Gross domestic product by income and by expenditure

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Fourth quarter 2007

Economic growth slowed considerably in the fourth quarter as real gross domestic product grew 0.2%, down from 0.7% in the third quarter. Exports recorded a significant 2.2% decline in the wake of a rising Canadian dollar and extended shutdowns in motor vehicle manufacturing facilities. Meanwhile strong growth in final domestic demand and an accumulation of wholesale and retail inventories drove imports up 2.6%.

Chart B.1 Final domestic demand outpaces GDP

Chart B.2 Contributions to percent change in GDP, fourth quarter 2007

Exports down sharply

Exports of goods and services dropped 2.2%, the first decline in six quarters. The decline in exports in the fourth quarter was spurred by a 2.7% decrease in international shipments of goods, as demand for Canadian goods south of the border declined. Merchandise exports had averaged growth of 0.5% over the previous three quarters.

Chart B.3 Exports down sharply

The drop in the export of goods was widespread. Exports of machinery and equipment as well as automotive products continued to be weak, falling 3.4% and 1.7% respectively. Industrial goods and materials also declined 2.7%, following two consecutive quarters of growth. Energy exports declined (-3.2%) for the first time this year.

Exports of services were up 1.2% in the fourth quarter, partially offsetting the decline in goods. This gain reversed the sharp 2.2% drop in the third quarter. Increased exports of both commercial and government services pulled up services exports as travel services remained flat. However, transportation services declined for the third consecutive quarter, dampening growth in services exports.

Canada's international trade balance continued to deteriorate in the fourth quarter. Import growth remained robust at 2.6%. There were strong increases in imports of machinery and equipment, industrial goods and materials and other consumer goods. Expenditures of Canadians travelling abroad jumped in the fourth quarter, and imports of transportation services also posted another healthy gain.

The strong import growth was the result of increased consumer spending as well as a substantial accumulation of inventories as wholesalers and retailers took advantage of the strong Canadian dollar to stock up on merchandise.

Consumer expenditure picked up

Consumer expenditure picked up in the fourth quarter of 2007, advancing 1.8%, from a 1.1% increase in the third quarter. It was boosted by a large jump in travel spending abroad which contributed about half of the 2.1% increase in expenditure on services. This was the third consecutive large quarterly increase in net expenditure abroad. According to the International Travel Survey, overnight trips to the United States increased by 10% in the fourth quarter, attaining a level not reached since the fourth quarter of 1991. Overnight trips by car grew at an even faster rate (+16%). As travel spending abroad accounts for expenditure on both goods and services, part of the increase is attributable to increased spending on goods brought back to Canada. In the fourth quarter, purchases of new and used motor vehicles by Canadians in the United States more than doubled.

Chart B.4 Consumer spending picks up

Meanwhile, purchases of new and used motor vehicles by households in Canada jumped 4.3% in the fourth quarter. Spending on furniture and household appliances registered robust gains (+1.7%). Purchases of recreation, sporting and camping equipment also remained strong in the quarter (+2.2%).

Housing investment slowed

Business investment in residential construction grew 0.6% in the fourth quarter, less than half the pace of the third quarter (+1.4%). This was the fourth consecutive quarterly increase. Most of the slowdown in the quarter was the result of lower activity in the resale market (-2.6%), the second consecutive decrease.

New housing construction rose 1.3%, the third consecutive increase of 1% or more. Adding to investment in residential construction was renovation activity, up 1.2% this quarter.

Non-residential construction edged up

Business investment in buildings and engineering projects edged up in the fourth quarter, following two quarterly declines. Business spending on engineering projects slowed significantly in 2007 following double-digit increases in the previous two years.

Business investment in machinery and equipment still strong

Investment in machinery and equipment advanced 3.4% this quarter, similar to the 3.3% pace set last quarter. Except for the first quarter decline, investment in machinery and equipment has posted continuous quarterly growth since the beginning of 2003.

Chart B.5 Business investment in machinery and equipment still strong

The gain in investment in the last two quarters resulted in a 2.5% surge in imports of machinery and equipment on top of the 6.4% rise in the third quarter. The large gains indicate that businesses are continuing to take advantage of lower prices for machinery and equipment.

Business purchases of industrial machinery grew 5.8% this quarter, on the heels of two consecutive quarterly increases of 3.0% or more. Strong increases were also recorded for telecommunications equipment, up 9.8%, on top of large increases in the second and third quarters.

Truck purchases bounced back in the fourth quarter, up 6.3%, mostly offsetting the declines of the previous three quarters.

