Section 1: Current economic conditions
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Real GDP rebounded 0.3% in March, capping its best quarterly advance in a year of 1.0%. Employment growth resumed in April and May after a stall in March.
The sources of growth continued to shift from household spending to exports and especially business investment in the first quarter. Household spending was dampened by no growth in personal expenditure. With jobs and incomes rising steadily, some of the slowdown in consumer spending growth coincided with temporary factors in central Canada, notably the hike in Quebec's provincial sales tax and the end of rebate cheques for the HST in Ontario, both of which likely boosted sales in the fourth quarter of 2010. The slowdown in spending was concentrated in a drop in outlays for durable goods, which was reflected in a continued low level of consumer demand for credit. Mortgage demand was steady, reflecting a pick-up in residential construction after three quarters of small declines.
Business investment continued to recover, having recouped about two-thirds of the decline posted during the recession. Spending on engineering projects, a sector dominated by energy, continued to lead growth. Outlays for machinery and equipment were led by agricultural and industrial machinery. Machinery and equipment also accounted for much of the build-up of inventories in the first quarter.
Real exports continued to grow at an annual rate of about 6%. Energy products and autos contributed the most to the first-quarter gain. While the tsunami disaster hampered trade with Japan in March, especially the auto sector, total exports continued to grow as machinery and equipment and industrial goods rebounded from a weak start to the year.
Revisions to real GDP in 2008 and 2009 more clearly defined the 2008-2009 business cycle, with a sharper peak before the recession, a deeper contraction during the downturn, and a slightly faster recovery. Instead of a 0.1% net decline in GDP in the first three quarters of 2008, revised GDP data now show a net 0.2% increase, which removes any ambiguity that the recession might have begun before the fourth quarter (there was never any ambiguity in employment data, with the labour force survey showing steady job growth in the first three quarters of 2008). The recession that began in the fourth quarter of 2008 is steeper in the revised estimates, with a total drop of 3.9% (versus 3.3% in the previous estimate). The recovery that apparently began in the third quarter of 2009 was also revised moderately to 5.1% through to the end of 2010, compared with 4.7% in the previous estimate.
Employment rose 0.1% in May, reinforcing its 0.3% gain in April. Full-time jobs accounted for all of the increase, and contributed two-thirds of the job growth in the past 12 months. Together with a drop in the labour force, the unemployment rate fell from 7.6% to 7.4%. The labour force has grown only 0.8% in the past year, reflecting a lower participation rate for youths, a slowdown in the growth of the core-age population to 0.4% since May 2010 and a dip in the participation rate for this age group (especially adult women).
Employment growth was concentrated in services, especially in trade where jobs posted their first gain since January. Business services also posted small gains. These advances outweighed a drop in the public sector and in manufacturing. The manufacturing losses were concentrated in Ontario (where auto assemblies were disrupted by the shortage of parts coming from Japan) which pulled down overall employment in Ontario. Quebec led the increase in employment, especially in trade, and its unemployment rate dropped half a point to 7.3%. Alberta led job growth in western Canada, fuelled by construction demand, and its unemployment rate also fell half a point, to 5.4%.
The composite leading index rose 0.8% in April, after a 0.6% gain in March. Eight of the ten components increased, two more than the month before.
All three manufacturing components advanced, versus only one the month before. New orders rebounded 0.5%. The average workweek lengthened for the third time in four months. The ratio of shipments to inventories rose, led by stronger sales. Much of the gains in manufacturing reflected stronger exports, and the leading indicator for the US posted another solid increase (+0.7%).
The components related to household demand in Canada were mixed. The housing index posted its first dip (-0.4%) in six months, as starts slowed while sales increased. Furniture and appliance sales rose 0.4%, but sales of other durable goods fell 0.2%.
Real GDP expanded 0.3% in March after a 0.1% dip in February. The resumption of growth was driven by goods production, as services were flat for the second straight month.
Manufacturing output rose 1.8%, its largest monthly advance since December 2006. A rebound in auto assemblies led the increase. There were also large gains in all capital goods industries, including a double-digit gain in construction and mining machinery and the largest increase in aerospace since its recovery began last summer.
