Gross domestic product by income and by expenditure

Third quarter 2005

A 2.5% jump in exports led to a 0.9% increase in real gross domestic product (GDP) in the third quarter following a 0.8% increase in the second. A pick-up in business investment and moderate growth in personal expenditures also contributed to overall growth.

Incentive-induced auto exports

Incentive-induced automotive sales south of the border had a substantial impact on Canadian exports. Exports of automotive products were driven up 7.0%, on par with the large quarterly increases seen in 2003 and 2004. Over the last three years, growth in exports of automotive products has been erratic, posting one large quarterly increase each year surrounded by three quarters of weak or negative growth. Sales in the US, the major destination of Canadian automotive products, over this period have been driven by a number of aggressive incentive programs and introduction of new models which seem to have resulted in large swings in Canadian exports.

Vroom-vroom...automotive exports take off

Exports of agricultural and fish products skyrocketed in the third quarter (+6.4%) helped by the easing of border restrictions on Canadian live cattle in July. Exports of energy products and industrial goods rebounded from last quarter’s declines, while exports of machinery and equipment and other consumer goods declined following two quarters of sustained growth.

While exports of agriculture and fish products have enjoyed a number of quarters of successive growth, the same cannot be said of the struggling forestry sector. Exports of forestry products fell 0.5% in the third quarter of 2005 and have now declined in each of the last five quarters.

Not all resource sectors are performing well

While a lot has been made of the tremendous growth in the energy sector, much of this increase is due to prices. In fact, since mid-2003 it has been exports of agriculture and fish products that have shown the most real growth, advancing an average 2.6% per quarter compared with 0.8% for energy products. Much of this growth is due to the partial re-opening of the US border to Canadian boneless beef in September 2003 and the return to more normal levels of production of grains and oilseeds following two years of drought (2001 and 2002) in Western Canada.

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Energy sector boosts corporate profits

Rising energy prices have had a significant impact on corporate profits. Corporate profits posted a healthy increase this quarter (+5.4%), stronger than the previous quarter’s growth of 3.3%, as 2005 is proving to be a good year for mining and mineral fuel industries. Manufacturers also saw their profits edge up on strength in the petroleum and coal products and motor vehicle and parts manufacturers industries. Profits among financial industries accelerated this quarter.

Corporate outlays decelerated in the third quarter (+2.1%) and, as a result, corporate saving ballooned (+16%). Corporate saving has now remained above the $100 billion mark for two consecutive quarters. Corporations more than tripled the rate at which they acquired fixed capital (+4.4%) this quarter, averaging quarterly increases of 2.8% so far this year. The net lending position of the corporate sector strengthened (+14.6%) and is now 44% higher than the level posted in the fourth quarter of 2004.

Since the start of 2002, corporate profits have accounted for a steadily increasing share of total GDP, from 11% in 2002 to 14% in the third quarter of 2005. The recent string of increases in energy and metal prices has had a lot to do with this latest surge.

Corporate profits accounting for a greater share of GDP

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Consumer spending moderates

Following a strong first quarter (+1.6%), growth in personal expenditures has slowed in recent quarters climbing 0.6% in the third. This slowdown was widespread as growth for most expenditure categories decelerated.

Consumption of electricity jumped 1.9% as Canadian turned up their air conditioners to ward off the effects of an unusually warm summer. A wave of automotive dealer incentives also boosted purchases of new motor vehicles which climbed 1.4%. The majority of this increase was due to stronger purchases of compact and sub-compact passenger cars as the rising price of motor fuels deterred purchases of SUV’s.

Growth in the purchases of furniture and other furnishings and clothing and footwear, both of which grew substantially in the first quarter, has leveled off. Purchases of furniture, furnishings and household equipment grew 0.3% following growth of 1.0% in the second quarter and 2.3% in the first while purchases of clothing fell 0.4%.

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New housing construction stalls

Investment in residential construction has slowed considerably in 2005 following six years of steady growth. Renovation activity slowed this quarter to 1.1%, just half of the second quarter pace, and off the average quarterly pace of 2.6% set in 2004. A slowdown in renovation activity coupled with weakening sales of new houses had wide-ranging effects throughout the economy, weakening profits in the construction, retail and financial sector.

