Section 1: Current economic conditions

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Overview ¹ 

The economy continued to pick-up over the winter, with real GDP in January matching its 0.5% gain in December. Labour demand accelerated in the first quarter, after a slowdown in the second half of 2010.

Exports led the growth of demand, with a large gain in energy exports in December followed by a surge in auto exports in January. These increases reflected improved demand in the US, the expansion of pipeline capacity to the US and the end of supply disruptions that hampered auto exports late in 2010.

The US economy in February also improved, after a series of storms helped dampen activity in December and January. Retail sales posted their largest monthly gain since October. Manufacturing output was buoyed by higher auto assemblies, as inventories were replenished after a drop in the fourth quarter. While the housing market remained weak, the US labour market strengthened, with private sector payrolls up over 200,000 in both February and March.

Labour markets

Employment in Canada was unchanged in March, capping a 0.6% increase in the first quarter. While employment was flat in March, there was a sharp shift from part-time to full-time positions, which boosted hours worked by 0.5%. With a small dip in the labour force, the unemployment rate edged down from 7.8% to 7.7%.

Goods-producing industries increased employment by 0.5%, mostly in construction. This was offset by a 0.2% drop for services, especially in finance and the public sector. There was little change in employment and unemployment in most regions.

Leading indicators

The composite leading index rose 0.8% in February, double its gain in each of the previous three months and its largest advance since May 2010. The increase was broadly based, with nine of the ten components posting gains, compared with six increases the month before. A turnaround in manufacturing contributed to the overall increase in the index.

In manufacturing, new orders for durable goods rebounded 0.3%, after three straight declines. Some of this upturn reflects the marked improvement in exports in December and January. The ratio of shipments to inventories posted its first gain in five months. Manufacturers appeared optimistic that the improvement in demand was sustainable, as they extended the length of the workweek and substantially boosted employment levels over the winter.

The stock market continued to lead all components with a 2.7% increase in February. The housing index was close behind with a 1.8% advance, mostly due to higher existing home sales. The improvement in housing was reflected in furniture and appliance sales, up 0.9% for their first gain in eight months. Spending on other durable goods rose 0.6%.

Output

Real GDP rose by 0.5% in January, its fourth straight month of strong growth. Output grew by 1.8% over the last four months, similar to the peak rates of growth observed earlier in the recovery. Goods-producing industries led the way, boosting output by 1% in both December and January. However, December's increase was dominated by a 2.8% burst of energy output, while January was driven by a 2.8% hike in manufacturing output.

The January advance in manufacturing was broadly based. Just over half originated in motor vehicle output, which hit a post-recession high after auto assemblies were dampened by retooling in November and storms in December. The increase in auto output reverberated in other industries, notably metal fabricating. Capital goods industries continued to raise output, especially non-metallic minerals. The latter was partly in response to a 0.4% rebound in construction, with residential construction posting its first increase in five months. Output of goods was dampened by a dip in oil and gas production and petroleum refining, after an explosion at a major plant in the oilsands.

With more goods circulating in the economy, goods-handling services (transportation and wholesaling) led the expansion of services over the last two months. Elsewhere, real estate brokers posted a sixth straight increase, while finance overall was buoyed by both more trading in markets and rising demand for bank services. Business services grew steadily for a second straight month, while demand for consumer services slowed.

Household demand

Consumer spending was mixed in January, with slow auto sales dampening overall retail sales. Housing demand gave conflicting signals: existing home sales edged down, new home sales gave back nearly all of January's large gain, while housing starts increased.

Retail sales volume fell 0.6% in January, after a 0.5% drop in December followed a 1.5% gain in November. Much of the decline originated in Quebec, after the provincial sales tax increased January 1, which likely brought spending forward into December. After providing a boost through most of 2009 and 2010, auto sales edged down in December and accounted for most of January's drop. Smaller declines occurred for most other goods. Clothing was among the few that increased, holding onto its strong gains in November and December.

The number of existing homes sold fell 1.6% in February while the average price for homes rose 2.5% to their highest level on record. A concentration of homes being sold in Vancouver, which has above-average prices, accounted for much of the rise in prices. New home sales returned to their December level following a 34% increase in January. Sales have gradually slowed since mid-2010 while vacancies increased. Housing starts increased 6.6% to 181,900 (at annual rates). Most of the gain originated in multiples, with Ontario posting a 50% increase in construction. This, coupled with a rise in single-home construction in the Prairies, offset declines elsewhere.

Merchandise trade

Exports rose 0.8% in January, reinforcing their 8% hike in December. Imports increased 5.3% after a 1.5% advance in December. All of the advance in both exports and imports reflected higher volumes, especially in the auto sector. The monthly trade surplus shrank from $1.7 billion to $0.1 billion.

Auto exports rose 16%, after shipments were slowed by retooling in November and poor weather late in December. Higher prices for metals helped boost exports of industrial goods for the fourth straight month (with a total gain of 20% since September). Energy exports rose 2.5% after a 21% jump in December, led by crude oil where an unseasonably cold winter in the US occurred just as pipeline capacity expanded for Canadian exports. Elsewhere, exports of agricultural and forestry products and machinery and equipment all gave back the gains made in December.

Higher auto imports accounted for nearly half of the overall advance in import demand. Energy imports also posted a large increase, reaching their highest level since October 2008. Imports of machinery and equipment rose 1.8%, as the volume of demand hit its highest level in over a year.

Prices

Total consumer prices were unchanged between January and February, after seven straight increases averaging 0.3% a month. As a result, the year-over-year rate of increase eased to 2.2%. The Bank of Canada core index edged down 0.1% in February, leaving it 0.9% above its level in February 2010.

