Gross domestic product by income and by expenditure

Fourth quarter 2004

Real Gross Domestic Product (GDP) rose 0.4% in the fourth quarter, slowing from 0.7% in the third quarter, as exports declined. Final domestic demand increased 1.1%, as consumer spending, business investment in machinery and equipment, and government spending all gained strength.

The Canadian economy grew at an annualized rate of 1.7% in the fourth quarter, down from 2.9% in the third quarter. In comparison, the US economy advanced at an annualized rate of 3.8%, down from 4.0% in the third quarter.

GDP growth slowed

Economy-wide prices, as measured by the chain price index for GDP, rose 0.8%, slowing from the 1.0% pace of the previous quarter. Excluding energy, the index was up 0.5%. The Canadian dollar appreciated 7.1% against the US dollar in the fourth quarter, after gaining 4.0% in the third quarter. Influenced by the exchange rate, both export and import prices declined in all groups, except energy. The implicit price index for final domestic demand was up a modest 0.1% for the quarter.

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Exports declined for the second consecutive quarter

Exports declined 0.9% in the fourth quarter, matching the decline of the third quarter. All of the goods categories declined, with the exception of industrial goods and materials (+0.6%), and automotive products (+0.7%). Exports of machinery and equipment posted the second consecutive quarterly decline, after strong increases in the first half of 2004. Exports of agricultural and fish products posted its largest quarterly decline this year (-3.9%), and exports of forestry products also declined for the second consecutive quarter (-0.1%), dampened by the slowing US housing market.

Exports slipped for second consecutive quarter

In contrast, exports of services increased 0.8% led by strong exports of commercial services (+3.3%). Exports of both travel and transportation services declined, after slowing considerably in the third quarter.

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Sustained growth in consumer spending

Consumer spending increased 1.0% in the fourth quarter, similar to its third quarter increase of 0.9%, but down from the strong growth posted in the first quarter (+1.5%). Purchases of durable goods slowed to 1.0%, from the third quarter pace of 1.3%, and purchases of semi-durable goods were flat.

Spending on food, beverages and tobacco increased 0.5%, restrained by declines in alcoholic beverages purchased in stores (-1.0%) and tobacco products (-0.8%). Although purchases of tobacco products have fallen steadily for the last three years, purchases of alcoholic beverages declined for the first time since the second quarter of 2003, affected by the strike at the Société des alcools du Québec.

Expenditures on furniture, furnishings and household equipment and maintenance slowed to 0.4% from a third quarter growth of 2.0%. Expenditures on household appliances and semi-durable household furnishings slowed considerably during the quarter, while spending on household supplies edged down. Spending on clothing and footwear declined for the first time this year (-0.7%).

Spending on recreation, entertainment, education and cultural services also slowed this quarter (+0.1%). Spending on recreational services was down 1.6%, partly as a result of reduced expenditures on spectator sports.

Consumer spending sustained

In contrast, spending on transportation and communications increased 1.6%, up from the previous quarter growth of 0.5%. Purchases of motor vehicles increased 0.9% in the fourth quarter after two weak quarters, as consumers took advantage of lucrative financing incentives.

Purchased transportation also increased 1.1%, as trips to both US and non-US destinations increased, helped by the stronger dollar.

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Housing investment still strong

Business investment in residential construction increased 1.7% in the fourth quarter, its sixth consecutive quarterly increase. Quarterly growth in new housing construction activity has averaged 1.6% throughout 2004.

Investment in housing remained strong

In addition, renovation activity posted two healthy quarterly increases in a row. Ownership transfer costs, however, declined for the second time, reflecting a weaker resale market.

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Massive build-up of inventories

Non-farm businesses increased inventories by $19.2 billion in the fourth quarter, after building up extensive inventories in the previous quarter. The build-up was concentrated in wholesale trade and manufacturing, especially durable goods. In contrast, retail trade inventories were only up slightly, reduced by a draw-down of motor vehicles after a large build-up the previous quarter.

Massive build up of inventories

The economy-wide inventory-to-sales ratio edged up, leaving sufficient inventories to satisfy 62 days of sales at the current pace.

