Section 1: Current economic conditions

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Overview ¹ 

Output stalled in April, but the impression that this was related to temporary factors—notably the disruption of the global supply chain for auto parts by the tsunami in Japan—was reinforced by steady gains for the composite leading indicator in May. The sturdy underlying trend of growth was reflected in steady employment gains into June.

Much of the stall in output in April reflected the drop in auto assemblies. Exports were less affected in the month, as producers adapted temporarily by shipping from inventories instead of from the production line.

Lower household demand also continued to hamper output growth. The reasons for this were more complex than the shortage of parts that slowed the auto sector. Some of the decrease reflected a cooling of the housing sector, after a burst of demand during the unusually favourable financing conditions in 2010. The sluggishness of retail sales so far in 2011 is more unusual, given the ongoing strength of employment and incomes. The lingering weakness into April may reflect the lack of supply for specific lines of autos, the temporary spike in food and energy prices, and unusually cool and wet weather in much of the country. Whatever the specific cause, it is noteworthy that auto sales in Canada rebounded to their highest level of the year in June, while they continued to flounder in the US.

Lower auto sales in the US in May led to the first decline in retail sales in nearly a year, while the housing sector remained weak. Instead, overall growth was sustained by business investment and exports. Capital goods led the increase in manufacturing output and new orders in May. Exports in April reached a new record high, having recouped all of their losses incurred during the recession. By comparison, exports in Canada have recovered only half of their declines recorded in 2008 and 2009.

Labour markets

Employment expanded by 0.2% in June, its fifth increase so far in 2011. In the first half of the year, employment grew by 1.1%, versus a 0.2% gain in the second half of 2010, with services (including Census operations) and construction accounting for most of the upturn in 2011. The labour force matched the increase in jobs in June, especially adult women where most of the job gains occurred, leaving the overall unemployment rate unchanged at 7.4%.

Ontario and Alberta recorded most of the increase in jobs in June, continuing their upward trend in the first half of the year. Most of the acceleration of job growth so far in 2011 originated in these two provinces: Ontario shifted from no job growth in the second half of 2010 to a 1.7% gain in the first half of 2011, while Alberta accelerated from 0.5% growth to a 2.9% expansion. A wide range of services led the upturn in both provinces, supplemented by gains in construction in Ontario and in manufacturing in Alberta. Employment fell slightly in most other provinces between May and June, notably manufacturing in BC and services in Quebec. This helped limit employment growth in the first half of the year to 0.3% in Quebec and 0.4% in BC, little changed from their gains in the second half of 2010.

Leading indicators

The composite leading index rose 1.0% in May after a 0.9% increase in April. The May increase equalled the largest advance of the year so far, and compared with growth of 0.4% as recently as December 2010. Nine of the ten components posted gains in May, one more than the month before, while one declined. The manufacturing sector showed the largest improvement from the previous month.

New orders for durable goods increased 9.8% in volume, its largest advance since the recovery began. Much of the hike in orders originated in aerospace. The ratio of shipments to inventories posted a fourth straight advance, as sales rose steadily while inventories levelled off after three straight declines. The average workweek lengthened for the fifth straight month.

The indicators related to household spending remained mixed. The housing index continued to decline, down 0.6%, as a dip in house sales outweighed a rebound in housing starts. Furniture and appliance sales recorded their largest gain in over a year, while spending on other durable goods rebounded 0.2% after a drop the month before.

The financial indicators continued to slow. The trend of stock market prices in May posted its smallest increase since autumn 2010, hampered by lower commodity prices. The real money supply posted its smallest gain in over two years.

Output

The volume of GDP was unchanged in April, after large gains in five of the previous six months. Manufacturing output fell due to the impact of the tsunami in Japan on the supply of auto parts for producers in Canada. These losses also depressed output in transportation and wholesale trade. Mining offset these declines, partly as production in this industry rebounded from strikes during the winter.

Transportation equipment accounted for almost all of the drop in factory production. This reflected a 7% loss of auto output, mostly at Japanese-owned factories due to a shortage of parts. As well, aerospace production fell to a new low in its current cycle, despite an influx of new orders in the spring. Output of other capital goods increased, led by gains in machinery, notably for the mining and energy industries. Construction output rose by the smallest amount in over a year, slowed by a sharp drop in home-building.

Services output was unchanged. Besides the slowdown in goods-handling industries, household demand fell, as losses for real estate and recreation outweighed a small gain for retailers. These declines were offset by small gains for business and public services.

