Section 1: Current economic conditions
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Output in the Canadian economy fell 0.3% in May after no change in April and 0.3% growth in March, while employment levelled off in July after steady gains in the second quarter. Much of the weakness reflected specific events in energy output in May and public sector employment in July. These events occurred against a backdrop of continuing weakness in the US recovery and the continued disruption of global trade due to the tsunami in Japan in March.
The drop in real GDP in May was concentrated in oil and gas extraction, due to wildfires in Alberta and maintenance. These cuts echoed downstream in engineering construction and petroleum refining. As well, auto assemblies fell for the second straight month, mostly in Japanese-owned plants after problems in the global supply chain in parts hampered auto assemblies in Canada in April and into May.
Consumer spending continued to be sluggish so far in 2011. Some of the weakness in April and May reflected a shortage of vehicles, as well as higher gasoline prices. When the supply of autos began to improve in June, and both auto and gasoline prices fell, auto sales picked up in line with the underlying trend of jobs and incomes.
Real GDP in the United States rose 0.4% in the second quarter, after significant revisions lowered first-quarter growth to 0.1%. Revisions also lowered the peak-to-trough decline in GDP during the 2008-2009 recession to 5.1% from the initial estimate of 3,7%, and left output in the second quarter of 2011 below its pre-recession peak. Weak household demand for both consumer goods and housing checked growth in the second quarter, while business investment and exports continued to strengthen.
Employment was little changed in July, after steady gains in the second quarter. However, full-time jobs expanded 0.2%, while part-time positions fell 0.5%. With the labour force falling 0.2%, the unemployment rate dipped to 7.2%.
There was a marked contrast between private sector and public sector employment in July. Private sector jobs grew by 0.9%, reflecting solid gains in construction, manufacturing, transportation and finance. Meanwhile, the public sector contracted 2.0%, led by declines in education, health and public administration. Some of the 30,000 loss in education appears to reflect a recent seasonal pattern of layoffs in the summer months, a trend that is being reflected in updated seasonal factors.
This trend of laying off education workers temporarily over the summer seems most pronounced in central Canada. Education employment in July fell by 20,000 in Quebec and 25,000 in Ontario, after these provinces had led the July declines in recent years. Many of these workers appear to have left the labour force, which shrank by 21,000 in Quebec and 36,000 in Ontario, consistent with a pattern of lower labour force participation in these provinces in July in recent years. About 40% of people who left the labour force in July expected to be recalled to work soon. Private sector jobs expanded in both provinces, led by manufacturing in Ontario (partly as the auto industry revved up production) and construction and trade in Quebec. Elsewhere, employment rose steadily in Alberta and BC, mostly due to increases in services.
The composite index rose 0.2% in June after a 0.8% gain in May. Four of the ten components declined, compared with none the month before. Most of the reversals occurred in manufacturing, where all three components swung from gains the month before to declines or no change. Much of the downturn in manufacturing originated in the auto sector, where the disruption of the global supply chain originating in Japan's tsunami disaster temporarily slowed assemblies in Canada in the spring.
The ratio of manufacturing sales to inventories fell for the first time in seven months, led by the drop in auto shipments. The average workweek at factories also posted its first decline in ten months. New orders for durable goods were unchanged, remaining at the high level established after a 9.3% surge the month before due to the booking of several large orders in the aerospace industry.
Household spending remained mixed. The housing index increased 0.3%, as housing starts in June reached their highest level of the year. Gains in housing helped to sustain growth in furniture and appliance sales. However, spending on other durable goods fell 0.3%, partly as a shortage of some vehicles from Japanese-owned producers appeared to delay purchases.
Elsewhere, the leading indicator for the United States rose by 0.4% for the second straight month, as exports and business investment increased to offset a slowdown in consumer spending. The Toronto stock market in June posted its largest drop since last summer.
Real GDP fell 0.3% in May, after no change in April and a 0.3% gain in March. Much of the spring slowdown in production originated in supply disruptions in the auto industry in April and in the energy sector in May. Oil and gas production fell 4.2% in May as a result of wildfires in Northern Alberta and scheduled maintenance at oilsands plants (scheduled means advance notice of as little as two weeks). Exploration and development of oil and gas fell 11%, largely due to flooding in the Prairie provinces. The wildfires and poor weather also slowed engineering construction, after three months of growth averaging 1.5%. The drop in oil output reverberated downstream in a drop in petroleum refining. Altogether, the declines in industries related to oil and gas accounted for about three-quarters of the May drop in output.
Outside of mining, manufacturing posted the largest drop in output. Petroleum refining led the decline, off 11%. Auto production fell another 1%, on the heels of an 11% decrease in April when the brunt of the impact of a shortage of parts from Japan began to be felt. The impact of these declines was largely offset by gains in chemicals and capital goods. Within the latter, both computers and machinery posted large increases.