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Corporate profits weakened

After posting healthy increases in the first two quarters of 2004, corporate profits weakened in the second half of the year, increasing only 1.5% in each of the last two quarters. Declining exports restrained manufacturing profits, and earnings weakened among financial corporations. Profits were strong in the transportation industry, but manufacturers had mixed results. Wood, paper and chemical companies fared well, while earnings fell back for petroleum and coal, primary metals, and motor vehicle manufacturing.

Investment in plant and equipment remained strong

Business investment in plant and equipment posted another healthy increase, the strongest this year (+2.2%). Business investment in buildings and engineering projects remained weak in the fourth quarter (+0.4%). Investment in machinery and equipment increased 3.4% in the fourth quarter, after averaging 2.3% in the previous three quarters. Large increases were registered in computers and other office equipment, furniture, trucks, and industrial machinery.

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Import growth slowed

Overall, growth in imports of goods and services slowed to 2.0% in the fourth quarter, as imports of goods slowed to 1.7%, from 4.1% last quarter. Imports of machinery and equipment maintained growth (+3.1%), while growth in imports of industrial goods and materials slowed considerably (+1.6%).

On the other hand, imports of services jumped 3.5%, following two weak quarters. Travel services (+8.0%) and commercial services (+3.1%) rebounded from third quarter declines, encouraged by the strength in the dollar.

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Personal saving slipped further

Personal disposable income strengthened in the fourth quarter (+1.1%), following a gain of 0.7% in the third quarter, helped by growth in labour income of 1.1%. Personal expenditure on consumer goods and services (in nominal terms) grew at a faster rate than disposable income, resulting in a negligible personal saving rate. The debt-to-income ratio increased to 105.8 in the fourth quarter, as households carried almost $1.06 of debt for each dollar of disposable income.

Debt service charges stable in relation to income

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Government surplus continued to improve

The government surplus (on a national accounts basis) grew substantially in the fourth quarter bringing the annual surplus to $16.8 billion. Government revenues slowed in the quarter to 1.2% and outlays accelerated 1.1%, but capital transfers to businesses declined, returning to previous levels, thus adding to surplus.

Year-end Review

Real GDP advanced 2.8% in 2004 up from 2.0% in 2003, although weaker than 2002 (+3.4%). Exports rebounded in 2004 and corporate profits soared. Businesses increased inventories, and consumer spending maintained a steady pace. Final domestic demand grew 3.8%, up slightly from 2003.

Contributions to percent change in GDP

Economy-wide prices, as measured by the chain price index for GDP, rose 3.2%. Excluding energy, the index was up 3.0% compared to 2.1% last year. The Canadian dollar appreciated a further 7.7% against the US dollar in 2004, following the 12% gain posted in 2003. The implicit price index for final domestic demand rose 1.7% up from 1.3%.

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Consumer spending continued steady pace in 2004

Growth in consumer spending continued at a steady pace in 2004 (+3.5%). Personal expenditures grew at an average rate of 3.3% over the previous 4 years. Consumer spending on semi-durable goods contributed markedly to the 2004 increase, up 5.6% from 3.1% in 2003. More specifically, spending on clothing and footwear jumped 4.8%, especially at beginning of the year, as spending on men’s and boy’s clothing almost doubled its pace from last year.

Spending on furniture, furnishings and household equipment and maintenance advanced 6.1%, spurred by a strong housing market and increased renovations activity. Furniture, carpets and other floor coverings, household appliances, and semi-durable household furnishings all posted growth of over 7% in 2004.

Spending on services also registered strong growth of 3.9% for the second consecutive year led primarily by purchased transportation (+5.7%). Air transport rebounded from the weakness of the previous three years encouraged by the strength of the Canadian dollar.

Financial and legal services also increased (+5.0%), as spending on mutual fund and stock and bond commissions increased substantially in 2004.

In contrast, purchases of new and used motor vehicles declined again in 2004 (-3.2%), after falling 1.7% in 2003, despite numerous financing incentives offered by dealers and manufacturers throughout the year.

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Investment in residential structures still increasing in 2004

Although down from the double-digit growth registered in 2002, business investment in residential construction increased 8.4% in 2004. Investment in new housing construction was up (+8.6%), especially in Quebec and British Columbia. Renovations activity increased 8.9%, following robust growth in 2003. Sales of multiple dwellings outpaced sales of single dwellings in 2004.