Household demand

Consumer spending slowed in the first four months of 2011. Following downward revisions to both February and March, retail sales volume in April was 1% below its December 2010 level. For April, retail sales volume edged up 0.2%. Sales of durable goods were bolstered by furniture and appliances, as auto sales slowed in the month. Unit auto sales fell sharply in May, before recovering in June to their highest level of the year. Spending on semi-durable and non-durable goods was little changed.

After picking up through the latter part of 2010, the housing market slowed in 2011. The number of homes sold edged down 0.9% in May, capping a 6% decline for the first five months of 2011 compared to 2010. Sales activity was down in Vancouver though the city continued to post higher prices. Housing starts were up 2.7% in May on the strength of the volatile multiple units component after declining the previous month. Year-to-date, housing starts were 7% below 2010 levels.

Merchandise trade

Both exports and imports fell slightly in April, after increases of about 5% in March. The 1.9% drop for exports exceeded the 0.6% dip in imports, doubling Canada's trade deficit to $0.9 billion. The tsunami disaster in Japan was reflected in a 31% drop in imports from that country, notably auto parts, while exports to Japan were little changed overall. The dip in export demand was mostly due to a 14% drop to the EU, as shipments to the US were unchanged.

The drop in exports was concentrated in aircraft and industrial goods, especially to markets in the EU and Asia. While auto production in Canada was hampered by a shortage of imported parts, exports continued to grow as producers shipped from inventories. Agricultural products posted the only other advance, reflecting increased volumes for grains.

Lower auto imports accounted for most of the dip in imports, as the disruption of production in Japan led to a 22% decline in imports of passenger vehicles and a 7% drop of parts. Imports of machinery and equipment and industrial goods both hit their highest level since before the recession began in 2008. Much of these gains reflected the buoyancy of non-automotive industrial activity in Canada, which was boosted by higher imports of industrial machinery as well as chemicals and plastics.

Prices

The CPI rose 0.2% between April and May, which lifted the year-over-year rate of increase from 3.3% to 3.7%, the most in eight years. The increase was almost identical across goods and services. The sharp run-up in gasoline prices so far this year began to moderate in May. This was offset by higher food prices, as well as increases for clothing and vehicle purchases. The increase in auto prices followed steady declines earlier in the year, and left prices down 0.9% since January. This is in marked contrast to the US, where the shortage of imported vehicles led to a price hike of 3.6% since January.

Commodity prices continued to moderate in June. Energy prices led the decline, with crude oil falling below $100 (US) a barrel after the IEA announced a sale from its strategic reserve. Natural gas prices continued to weaken. Agricultural prices retreated from their recent peaks. Wheat posted the largest drop, falling $2.50 a bushel on the prospect of a good harvest. A bumper crop for corn in the US left prices one-quarter below their peak earlier this year, when flooding in the mid-West raised concerns about the crop. Prices for most metals firmed after softening in the spring, with the exception of gold after the threat of a default by the Greek government passed.

Prices for manufactured goods dipped 0.2% in May, their first decline since July 2010. However, most of the drop originated in metals and petroleum refining, which had dominated the increases earlier this year. Conversely, more commodities (10) posted increases than decreases (6) in May, also a reversal of the downward trend for the majority earlier in the year. Prices turned up for exported goods such as autos, paper, and machinery, partly reflecting a dip in the Canada/US exchange rate. The exchange rate was little changed in June.

Financial markets

The Toronto stock market fell by 3.6% in June, after declines totalling less than 3% in the previous three months. The drop was led by the energy sector, where the sell-off in May intensified in June. Consumer staples also ceded the ground gained the month before. However, metals and minerals levelled off while industrials eked out a second straight gain.

Household credit growth slowed to 0.5% in April, after a brief pick-up to 0.8% in March. The moderation was equally evident in consumer credit and mortgages. Business credit in May rose at a steady clip of 0.5%. Short-term borrowing again led the increase, as fund-raising slowed in the bond and equity markets.

Regional economies

The prairie provinces continued to strengthen across the board. Housing starts rose 10% in May, their third increase in four months. Retail sales rose 1.0% in April, after a 0.7% gain in the first quarter. Alberta accounted for all of the April gain, with a Canada-high advance of 1.6%. Manufacturing sales advanced 0.9%, the only increase among the regions in April, after rising nearly 4% in the first quarter. Petroleum receipts levelled off, after leading growth earlier in the year, but shipments by capital goods industries picked up, notably for machinery.