Services expanded by 0.2%, their largest advance in four months. Wholesaling led the way, despite the lower volume of goods circulating in the economy as well as no change in transportation (even before the postal lockout in June). Accommodation and food posted its largest gain of the year to date. The public sector grew, largely due to hiring related to the Census. Partly offsetting these increases were a small dip in real estate sales and little change in business services.
The volume of retail sales was little changed in May, after a 0.4% gain in April. Spending on durable goods was flat, as a further decline for automotive goods offset a fourth straight increase for non-automotive durable goods. The drop for autos was the second straight in the wake of the disruption of supplies of Japanese models, which led to a shortage of product at dealers and higher prices. When the supply chain began to be replenished in June, prices fell sharply and unit sales rebounded by 10%. The buoyancy of non-auto demand was led by electronic goods and computers, as furniture and appliance sales slowed.
Spending on semi- and non-durable goods was checked by higher prices. Clothing prices rose over 1% after discounts the month before. Consumption of non-durables edged down, as the cost of food and especially gasoline increased during the month.
Housing starts continued to recover from a weak start to the year. Starts in June edged up 2% to an annual rate of 197,400 units, capping a 12% rebound in the second quarter. Ground-breaking on single-family dwellings were particularly strong, rising 11% in June to their highest level since July 2010. However, new home sales slumped in June just as construction picked up, leading to the first monthly increase in the number of vacant new homes so far this year.
Exports rebounded 1.2% in May, recovering most of their decline in April. Industrial goods and machinery and equipment led the drop in April and the rebound in May, while autos edged up in both months. Metals drove the increase in industrial goods, notably copper and gold. The volatile aerospace component lifted machinery and equipment exports. However, after breaching $10 billion in January for only the ninth time on record, energy exports retreated steadily to $9.1 billion in May. This declining trend was driven by crude oil, which fell from a record $6.4 billion in January to $5.2 billion in May. The high for oil exports in January reflected a one-third increase in volume since mid-2008, as prices remained 21% below their peak set in June 2008 (overall energy exports remain well below their 2008 high, largely because natural gas prices have fallen by two-thirds).
Imports rose 1.1% in May, keeping them near the high for the current cycle touched in March. Autos led the increase in imports, after supplies from Japan were interrupted by the after effect of the tsunami. However, the rebound was confined to vehicles, as parts from Japan remained in short-supply, which continued to hamper production in Canada at Japanese-owned plants. Machinery and equipment imports continued to trend up, with a fifth gain in six months, largely due to aircraft. Industrial goods imports expanded as a result of inflows of precious metals to be refined in Canada. The overall growth of imports was tempered by a second straight decline for energy products.
Consumer prices fell 0.4% between May and June, lowering the year-over-year rate of increase to 3.1%. Gasoline prices fell 3.7% in the month, after leading the upturn in prices in the first half of the year. Core prices also dropped 0.2%, led by sharply lower prices for vehicles. In Canada, vehicle prices were 3.1% below a year-ago, a marked contrast with the 3.9% hike in the US. Clothing prices also were discounted in June.
Commodity prices rose in July, after two months of decline. Energy and metals led the increase. Crude oil rallied to near $100 for the West Texas Intermediate grade, although the gap between this price and Brent crude widened to a record of $20 by month end. This gap was reflected in continuing increases in the price of oil imported into Canada, while the price received for our exports has been little changed so far this year. The increase for metals was widespread, although gold surpassed $1600 an ounce for the first time ever, partly due to concerns about sovereign debt defaults in Europe and the US. Agricultural prices continued to edge down, on the expectation of good wheat and corn crops.
Industrial prices fell 0.3% in June, mostly due to lower prices for refined oil and metals, which had driven the index higher for most of 2011. A slight dip in the exchange rate lifted prices for a number of exports, notably autos and paper.
The Toronto stock market fell another 2.7% in July, its fifth straight monthly decline that left the index at the same level as the end of November 2010. Consumer discretionary stocks posted the largest decline, followed by industrials and financials. Energy and metals stocks levelled-off, after leading the retreat in the spring.
The Canadian dollar appreciated to $1.05(US), and long-term bond prices fell as negotiations continued on lifting the US government debt ceiling, although these developments have reversed in early August due to renewed concerns about the global economy. Non-residents have purchased $28.0 billion of Canadian bonds in the first five months of 2011 after buying $84.6 billion in all of 2010.
Household and business credit continued to grow steadily. Firms in June used increasing amounts of short-term credit to finance their need for funds, as bond issues slowed.
Ontario's economy improved broadly, after sharp losses in the auto and housing sectors the month before. Housing starts rebounded 30% in June, boosting second-quarter starts by 12% after a 10% gain in the first, easily the best in the country. Retail sales recorded a second straight 0.5% increase in May, after a weak first quarter. Manufacturing sales rose 0.4%, recovering only a fraction of their 1.8% drop in April as shipments from the auto industry continued to decline.
