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Gross domestic product by income and by expenditure
2005 and fourth quarter 2005
Investment spending, exports and personal expenditure all advanced in the fourth quarter pushing up real Gross Domestic Product (GDP) 0.6%.
Residential and non-residential investment switch roles
Investment in machinery and equipment (+3.2%) and non-residential structures (+2.9%) were strong for a second consecutive quarter. Investment in residential structures remained weak, growing 0.3%, with all the growth coming from a 2.7% jump in renovation activity.
While growth in overall investment was unchanged from 2004, there was a significant change in its composition. In 2004, much of the growth was attributable to continued strength in the housing market as investment in residential structures climbed 8.3%. In 2005, residential growth slowed to 3.3% while growth in investment in non-residential structures strengthened substantially – climbing 6.8% in 2005 following a 0.8% increase in 2004.
A large share of the recent growth in investment in non-residential structures is a result of a ramp up in engineering investment which increased 3.2% in the fourth quarter and 6.6% for the year. The main industry behind most of this recent growth is the mining and oil and gas extraction industry. According to the recent release of the private and public investment, 2006 intentions, investment in this industry jumped 17.4% in 2005 with another 6.0% increase forecast for 2006.
Renovation activity remains the only bright spot within the residential construction industry. Investment in renovations and alterations increased 2.7% in the fourth quarter and 8.0% for the year. The value of new housing construction declined in each quarter of 2005 and ownership transfer costs, which were up in each of the first three quarters fell in the fourth, dampening overall growth.
Over the last number of years renovation activity has captured an increasingly larger share of total investment in residential structures. In 1992 renovation activity represented 33% of total residential investment whereas by 2005 this share had reached 38%.
While residential investment and non-residential investment have taken turns sharing the investment spotlight, investment in machinery and equipment has continued its steady climb. Growth in 2005 was widespread with investment in computers and other office equipment increasing 25%, other transportation equipment up 19% and investment in trucks registering another strong year jumping a further 13%. Growth in investment in telecommunication equipment remained strong in 2005 (+6.1%) but was well off the 23% increase in 2004.
Non-residential investment picks up where residential investment
Consumers scoop up big ticket items in 2005
Consumer spending grew moderately in the fourth quarter as purchases of clothing and other semi-durable items rose 1.5%. Expenditure on durables fell 0.3%, mainly due to a 3.5% decline in purchases of new and used vehicles. The fourth quarter decline in consumer durables follows seven quarters of growth.
Fourth quarter demand aside, sales of big ticket items such as motor vehicles, televisions and other household appliances were strong throughout the year. Expenditure on new and used motor vehicles bounced back from a 1.9% decline in 2004, climbing 3.3% in 2005. This coupled with a 3.3% jump in expenditure on motor vehicle repairs and parts pushed up spending on transportation and communications by 3.0%.
Spending on furniture and household appliances grew another 2.8% in the fourth quarter and registered a 7.5% increase for the year, a second year of very strong growth. A large part of this increase was a result of an 8.9% increase in household appliances.
Canadians continued to remain active in 2005, purchasing more sporting and camping equipment in addition to other recreational equipment such as televisions and home theatre systems. As a result, spending on recreation, sporting and camping equipment was up 10.2%, the strongest annual increase among all major expenditure categories.
Overall, expenditures on consumer durables climbed 6.0% in 2005, twice the growth rate of 2004.
Consumers scoop up big ticket items in 2005
Exports pick up steam in the second half of the year
While the growth in exports in the first two quarters of 2005 was moderate at best, there was a marked pickup in the second half of the year. Exports climbed 2.3% in the fourth quarter following a 1.8% increase in the third. The main driver behind the sudden increase was exports of automotive products, which have grown more than 7% for two consecutive quarters. For the year, exports of automotive products increased 3.7%, making for a second consecutive year of significant growth.
Exports of forestry products bounced back in the fourth quarter, jumping 4.9% as rebuilding projects in the US following the devastation of hurricane Katrina last year upped demand for Canadian lumber. This is the first quarterly increase since the second quarter of 2004 when a similar increase was registered. Even with this fourth quarter surge exports of forestry products were down 2.2% for the year.
The year 2005 was marked by another large appreciation in the Canadian dollar vis à vis the American dollar. The Canadian dollar appreciated a further 7% from the 11% and 7% gains posted in 2003 and 2004, respectively. Despite the appreciation in the dollar, Canadian exports have been strong over this period and remain a major source of overall economic growth.
Exports perform well despite appreciating dollar
Exports of agricultural and fishing products were up again in the fourth quarter and increased in each quarter in 2005. Much of the recent growth is a result of an increase in exports of live animals. The opening of the US border to Canadian cattle is having a positive impact on the industry.
High energy prices felt throughout the economy
Income growth was once again very strong in the fourth quarter as both corporate profits and labour income posted healthy gains. Corporate profits rose 3.9% in the fourth quarter, following an equally strong third quarter and labour income maintained the 1.7% pace established in the third quarter.
The year 2005 was characterized by a steady flow of income into the economy driven mainly by a healthy nominal trade balance which topped $50 billion. Almost all of this income was due to skyrocketing energy prices, as the trade balance excluding energy products sat at just a little under $1 billion.
Energy products account for the entire trade balance
While corporate profits did not quite match 2004’s performance they did post another year of double digit growth, up 10.7% in 2005. A large share of the overall growth in the last two years was due to a large jump in profits in the mining and oil and gas extraction industries and in petroleum and coal products manufacturing. Other industries, such as manufacturing (excluding petroleum and coal products) and the forestry sector, have not fared as well as the continued appreciation of the Canadian dollar cut into profit margins.
Corporations were not the only ones benefiting from higher energy prices. Governments also saw large increases in energy-related incomes in 2005 with corporate income taxes up 11.7% and a 10.6% jump in investment income, mainly due to increasing natural gas and oil royalties. The other main contributor to the 7.1% growth in government sector income was personal income taxes which grew 10.4%.
Economy-wide prices advance again in 2005
Not only did higher energy prices serve to drive up incomes, they also had a major impact on economy-wide prices which climbed 1.3% in the fourth quarter and 3.1% for the year.
The year 2005 was the third consecutive year that economy-wide prices have increased by at least 3%. The last time we have seen three such similar increases was in the late 1980’s and early 1990’s. At that time much of the increase was a result of rising consumer prices rather than energy prices which are driving the current increase.
Economy-wide prices excluding energy increased 1.9% in 2005. The GDP deflator excluding energy is calculated by removing all energy-related prices prior to calculating economy-wide prices. This means that prices such as the export and import price of energy products, the personal expenditure price for motor vehicle fuel and lubricants and electricity are removed leaving only non-energy related prices in the index.
Information on methods and data quality available in the Integrated Meta Data Base: 1901 and 2602.
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