Large build-up of inventories

The last half of 2007 saw two large quarterly build-ups in inventories with a fourth quarter rise in inventories worth $19 billion, higher than the $16 billion accumulation in the previous quarter.

Chart B.6 Inventories continue to build

Retail and wholesale durable goods accounted for about half of the accumulation. Manufacturing inventories were drawn down and farm inventories were sold off as farmers cashed in on high grain prices.

The economy-wide inventory-to-sales ratio edged up to .68 leaving sufficient inventories to satisfy 62 days of sales.

Corporate profits levelled off

Corporate profits were up slightly this quarter (+0.5%), well short of the pace set in the last three quarters.

Higher profits in the retail and wholesale trade industries offset lower manufacturing and mining profits. Corporate profits of financial institutions declined slightly in the fourth quarter.

Labour income pushed upward

Labour income registered a strong fourth quarter, up 1.8%, a marked acceleration from the third quarter growth of 0.4%. Mining and utilities pushed up wages in goods-producing industries (+1.9%), while education and health care contributed to growth in services-producing industries (+1.7%).

Employment and average earnings continued to grow in the quarter.

Special pay equity payments in Quebec in the fourth quarter accounted for only 0.1% of growth in labour income. If extraordinary special payments were excluded from labour income, the third quarter growth would be 1.1%, followed by 1.7% in the fourth quarter.

Personal saving down

Government transfers to persons moderated in the fourth quarter (+0.7%), after a strong third quarter. Transfers in the fourth quarter were boosted by a large compensation payout to residential school survivors. This followed a $1 billion dollar payout in the third quarter to persons for hepatitis C compensation.

An increase in personal income combined with modest growth in income taxes resulted in a 1.6% increase in personal disposable income. The personal saving rate slipped to 0.8% in the fourth quarter with higher personal spending.

Economy-wide prices

Prices of goods and services produced in Canada advanced 1.1% in the quarter, once again strongly influenced by higher energy prices. Excluding energy, these prices were up 0.7%. Meanwhile, import prices dropped 3.9% in the quarter. This was the third consecutive drop and left import prices 17% lower than in 2002. Export prices also declined for the third consecutive quarter slipping 0.7%. Prices for final domestic demand advanced 0.3%.

Year end review

Real GDP grew 2.7% in 2007, a slight deceleration from 2006. The growth rate for 2007 matches the average growth of the past five years. The economy slowed over the course of 2007 with the lowest growth recorded in the fourth quarter. The year was marked by a further large appreciation of the Canadian dollar. Imports surged ahead while exports edged up at a pace similar to 2006. Personal income and consumer spending remained strong as final domestic demand advanced 4.3%.

Consumer spending surged ahead

Consumer spending, up 4.7% in 2007, was a driving force in the economy. This was the largest gain since 1985. Strong employment and income growth, along with low inflation and low interest rates kept conditions favourable for consumers.

Outlays on durable goods advanced 7.7% in 2007, the largest increase since 2002. Purchases of new and used motor vehicles, up 7.2% in 2007 from 2.1% in 2006, helped drive up spending on durable goods. Canadians continued to spend more on furniture and household appliances in 2007, up 5.4% on top of the 6.8% pace set last year.

Spending on semi-durable goods also remained strong, up 6.1% in 2007. Consumer purchases of clothing and footwear advanced 6.0% in 2007, after climbing 8.1% in 2006.

Expenditure on non-durable goods rose 3.1% in 2007, the largest gain since 1974, bumped up by a big rise in consumption of natural gas (+7.3%).

Travel spending continued to push expenditures on services up in 2007. Travel spending abroad registered another large increase with the strong Canadian dollar making many foreign destinations more attractive and spurring Canadians to bring back more goods from abroad. Spending on air transportation advanced 7.1%, another robust year of growth and continuing the strong trend which started in 2004. Overall, purchases of services grew by 4.5% in 2007, almost the same rate as in the previous two years.

Housing demand accelerated

Business investment in residential construction contributed to overall growth as it increased 3.2% in 2007, a slight pickup from 2006. Although up a percentage point from the previous year, this was far off the peak set in 2002 of 14%.

Chart B.7 Residential construction picks up slightly

Renovation spending was again the catalyst for the growth in residential investment advancing 6.5%, the eighth consecutive year of strong growth but decelerating from the pace set in previous years. Investment in new housing declined 0.9%, following smaller declines in the previous two years. Ownership transfer costs spiked 8.5%, reversing a decline of 0.7% in 2006, reflecting an active resale market in early 2007.