Elsewhere in the goods sector, construction rose 0.7%. Engineering continued to lead a broad-based gain in construction. Mining output stalled for a third straight month, as technical problems hampered oil and gas output even as metal mine production rose sharply.
Services were unchanged, despite the boost to goods-handling services. These gains were offset by a drop in consumer-related services, notably retail trade, restaurants and recreation. As well, public sector has been flat so far this year, while business services advanced only 0.1%.
Household spending slowed in the first quarter, despite steady gains in jobs and labour income. Disposable income growth was slowed by a drop in transfer payments, after Ontario sent out the second wave of rebate checks related to the HST in the fourth quarter (the first wave was sent in the second quarter of 2010, and the final one will be sent in the second quarter of 2011). As well, Quebec raised its provincial sales tax on January 1 2011, coinciding with weak retail sales early in the new year. Overall, real consumer spending was flat in the first quarter. In contrast, households in Canada stepped up house purchases in the first quarter, before new restrictions on mortgage financing took effect in March.
Retail sales volume fell 0.8% in March, the third decline in four months. This marks the most prolonged period of slowing sales since the onset of the recession in late 2008. However, while the slump in sales late in 2010 originated in durable goods, demand for durables rose in March, supported by consumer confidence. Instead, sales fell the most for clothing, after large price discounts after Christmas boosted purchases at the start of the year. A late Easter also may have delayed seasonal purchases of clothing and food.
Housing demand slowed in April. The number of existing homes sold fell 4.4%, the largest of three consecutive monthly declines. New home sales fell to their lowest level since late 2009, following their best quarter of the recovery. Housing starts dipped 3.1%, with the decline concentrated in the volatile multiple units component. Starts of single-family homes hovered around 65,000 units (at annual rates) for the eighth straight month. This is about one-third below their peak reached during the spring of 2010. The drop in new house construction kept the number of vacancies from rising, despite the recent slowdown in sales.
The current account deficit continued to shrink in the first quarter, falling below $10 billion for the first time in a year. Most of this decline reflected a rising surplus in trade in goods which, at $1.7 billion, reached its highest level since the recession began late in 2008. While non-residents were buying more Canadian merchandise, their demand for Canadian financial instruments fell. This was most evident for Canadian bonds, where non-resident purchases of $11.8 billion were only about a third of their level in the first quarter of 2010 (the financial data are not seasonally adjusted). However, direct investment in Canada totalled $25.4 billion in the last two quarters, more than in either 2009 and 2010.
The merchandise trade balance in March remained in surplus for the fourth consecutive month. The trade surplus in January and February was revised up by a combined $1.3 billion, mostly because energy exports were raised by $0.7 billion while energy imports were lowered by $0.4 billion. In March, the surplus rose slightly to $0.6 billion as a rebound in exports slightly exceeded that for imports. The tsunami disaster in Japan in mid-March led to a 9% drop in exports from Canada to Japan and a 7% decline in imports from Japan. However, these declines represent less than 1% of Canada's total monthly trade.
Exports rose 3.5% in March, recovering half their decline in February. The widespread losses in February were followed by equally widespread rebounds for all components in March, except autos. The recovery was particularly robust for the volume of machinery and equipment and the price of industrial goods, notably metals. Energy recovered only about a third of its February decline, although it remains above any month in 2010 after a surge in January.
Imports increased 2.8%, essentially recouping their drop in February. The increase was broad-based, with autos making the largest contribution to growth. Import growth was dampened by another dip in prices, especially for machinery and equipment. The volume of machinery and equipment imports rose 2.8%, and were just below their record high set in May 2008 (which was clearly an outlier compared to other months in 2008, reflecting the arrival of a record amount of aircraft and parts as well as equipment related to electricity generation).
