Financial flows

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First quarter 2008

Financial flows note to readers

Highlights

Total funds raised by domestic non-financial sectors on financial markets amounted to $160 billion in the first quarter (seasonally adjusted at annual rates), a deceleration from the previous quarter. Households continued to account for the largest share of private sector demand for funds. Borrowing by all levels of government weakened this quarter, contributing to the decrease in total funds raised.

Chart E.1
Overall demand for funds decelerates

Affected by weaker U.S. growth, ongoing financial market turbulence, and economic uncertainty, the S&P/TSX Stock Exchange Composite experienced further volatility in the quarter. The index closed out the quarter down 3.5%, the worst showing for Canadian stocks since the second quarter of 2006. Mining and energy stocks continued to bolster the Canadian equities market due to higher commodity prices. Canadian bank stocks were down, reflecting tighter credit conditions.

Demand for Canadian-produced resources, alongside rising oil prices and the weakening American economy, helped to maintain the Canadian dollar’s strong position against the U.S. Greenback, rounding out the quarter slightly under par.

The Bank of Canada cut the bank rate 25 basis points (bps) in January and a further 50 bps in March 2008, closing out the quarter at 3.75%. Despite this decrease, the 5-year conventional mortgage rate dropped by only 35 bps over the same period. Bond yields decreased during the first quarter, the third consecutive quarter of decline.

Household sector

Chart E.2
Household borrowing slows

The household sector demand for funds waned owing largely to a slow down in mortgage borrowing. The Canadian housing market eased over the quarter with new housing construction and transfer costs showing significant declines. However, the sales of multiples (in particular condominiums) and renovation activities continued to advance.

Gains in personal income and sales tax cuts provided improved household purchasing power and helped sustain growth in consumer expenditures in the quarter, albeit at a slower pace. At the same time, growth in household demand for consumer credit was flat.

Household debt in the form of mortgages and consumer credit edged up slightly to reach 116.2% of personal disposable income. Meanwhile, debt servicing charges remained unchanged at around 8% of personal disposable income.

Corporate sector

Chart E.3
Corporate sector surplus advances

Growth in investment in plant and equipment slowed in the quarter, reducing the demand for funds in the first quarter. However, notable increases in investment in automobiles and other transportation equipment helped to partially offset this decline.

The corporate sector continued to act as a net lender to the rest of the economy with growth in undistributed corporation profits for the fourth consecutive quarter, propelled by strong earnings, in particular the energy sector. Private non-financial corporations remained active in the financial markets, particularly in new share issuances.

Financial institutions continue to increase their overall financial assets, albeit at a much slower pace. Growth in loan asset holdings slowed in the first quarter, while both short-term paper and share asset holdings declined.

Government sector

Government debt reduction continued, mainly at the federal government level. The significant drop in overall government sector debt experienced in the quarter was affected by the sizeable reduction in combined short-term debt for all levels of government and retirement of Government of Canada bonds. Federal government revenues were down in part due to the reduction in GST introduced early in the quarter, reflected in lower government saving. However, the overall government sector continued to be a net lender to the rest of the economy.

Data 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.