The value of new housing construction fell 1.1% in the third quarter and has now fallen 2.7% since the fourth quarter of 2004. These declines were offset by another large increase in ownership transfer cost which climbed 4.7%, helping to push up total investment in residential structure 0.7%.

New housing construction stalls

While residential investment cooled off, investment in non-residential structures is gaining momentum. Business investment in non-residential construction grew 2.9% in the third quarter and is now 8.2% higher than the fourth quarter of 2004 well above the 0.8% annual 2004 pace.

Residential investment and non-residential investment have exhibited quite different growth patterns over the last five years. In 2001, the levels of quarterly investment in residential and in non-residential construction were on par, both sitting at around $49 billion. Since that time investment in residential construction has grown faster than non-residential construction. For a detailed analysis of residential and non-residential investment cycles see the article “Long-run cycles in business investment” published in the September issue of the Canadian Economic Observer.

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Investment in plant and equipment still strong

Since the beginning of 2005, businesses have increased investment in plant and equipment, posting average quarterly growth of 2.4%, up from 1.3% in 2004. Business investment in machinery and equipment returned to the 3.0% pace set in the first quarter, continuing the strong pattern of investment registered in the last half of 2004. Purchases of industrial machinery rebounded (+5.5%), reversing the decline posted last quarter. Purchases of automobiles and trucks slowed this quarter, but were offset by increased purchases of other transportation equipment, which have remained strong throughout the first half of 2005.

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Inventory accumulation slows

Business inventories (excluding farm inventories) increased $9.4 billion in the quarter, less of a build up than in the second. Inventories of durable goods for both manufacturers and wholesalers jumped substantially in the third quarter while retail inventories of durable goods were drawn down.

The economy-wide inventory-to-sales ratio was unchanged, leaving sufficient inventories to satisfy 62 days of sales.

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Growth in labour income continues to accelerate

Growth in labour income has been steadily accelerating since the fourth quarter of 2004. This recent round of increases is the largest since 2000 when income jumped as a result of strength in mining and oil and gas extraction, in finance, insurance and real estate and in federal administration due to large pay equity payments.

Most of the gains in 2005 have been registered in finance, insurance and real estate, professional and personal services and mining and oil and gas extraction. Wages and salaries posted average quarterly gains in mining and oil and gas extraction of 3.1% in 2005, up from 2.3% in 2004. Wages and salaries in the service-producing industries outperformed the goods-producing industries for a second quarter in a row, with growth of more than 2% in the finance, insurance and real estate, professional and personal services and health care industries.

While the mining and oil and gas extraction and professional and personal service industries have performed well over the last number of years, the same cannot be said of the manufacturing industry which has seen its share of total wages and salaries fall from 17.3% in 2000 to 14.7% in the third quarter of 2005.

Personal income taxes slowed this quarter growing only 1.3% following four quarters of sustained growth over 2%.

Personal income taxes have been growing considerably faster than personal income since mid-2004. One reason is that personal income taxes reflect all taxes paid through source deductions, such things as the Ontario Health Premium, which started in July 2004, as well as retirement income from pension plans and taxes on capital gains rather than just taxes on wages and salaries. The end result is that growth in personal income taxes has a higher degree of variability than that of personal income.

Personal income and personal income taxes

Personal outlays slowed as a result of lower transfers to government while personal expenditures kept pace with personal income, closely matching the growth recorded in the previous quarter (+1.2%).

With fewer outlays, personal disposable income increased 1.6%, up from 1.3% last quarter and much stronger than the 0.5% posted in the first quarter. The personal sector saving rate sat just below zero.

The national saving rate sat at 12.3% in the third quarter, up from 11.0% in the second. A large increase in saving by the corporate sector was responsible for the growth. For more information on the calculation of the national saving rate and the relationship between saving in the different sectors of the economy see ‘Trends in Saving and Net Lending in the National Accounts’.

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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.

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