7% monthly increase, just over half came from non-core items, notably gasoline. Core CPI prices rose 0.3%, led by auto insurance premiums in Ontario and the first significant increase in clothing prices since April. Food prices were little changed, as increases for bread and meat were offset by declines for vegetables (notably potatoes, after heavy rains blighted the crop in 2009).

Commodity prices in November added to their gains in October. Energy prices regained their summer highs, as natural gas prices recouped some of their recent losses while crude oil advanced to $84 (US) a barrel. Food prices rose, largely the result of the second hike for wheat in the last three months. Metals were little changed after leading the autumn rally in commodity prices. Copper was the first metal whose price returned to its pre-recession high and gold remained near record levels, but this was offset by declines for zinc and aluminum.

Manufacturing prices rose 0.5% in October, after gains of 0.4% in August and 0.3% in September, its longest string of increases since the turn of the year. The advance mostly reflected higher prices for metals and petroleum. This outweighed the dampening effect of a rising exchange rate on other exports, notably autos and forestry products.

Financial markets

The net inflow to Canada in the financial capital account rose to $20.1 billion in the third quarter, nearly double the second. Foreign purchases of bonds rose another $24.8 billion, with increased demand for private corporate bonds. Firms in October continued to issue more bonds than short-term debt. As well, bond issues also outstripped equity issues, further lowering the ratio of debt to equity.

The Toronto stock market rose 2% in November, its fifth straight gain. The advance continued to be broadly-based, with the largest increases for mining, energy and materials.

The Canadian dollar was little changed against the US greenback in November. However, both appreciated against the euro following Ireland's request for financial aid. Interest rates in Canada were little changed.

Regional economies

The prairie provinces posted the largest gains in demand in the third quarter. Retail sales rose 2.2%, including a 0.6% gain in September. Manufacturing sales grew 3.9%, the largest of four straight quarterly gains as all three summer months saw solid growth. Petroleum and capital goods (notably machinery) led the advance. Housing starts remained an exception to growth, declining in October for the third month in a row to their lowest level since July 2009.

The pattern of demand growth in Ontario was similar to the prairies. Retail sales rose moderately, after a dip in July slowed quarterly growth to 0.4%, below the Canada average. Despite a setback in the auto industry in September, manufacturing sales posted a fifth straight gain, led by primary metals. And like the prairies, housing starts fell to a 16-month low.

Retail sales in BC declined 0.3% in the third quarter, the only drop in Canada and the second consecutive quarterly decline. The weakness was concentrated in June and July, and sales picked up by 0.6% in September. Housing starts dipped in October, but after solid gains in the previous two months they remain near their average for the year. Manufacturing sales rose 1.5% in September to cap a fifth straight quarterly gain, as gains in capital goods outweighed a dip for forestry products.

In Quebec, manufacturing sales fell 2% in September, sealing the only quarterly decline in Canada. Transportation equipment led the retreat, and stands 50% below its high in mid-2009. Housing starts also fell for the second time in three months, equalling its low for the year. Retail sales provided some relief, with increases matching the Canada average.

International economies

In the United States, there were conflicting signals from both household and industrial demand. Household spending on retail sales continued to strengthen in October, while housing retrenched. Retail sales rose 1.2%, the largest of four straight gains as auto sales hit an annual rate of 12.3 million units, the highest of the year. Housing starts fell 12%, as multiple units plunged 44%. Single-family have starts fell only 1%, in line with a small dip in house sales in the month after gains in August and September.

Industrial production was flat in October. Manufacturers raised output 0.5%, led by auto assemblies and business equipment. But mild weather led to another sharp drop in output of utilities, offsetting the gain in manufacturing. New orders gave back most of their September gain, notably for capital goods.

Real GDP in the euro-zone grew 0.4% in the third quarter of the year, after a 1% rise in the second. Industrial production fell in September, reversing its gain the month before. New orders dropped 3.8% with demand down in every sector, led by consumer durable goods. Construction continued to retrench after a brief respite in June. Trade remained brisk with exports expanding to Brazil, China and Turkey, while imports from Russia, China and India posted the strongest gains. Consumers remained hesitant to spend as both inflation and unemployment crept upwards.

Real GDP growth in Germany slowed to 0.7% in the third quarter from 2.3% in the second. Exports continued to power the economy, aided by business investment. Industrial production and new orders slipped in September. Rising exports and falling imports boosted the trade surplus. Consumers reined in spending for the second straight month, even as the unemployment rate and inflation remained steady.

France grew by 0.4% in the third quarter, following a 0.7% gain in the second. Consumer spending was upbeat, although industrial production was flat in September and new orders posted their second straight month of decline. The unemployment rate eased to 9.8% in October.

Real GDP in the UK rose by 0.8% in the third quarter, versus a 1.2% in the second, dampened by weakness in business investment. Industrial production in September posted its fourth gain in five months, while construction turned down after a rebound in August. Consumer spending was brisk in advance of a rise in the VAT tax to 20% from 17.5%.

Italy grew by 0.2% in the third quarter, down from 0.5% in the second. Industrial production fell 2.1% in September after five months of steady gains. New orders also retreated after a strong rebound in August. Consumer spending was upbeat, despite a rise in the unemployment rate to 8.6% in October.

Real GDP in Japan grew 0.9% in the third quarter, as consumers responded to government subsidies for fuel-efficient autos. Spending was also aided by extremely hot weather and stock-piling of cigarettes before a large tax hike.

China's trade surplus continued to climb in October, hitting $27.1 billion (US). Inflation surged to a 25-month high of 4.4%, led by mounting food prices, which prompted the government to impose price controls on basic food items.

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