The implicit price index for personal expenditure rose 0.8% in the first quarter of 2011 and was 1.9% above its level a year-earlier. This was below the 2.6% increase in the CPI over the same four quarters. Half of the gap between the two price indices reflected changes in spending patterns induced by higher prices for some items (notable energy). A similar gap was evident in the US, where the 1.5% increase in the implicit price index for personal expenditure was below the 2.2% rise in the CPI.
After a 0.8% jump in March, the CPI rose 0.3% between March and April, leaving the year-over-year rate unchanged at 3.3%. Energy prices continued to rise rapidly, notably gasoline. But the 1.6% jump in food prices in March was followed by a 0.2% drop in April, as the shock to vegetable prices from poor crops in the southern US began to dissipate.
Excluding food and energy, the CPI was flat after a 0.2% increase in March. Lower prices for clothing and non-automotive goods were offset by increases for motor vehicles and rents.
The recent surge in commodity prices was partly reversed in May, with prices returning to their March level. The reversal was led by declines of about 4% for energy and metals. The price of crude oil fell $10 a barrel after four straight increases. Copper and nickel led the decline in metals, while gold continued to set record highs. Agricultural prices were an exception to the downturn in commodity prices, with grains receiving a boost from below average rain in parts of the US.
Prices for manufactured goods continued to rise, with their 0.5% gain in April about equal to their average monthly increase since beginning a sustained recovery in July 2010 that has left prices only 1.3% below their record high set in August 2008. The recovery since last summer has been largely-confined to oil and metal refining, chemicals and food products. Many products continue to see sustained price declines. This was most evident for autos and paper, where prices fell for the ninth straight month, machinery (7 consecutive monthly declines) and lumber (3 straight declines).
Total household credit in the first quarter grew $93.2 billion (at annual rates), down slightly from the fourth quarter and well below the peak gains of nearly $120 billion in 2007 and 2008. Mortgage demand picked up slightly to $67.6 billion, continuing its recovery from its low in the winter of 2008. But consumer credit growth remained near its recent lows at $22.8 billion in the first quarter, and was nearly 40% less than the quarterly gains posted in mid-2007.
Elsewhere, net borrowing by government continued its steady decline over the last four quarters, from a peak of $102.2 billion (at annual rates) to $88.0 billion. Despite continued large financial surpluses, corporations continued to tap financial markets for sizeable amount of funds, notably through new equity issues of nearly $35 billion in the first quarter.
In May, the stock market edged down 1% for the second straight month. Metals and energy led the retreat, as industrials and consumer stocks rose while financials were flat. The slowdown in the price of stocks was accompanied by a marked deceleration of new equity issues in April, as firms turned to the bond market to raise funds.
The Canadian dollar averaged about $1.03(US) in May, returning to its average level of February and March after a brief surge to near $1.06 in April. Most interest rates were little changed in May, with the exception of a small dip in mortgage rates at month end.
British Columbia led national growth, with all sectors posting gains in the spring. Manufacturing sales rose 2.2% in March, capping a 5% increase in the first quarter. Shipments of paper rose 8% in March to their highest level of the recovery, while lumber sales remained close to their January high. In the machinery industry sales rose 7% in the first quarter. Elsewhere, household demand rebounded from a weak first quarter. Housing starts increased 24%, after falling by over a third in the previous three months. Retail sales edged up 0.2%, but nevertheless were down 1.3% in the first quarter, the largest drop in Canada.
Manufacturing also led growth in Quebec. Factory sales rose 2% in March, lifting first-quarter growth to 4.2%. Aerospace dominated both gains. Retail sales rebounded 0.5% in March, but were down for the first quarter after a surge at year-end 2010, likely in advance of the provincial sales tax hike on January 1. However, labour income growth accelerated to 1.5% in the first quarter, laying the foundation for the recovery of sales in the spring.
Higher petroleum receipts lifted manufacturing sales for the prairie provinces by 3.5% in March, matching their quarterly advance. Housing starts recovered 5% in April after a sharp drop the month before. Retail sales dipped 0.1% in March, but first- quarter growth was positive, reflecting strong gains in labour income.