Household demand in BC improved even faster than in the prairies. Housing starts in May jumped by a third; on the heels of a 22% gain in April, this left starts at their highest level since the recession began in October 2008. Ontario is the only region that has not regained its pre-recession level of housing starts (the closest it came was in November 2010, when a spike in condominium construction pushed starts to 78,600 units, versus 85,000 starts just before the recession began). Retail sales rose 1.3%, the largest of three consecutive increases as sales recovered all of their losses in December and January. However, manufacturing in BC could not keep pace with the prairies, with sales down 0.9% due to a setback in the recovery of the wood and paper industries.

In Quebec, housing starts increased 14% to 42,000 units (at annual rates), their highest level of the year. However, retail sales slipped 0.4%, after sales declined 0.8% in the first quarter after the provincial sales tax was raised. Manufacturing sales fell 1.3%, reversing a third of their first-quarter gain, due to a downturn for aerospace.

Manufacturing sales in Ontario posted the largest drop of the major regions, falling 1.8% due to the loss of auto production as a result of parts shortages. Housing starts also dropped, down 23% to their lowest level since January. Retail sales edged up 0.4%, recovering some of the ground lost in the first quarter.

International economies

In the United States, growth was sustained by business investment and exports as household spending stalled in the spring. Output of business equipment rose 1.2% in May, which lifted overall manufacturing production despite a further decline in auto assemblies. New orders for core capital goods increased 1.6%, capping their largest 3-month gain in over a year.

Exports in April rose 1.2% to a new record high level. The increase was broadly based among capital goods, agricultural and industrial products. Imports fell because of a large drop in auto imports from Japan. This left the monthly trade deficit at $43.7 billion, its low for the year despite rising oil prices.

Retail sales in May fell 0.2%, their first monthly decline since June 2010. The drop was led by autos, where the combination of higher prices and a shortage of supplies from Japan contributed to a third straight decline in sales (sales fell again in June, leaving unit sales down 7% in the second quarter). Consumer prices rose 0.2% in May, the smallest monthly increase in six months. New vehicle prices were up 1.1% after increases of 0.7% in the previous two months. Meanwhile, gasoline prices fell 2.0% on a seasonally adjusted basis (unadjusted prices rose 3.6%, reflecting the usual hike as the summer driving season began).

The housing sector continued to hover slightly above its low set in 2010. Housing starts rose 4% in May, while residential permits posted a stronger increase. Existing home sales dipped for the third time in three months; these declines reversed about one-third of their 38% increase recorded between July 2010 and January 2011. New home sales continued to rest about 14% above the recent lows set last summer and equalled in February.

The euro-zone economy continued to expand in April, with industrial production rising 0.2%, its sixth straight increase, despite a 3.7% drop in energy output. New orders rebounded, led by strong gains in consumer goods. Construction recovered its losses over the previous two months. The external trade deficit widened as the increasing energy deficit more than offset the rising manufactured goods surplus. Consumers opened their wallets with sales recovering 0.9% from their March drop. Inflation eased slightly in May to an annual rate of 2.7%, despite continued upward pressure from transport, housing, alcohol and tobacco prices.

Industrial production dipped 0.3% in Germany in April after two months of growth, while new orders rebounded from a dip in March. Construction fell for the first time since January as pent-up demand began to wane. Exports remained upbeat with Germany continuing to post the largest external trade surplus in the euro-zone. Consumer spending was unchanged in April, after declines in the previous two months. The annual rate of inflation eased to 2.4% in May from 2.7% the month before.

French industrial production fell 0.3% in April, after a 1.2% decline the month before, mirroring the trend in new orders. Construction picked up slightly after contracting the previous two months, while consumer spending remained on its upward trend. Prices were flat in the three months to May. Extreme heat in March and May and a lack of rain led to France's worst drought in over 30 years.

Industrial production in the UK fell 1.6% in April, its largest drop in two years, dampened by an extra holiday for the Royal Wedding and auto parts shortages. Construction also contracted after two strong months of growth. Imports continued to outpace exports, with the UK continuing to post the largest external trade deficit in euro-zone. Consumer spending was upbeat in the month, while inflation was steady at 4.5% in May.

Japan's industrial production rebounded at its fastest pace in over 50 years in May, as automakers restored operations at plants following the tsunami in March. Output rose 5.7% in the month, boosted by a 36% gain in autos. Exports continued to contract, however, falling for the third straight month in May as auto exports tumbled 39%. Consumer demand showed some signs of recovery with retail sales up 2.4% in May.

Inflation in China and India accelerated in May, prompting China's central bank to again lift bank reserve requirements and India's central bank to raise interest rates for the tenth time in sixteen months. China's annual rate of inflation hit a 34-month high of 5.5%, while India's was 9.1%.

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