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Businesses invested heavily in machinery and equipment

Business investment in plant and equipment grew 6.1% in 2004, almost double the pace of 2003. Substantial outlays in machinery and equipment (+9.4%), not seen since 1999, offset much slower growth in non-residential building and engineering projects. Since 2002, businesses have acquired machinery and equipment rather than investing in new plants.

For the second consecutive year, businesses invested heavily in computers and other office equipment, up 19.7% in 2004. In addition, investment in industrial machinery posted a substantial increase in 2004 (+8.8%), on top of 10.0% registered in 2003. Substantial increases were also noted in telecommunications equipment (+20.2%) and other transportation equipment (+15.1%).

Business investment in machinery and equipment strong

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Imports growth more than doubled pace

Overall, imports of goods more than doubled their pace to 8.5% in 2004, up from 3.4% in 2003. Substantial increases in imports of machinery and equipment (+12.7%) and industrial goods and materials (+10.4%) led the way.

Imports of energy products remained strong in 2004, averaging 9.3% over the last two years.

Imports of services also posted a strong increase of 6.7% in 2004, led by imports of travel services (+14.3%) and transportation services (+14.4%).

Imports post substantial increase

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Exports rebounded in 2004

Export demand increased 4.9% in 2004, reversing the decline of 2.4% in 2003. Exports climbed steadily in the first half of the year, but declined in the second half. Increases were widespread as most categories of goods grew above 5.0% in 2004, except energy products (+2.6%) and other consumer goods (+0.5%).

In contrast, exports of services were much weaker increasing 2.7%, although both travel and transportation significantly reversed declines of last year, with increases of 10.5% and 11.9%, respectively. Both exports of travel and transportation services have returned to pre-SARS levels.

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Corporate profits skyrocketed in 2004

Corporate profits continued to climb in 2004 (+17.7%). Corporate profits grew on average 9.3% over the previous two years, reversing the decline in 2001. Manufacturers rebounded strongly from a turbulent 2003 benefiting from hefty global demand and robust commodity prices. Wood and paper manufacturers, petroleum and coal producers, primary metal producers and chemical manufacturers all recorded substantial profit growth, while motor vehicle and parts manufacturers saw their earnings drop in 2004.

Wholesalers reported their highest level of profits, especially wholesalers of building materials, and machinery and equipment. Many wholesalers and retailers benefited from the appreciation of the Canadian dollar, as the price of imported goods declined, allowing higher profit margins. Higher prices for metals and oil drove up the profits of metal mining companies and oil and gas producers.

With outlays holding steady, the corporate sector registered another increase in its net lending position reaching a record $81 billion in 2004.

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Personal saving lowest on record

Labour income increased 4.1% in 2004 up from 3.5% in 2003, maintaining steady growth since the hefty increase of 2000. Increases occurred in mining, construction, and finance and real estate, while slowdowns were registered in public administration and manufacturing. Employment growth slowed in 2004.

The personal saving rate in 2004 was 0.4%, down from 1.4% in 2003. The saving rate fell to the lowest level on record since the 1930’s. Consumer spending (in nominal terms) grew faster than personal disposable income, with almost all disposable income being spent on consumer goods and services. The combined saving of all sectors of the economy expanded 12.3% in 2004, following 15.3% growth in the previous year.

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Government surplus improved in 2004

The surplus (on a national accounts basis) of all levels of government more than doubled to $16.8 billion in 2004, a level not seen since 2000. Government income was pushed up by strong corporate tax liabilities and higher resource royalties, whereas the growth in outlays was held back by lower interest payments, and lower electricity price-cap subsidies in Ontario.

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Statistical tables

• Gross domestic product, income-based, current prices and quarterly percentage change
• Gross domestic product, expenditure-based, current prices and quarterly percentage change
• Real Gross domestic product, expenditure-based, quarterly percentage change
• Real Gross domestic product, expenditure-based, annualized percentage change
• Contributions to percentage change in real Gross domestic product, expenditure-based
• Gross domestic product, implicit chain price indexes

Information on methods and data quality available in the Integrated Meta Data Base: 1901 and 2602.