Manufacturing sales in Ontario edged up 0.1% in March, recovering little of the ground lost in February. Auto shipments remained slow after a drop in February. Retail sales fell 0.8% in March, their third decline in four months. Housing starts in April retreated 8% after a strong start to the year.
In the United States, weakness in the auto sector hampered sales and output in April and May. Auto sales slowed slightly in March and April, and then fell 10% in May to their lowest level since August 2010. About three-quarters of the drop originated in Japanese firms, which faced product shortages as a result of the disruption of parts production in Japan caused by the tsunami. Faced with a shortage of product, retailers of Japanese vehicles slashed incentives for consumers to purchase, which also led American-based producers to raise prices. As a result, dealer incentives to purchase in May were the lowest in nine years. The mix of vehicles sold also shifted to more fuel efficient vehicles, as gas prices in the US neared record levels. The slowdown in auto assemblies also lowered manufacturing production by 0.4% in April; excluding autos, output rose 0.2%. Retail sales in April rose 0.5% despite the slowdown in autos, while growth in March was revised from 0.4% to 0.9%.
The housing market showed signs of bottoming out. New home sales in April posted a second straight gain of about 7%. However, this was not reflected in more housing starts, which fell 10.6% after the March increase was revised up from 8% to 13%. All of the drop in April originated in the southern states, where an active tornado season may have disrupted construction.
Employment growth moderated in May, as a slowdown in private sector payrolls to one-third its average increase over the previous three months accompanied continued cuts by local governments. Manufacturers trimmed jobs for the first time since last October. The unemployment rate remained little changed at 9.1%, still a full point below its recession high.
The pace of growth in the euro-zone accelerated in the first quarter of 2011, with real GDP rising 0.8% after a 0.3% gain in the final three months of 2010. Industrial production retrenched in March, led by contractions in both durable and capital goods. New orders followed suit with demand stagnating across the board. Construction remained downbeat, despite some pent-up demand early in the new year after early winter storms. The external trade surplus was unchanged in March as a large increase in the energy deficit was offset by a similar rise in the manufactured goods surplus. Consumers held on to their wallets as rising costs for transport, housing, alcohol and tobacco pushed inflation to an annual rate of 2.8% in April, up from 1.6% a year earlier while the unemployment rate was unchanged at 9.9%.
Real GDP in Germany rose 1.5% in the first quarter, after a 0.4% rise in the fourth quarter that was dampened by a slowdown in construction due to harsh winter weather. Exports remained the engine of growth, rising 7.3% in March to their highest value on record, led by demand for machinery and autos. Industrial production rose slightly in March, after a surge the month before, while new orders fell following two months of growth. Construction rebounded sharply in January from its December slowdown, and then tapered off to steady gains for the rest of the quarter. Despite a fall in the unemployment rate to 6.1% in April, consumers remained frugal and retail sales volumes fell for the second straight month.
Real GDP in France rose 1% in the first quarter, spurred by strong domestic demand. Industrial production contracted in March, after four months of growth. New orders also turned down, following strong gains at year end. Construction rebounded in the new year due to pent-up demand. Imports outstripped exports, further widening the trade deficit. Consumers reined in spending in March after two months of growth. The unemployment rate eased to 9.4% in April, while inflation was steady at 2.2%.
Total output in Italy rose 0.1% in the first quarter, unchanged from the fourth quarter. Industrial production rose slightly in March, after rebounding the month before, while new orders marched forward. Construction and consumer demand were lacklustre despite a drop in the unemployment rate to 8.1% in April.
In the UK, real GDP rebounded 0.5% in the first quarter. Prolonged and severe winter weather hampered construction through December and January, with building only picking up in February and March. Domestic demand remained weak, while the annual rate of inflation hit a two-and-a-half year high in April of 4.5%, boosted by rising travel costs and higher duties on alcohol and tobacco.
Real GDP in Japan fell 0.9% in the first quarter, following a 0.8% drop in the last three months of 2010. Consumer demand picked up in April after falling almost 15% year-over-year in March. Exports fell 12.5% from a year earlier, as shipments of autos and semi-conductors plummeted due to production losses following the earthquake and power outages.
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