Financial flows

Fourth quarter 2006

Financial flows note to readers

Highlights

Total funds raised by domestic non-financial sectors on financial markets amounted to $145.9 billion in the fourth quarter of 2006 (seasonally adjusted at annual rates), up from the third quarter. Private sector borrowers, in particular non-financial corporations, were the largest contributors to the demand for funds, while new borrowing by the government sector was negligible.

Chart E.1 Overall demand for funds expands

Financial markets in the fourth quarter of 2006 were punctuated by continued growth in share prices. The S&P Toronto stock exchange composite index closed December just under the 13,000 mark, a historical high. With the bank rate unchanged since May 2006, mortgage rates continued to tumble while bond yields fluctuated around September levels after retreating from the peak in June 2006. The Canadian dollar, while still strengthening over the year, slid to 88 cents against its U.S. counterpart in the fourth quarter.

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Household sector

Overall household borrowing remained steady in the fourth quarter. Mortgage demand rose slightly, as housing re-sale activity rallied and renovations spending strengthened further. Spending on consumer durables—particularly on motor vehicles—and on services was reflected in increased use of consumer credit.

Household debt in the form of mortgages and consumer credit edged up, amounting to 110.5 of personal disposable income. However, debt servicing charges remained stable at about 8% of personal disposable income.

Chart E.2 Household borrowing steady

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Corporate sector

The corporate sector’s position as net lender to the rest of the economy strengthened in the fourth quarter. With corporate earnings up in the quarter, corporate net saving advanced for the third straight quarter after a transitory drop in the first quarter. This advance was supported in part by the repayment of U.S. softwood lumber duties to Canadian forest product manufacturers. Please see Softwood Lumber Agreement between Canada and the United States: National Accounts treatment to understand how the softwood lumber rebates are being treated in the Canadian System of National Accounts.

Private non-financial corporations provided the bulk of demand for borrowed funds in the fourth quarter. This was reflected in new share issues and the renewed recourse to debt financing. This firmer demand corresponds with robust fixed capital investment, especially in non-residential structures. As well, funds raised were used to repatriate domestic interests held by non-residents, as there were some key acquisitions by Canadian enterprises in the energy sector in the fourth quarter.

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Government sector

A significant net reduction of federal government long-term debt offset the new issuance of bonds by provincial governments, making for negligible demand for funds by the total government sector. The overall government surplus expanded in the fourth quarter.

Chart E.3 Government borrowing negligible

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Year-end review

For the year as a whole, total funds raised in 2006 were down 6.7% compared to 2005.

Despite higher saving, the personal sector deficit (net borrowing) increased further. Household demand for mortgages and consumer credit continued to grow, with borrowing up 10.9%. Household borrowing was encouraged in part by the sustained low interest rate environment.

Private non-financial corporations displayed lower new share and corporate bond issuances compared to the previous five years. This reflects the continued restructuring of business balance sheets amidst a period of sustained corporate surpluses, despite renewed capital spending in 2006.

The total government sector had a net reduction of funds borrowed through financial markets. The reduction of long-term debt by both the federal and provincial government sectors contributed to this, as the total government sector experienced a third consecutive annual surplus.

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Statistical tables

• Table E.1 Financial market summary table
• Table E.2 Sector accounts - Persons and unincorporated businesses
• Table E.3 Sector accounts - Corporations and government business enterprises: Total
• Table E.4 Sector accounts - Government
• Table E.5 Sector accounts - Non-residents

Information on methods and data quality available in the Integrated Meta Data Base: 1804.