The slowdown in inflation reflected an easing in the recent upward pressure on food and energy prices and small declines for some other goods and services. Food prices rose 0.2%, the smallest monthly gain since October 2010. Within energy, gasoline price hikes slowed to less than 1%, while electricity rates fell outright.

Elsewhere, the cost of durable goods was unchanged, dampened by lower auto prices. Clothing led a second straight dip for semi-durable goods. Services were held in check by the cost of shelter, which fell in January and was unchanged in February, partly due to lower mortgage interest costs.

Commodity prices rebounded in March after a slight dip in February interrupted their strong upward trend over the last two years. Energy led the increase. Crude oil rose steadily, surpassing $100 (US) in North American markets, while natural gas remained around $4 per mmbtu. Metals prices retreated slightly from their record high in February, partly due to lower industrial demand in Japan after an earthquake disrupted production. Agricultural prices held on to their large gains over the previous three months.

Industrial prices rose 0.7% in February, their seventh straight monthly gain that has lifted prices 3.5% since August 2010. This increase occurred despite a 5% rise in the exchange rate since last August, which dampened prices received for exports. Price increases have been narrowly-based in metals (+12.8%) and petroleum (+19%) and, to a lesser extent, food and chemicals. In fact, half of manufacturing industries have seen prices fall since August, especially exporters.

Financial markets

Prices on the Toronto stock market slipped 0.1% in March, their first monthly setback since June 2010. Metals and energy led the retreat, just as they have dominated the bull market over the last two years.

Most interest rates and the exchange rate were unchanged in March. One exception was the Japanese yen, which appreciated against most major currencies as Japan repatriated funds from overseas to pay for the damage from the tsunami early in March.

Short-term business credit growth accelerated in February. This increase coincided with a slowdown in funds raised by stock and bond issues. Household credit growth also picked up slightly in January.

Regional economies

Central Canada dominated the January increase in manufacturing sales, with gains of 7% in Quebec and 6% in Ontario. Aerospace in Quebec and autos in Ontario both recovered from declines over the previous two months. Retail sales in January slowed in both provinces. The 1.0% drop in retail sales in Quebec was the most in Canada, and follows large gains late in 2010 prior to the hike in the provincial sales tax on January 1. For Ontario, its 0.5% drop in sales followed no change in December.

In British Columbia, manufacturing sales rose 3%, their third straight month of solid growth. Forestry-based industries led the way, notably paper. However, retail sales and housing starts both posted a second straight decline.

The prairie provinces posted the only losses for manufacturing and gains for household spending in Canada. Manufacturing sales fell 1.1%, after six straight large gains (dominated by higher receipts for oil refining). While oil receipts dipped in January, shipments continued to rise for capital goods industries. Retail sales recovered their 0.2% decrease in December. Housing starts rebounded 26% after a large drop in January, partly reflecting the impact of weather.

International economies

In the United States, retail sales rose 1.0% in February, their largest advance since last October. Some of the increase reflected the postponement of purchases from January due to severe weather. But the possible size of this effect was reduced by the upward revision to January sales, from 0.3% growth to 0.7%. Most of the upward revision originated in components where sales are sensitive to weather, such as building supplies, restaurants and clothing. A temporary (one-year) cut in payroll taxes may have helped lift sales at the start of the year. As well, employment in March posted a second straight solid gain.

Meanwhile, the housing market weakened in February. Existing home sales fell 17% to their lowest level on record back to 1963. Housing starts tumbled 23% to almost equal their record low set in April 2009. However, much of the decline originated in multiple units, which had nearly doubled in January (and starts in January were revised up by 4%).

Manufacturing production rose 0.4% in February, after January's advance was revised up from 0.3% to 0.9%. Auto assemblies led growth for the second straight month, as dealers continued to replenish inventories after a drop in the fourth quarter. Output of capital goods slowed, and new orders also declined at the start of the year. Despite the increase in factory output, industrial production dipped 0.1%, reflecting a return to normal demand for utilities after three months of unusually cold weather had boosted output by over 5%.

Industrial production rose 0.3% in the euro-zone in January, matching its December pace, although durable and intermediate goods replaced energy as the source of growth. New orders eked out a gain on the heels of three robust months. Construction posted its first increase since last summer, aided by a strong rebound in Germany. The trade deficit widened as an increase in the deficit for energy more than offset a rise in the surplus for manufactured goods. Trade remained brisk with Brazil, China, India and Russia. Consumers ventured out again after severe winter weather dampened demand. The annual inflation rate rose to 2.4% in February, up from 0.8% a year ago, while the unemployment rate eased to 9.9%.

German industrial production slowed to start the new year, although new orders rebounded sharply. Construction was upbeat after several months of little change, along with consumer demand. Exports remained the source of growth, with Germany continuing to post the largest external surplus in the euro-zone. Inflation rose to 2.2% in February, while the unemployment rate eased to 6.3%.

Output in France rose for the third straight month in January, although new orders gave back most of their large December gain. Construction recovered as the weather improved. Export demand remained tepid, while the unemployment rate was stable at 9.6%.

Industrial production in the UK rose for the third consecutive month in January, buoyed by a recovery in manufacturing. New orders shrank, after three large gains at year end. Construction remained hamstrung by poor weather, while exports continued to slow. Consumer spending picked up in the new year, boosted by rising prices for energy and commodities, which propelled inflation to a 27-month high of 4%.

China recorded a trade deficit in February as rising prices for oil and other commodities raised imports, while exports were dampened as suppliers shut down for the week-long Lunar New Year holiday. Inflation rose to 4.9%, with food prices up 11%, leading to government-imposed price controls on some basic goods.

Brazil's economy grew 7.5% in 2010, its fastest expansion in 25 years, buoyed by strong industrial production and domestic demand. Rising prices prompted the central bank to raise its key interest rates for a second time this year to 11.75%.

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