Conversely, most economic indicators for Quebec slowed. Housing starts fell 4% in June, limiting the second-quarter increase to 5%, the lowest of the major regions. Retail sales edged up 0.1% after decreases of 0.8% in April and 0.9% in the first quarter, both the largest declines in Canada. Manufacturing sales fell about 1% for the second straight month, led by a drop for aerospace.
The economy of BC retreated across the board, implying continuing weakness in manufacturing and a downturn in household demand. Manufacturing sales tumbled 4% in May after a 0.8% drop in April, weighed down by steepening declines for forestry-based products. Housing starts fell 28%, but after large gains in April and May this left the second quarter still up 8%. Retail sales dipped 0.7% after three straight gains averaging 1% a month.
In the United States, second-quarter real GDP rose 0.4% after a downward-revised 0.1% gain in the first (the preliminary estimate was 0.4%). Consumer spending stalled, as a shortage of product hampered auto sales while higher prices led to cutbacks in outlays for food and energy. Auto sales improved in July, led by sales of Japanese vehicles as inventories were gradually replenished. The recovery of housing continued to be barely perceptible. Instead, growth came from business spending and exports. Business investment rose 1.5%, while inventories also contributed to growth. The trade deficit shrank as exports rose faster than imports.
Industrial production rose 0.2% in June, reversing downward-revised declines of 0.1% in the previous two months. Manufacturing output was flat, with auto assemblies falling for the third month in a row as producers struggled to overcome the disruption in the flow of parts from Japan. However, auto production schedules for the third quarter show a substantial increase, helped by the opening of a new factory in Tennessee. Total industrial production was boosted by steady gains in mining and a rebound in utility demand, fuelled by a heat wave in the Southern states.
The US trade deficit widened to $50.2 billion in May, its highest level since October 2008. The surge reflected sharply higher imports, notably for petroleum as both prices and volume rose. As well, auto imports from Japan began to recover slowly after a sharp drop in April. Meanwhile, exports softened, after several months of strong growth.
Retail sales in June were little changed for the third straight month. Nominal auto sales edged up, despite fewer unit sales, reflecting higher prices. The 1% hike in auto prices helped to boost the increase in the CPI excluding food and energy by 0.3%. Overall, consumer prices fell 0.2% in June as gasoline prices retreated from their recent highs.
Housing starts jumped 15% in June, surpassing 0.6 million units (at annual rates) for only the second time in the past year. New home sales dipped 2%, reversing some of the large gains posted in April and May. However, existing home sales fell for the third time in four months, offsetting nearly half of the gains made in the second half of 2010. One bright spot was that the median price for existing homes posted their first quarterly gain since early in 2010.
Industrial production grew 0.1% in the euro-zone in May, led by energy and capital goods as demand for consumer goods waned after months of steady gains. New orders posted a 3.6% increase, with strength in every sector except for durable consumer goods. Construction retrenched in the month, continuing its see-saw pattern of late, as the pent-up demand following harsh winter weather subsided. External trade remained brisk, particularly with the emerging countries of Turkey, Russia, China, India and Brazil. Consumer spending rebounded 0.9% in June, its largest gain of the year to date.
German industrial production rebounded 1.2% in May, after a 0.5% dip the month before. New orders rose for the second straight month as demand for capital goods remained strong. Construction resumed growth after a lull in April. Exports also bounced back 4.3% in May, while imports rose 3.7%. Retail sales volume jumped 6.3% in June to lead the recovery in the EU. Inflation was steady at an annual rate of 2.4% in June and the unemployment rate eased to 6.1% in June compared with 7.1% a year earlier.
Industrial production in France rebounded in May, gaining 2%, to more than offset back-to-back monthly declines. New orders followed suit, up 2.3% in the month. Construction fell for the third time in four months as demand remained tepid. Imports continued to outstrip exports, leaving France with the second largest deficit in the euro-zone in May. Consumers reined in spending in the second quarter as unemployment hovered around 9.7%, while prices inched up in June after being flat for three months.
Real GDP in Britain grew 0.2% in the second quarter, dampened by an extra holiday for the Royal Wedding and disruptions to manufacturing supply chains from the tsunami in Japan. Industrial production rose 0.9% in May, recovering half of its drop the month before, while new orders were upbeat following two months of decline. Retail sales increased 0.8% in June, the third advance in four months. Inflation eased to an annual rate of 4.2% in June, from 4.5% in May.
The Japanese economy continued to recover from the earthquake and tsunami in March, posting a trade surplus in June for the first time in three months. Manufacturing strengthened as plants shifted some production to weekends to cope with ongoing power restrictions. Consumer spending was brisk with retail sales up 2.9% in June, after a 2.4% rise in May, driven by purchases of energy efficient goods to cope with electricity shortages and the need for new televisions before July's switch to digital broadcasting from analogue.
China's economy grew 9.5% in the year ending in the second quarter, down slightly from its 9.7% pace in the first. Factory output rebounded and retail sales grew double-digits, while business investment lagged, dampened by tighter credit. Inflation hit a three-year high of 6.4% in June, boosted by a 14.4% rise in food costs.
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