Business investment in plant and equipment still climbing

Businesses continued to invest heavily in plant and equipment in 2007 up 4.4%, adding another year to the string of substantial increases, after the decline recorded in 2002 (-4.1%).

Investment in engineering projects slowed in 2007 to 4.7%, after averaging growth of over 16% in the last two years. Similarly, business investment in building structures was up 1.3% in 2007, slightly off the pace of 1.9% set a year ago.

Business investment in machinery and equipment grew 5.1% in 2007, down from increases of more than 7% in 2005 and 2006. The largest increases in 2007, registered in other transportation equipment (+17%) and telecommunications equipment (+15%) were partially offset by declines in business purchases of automobiles (-1.7%) and trucks (-2.6%).

Corporate profits remained steady

Corporate profits maintained steady growth in 2007 up 5.8%, slightly above last year's growth of 5.0%. The increase was spurred by a rise in profits of the wholesale and retail trade industries and of the transportation industry.

Oil and gas extraction companies' profits declined from the record level posted in 2006. Profits of manufacturing industries grew slightly but were varied across industries - petroleum and coal manufacturers and food and beverage manufacturers posted strong profits, whereas chemical and wood and paper manufacturers posted declines.

Export growth edged up

Exports edged up in 2007 as the trends in imports and exports continued to move apart in the year. Imports registered another strong year in growth (+5.7%), the fourth consecutive year that growth was five percent or more. Although Canadian international exports continued to benefit from high commodity prices, the trade surplus narrowed in nominal terms.

Exports grew 0.9%, up from 0.7% in 2006, as forestry products and automotive products faced lower demand. Energy products (+4.5%) continued to be a major source of growth. Machinery and equipment (+0.9%), the largest component of merchandise exports, slowed in 2007.

Exports of travel services declined for the third year in a row as U.S. visitors decreased their trips to Canada.

Import growth widespread

Imports gains were widespread in 2007 with nearly all components recording increases. Continued strong purchasing power for consumers lifted imports of other consumer products (+10%) in the year and spurred imports of travel services (+15%).

Chart B.8 Imports outpaced exports again

Automotive product imports advanced for the fourth year in a row. Healthy business balance sheets kept demand for machinery and equipment imports strong (+6.7%).

Inventories continued to build

Inventories continued to accumulate in 2007 ($11 billion), just above the build up recorded in 2006 ($10 billion), with most of the gain recorded in trade inventories. Manufacturing inventories were drawn down over the course of the year.

Business investment in farm inventories was down in 2007. Grain inventories registered the largest declines. Higher crop prices encouraged farmers to sell off their stocks.

Personal income accelerated again this year

Labour income grew 6.1% in 2007, little changed from 6.2% in 2006. Special pension fund contributions in Newfoundland and Labrador and Quebec pay equity payments helped boost labour income. If extraordinary special payments were excluded from both years, growth would be 5.9% in 2006 and 6.2% in 2007.

Even though accrued net farm income nearly doubled from 2006, it was still well below the average of the past five years. Crop receipts were boosted by a jump in prices and higher deliveries. Livestock revenues grew only marginally pulled down by lower cattle and hog receipts. Program payments were down from the previous year.

With outlays outpacing income, personal saving was lower than in 2006. As a result the personal saving rate moved to 1.5%, down from the 2.3% rate in 2006.

Overall, combined saving among all sectors remained strong in 2007, recording growth of 9.1%, although down from 14% recorded a year ago. The national saving rate, which excludes the non-resident sector, was 12.5%, down slightly from 2006.

Economy-wide prices advanced

Prices of goods and services produced in Canada advanced 3.1% in 2007, up from 2.4% in 2006. Import prices declined 2.2%, resulting in a level that was 12.5% lower than in 2002, reflecting the continued appreciation of the Canadian dollar. The price for final domestic demand grew 2.1%, a similar rate to the previous two years.

Chart B.9 Import prices declined

Data tables

• Table B.1 Gross domestic product, income-based, current prices and quarterly percentage change
• Table B.2 Gross domestic product, expenditure-based, current prices and quarterly percentage change
• Table B.3 Real gross domestic product, expenditure-based, quarterly percentage change
• Table B.4 Real gross domestic product, expenditure-based, annualized percentage change
• Table B.5 Contributions to percentage change in real gross domestic product, expenditure-based
• Table B.6 Gross domestic product, implicit chain price indexes

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