Gross domestic product by income and by expenditure

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Third quarter 2008

Real gross domestic product (GDP) increased 0.3% in the third quarter, after remaining essentially flat over the first half of the year. Most of the third quarter gain occurred in July. Economic activity edged up 0.1% in September following a decline in August.

Exports declined for the fifth consecutive quarter and growth of final domestic demand decelerated to 0.1%, largely due to a slowdown in consumer expenditure.

Chart B.1 Final domestic demand slows

The instability of world financial markets did not appear to have a significant impact on funds borrowed in domestic financial markets in the third quarter. Funds borrowed by the domestic non-financial sectors on financial markets slowed. The fluctuation was similar to that which has typically been observed in the past.

The reduction in funds borrowed by the household sector was partially offset by increased borrowing by non-financial corporations in the third quarter, which accounted for just over one-third of all funds raised, driven by an increase in bank loans.

The Canadian economy grew at an annualized rate of 1.3% in the third quarter, compared with a 0.5% decline for the US economy.

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Chart B.2 Contributions to percent change in GDP, third quarter 2008

Exports down again

Exports of goods and services fell 1.4% in the third quarter. This was the fifth consecutive quarterly decrease, leaving the volume of exports 5.8% lower than in the second quarter of 2007. Exports of primary goods, including agricultural and fish products, energy, and forestry products registered notable declines. Shipments of automotive products abroad recorded a fourth consecutive decline.

Services exports fell 1.7%, the third consecutive decline. The decline was widespread among all major categories. The volume of commercial services exports in the third quarter of 2008 was 7.0% lower than the fourth quarter of 2007.

Chart B.3 Exports continue to fall

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Imports decline

Imports of goods and services declined 1.6% in the third quarter, and stood 3.2% lower than the peak reached in the fourth quarter of 2007. Services imports (-4.4%) recorded a third consecutive quarterly decline, as imports of financial services related to securities trading were down sharply. Canadian travel expenditures abroad were also down significantly for a third consecutive quarter.

Following two large quarterly gains, a large drop in energy imports led the imports of goods downward in the third quarter. Imports of industrial goods and materials declined for a third consecutive quarter. Machinery and equipment imports also fell as business investment in equipment edged down.

Imports of automotive products, as well as other consumer goods, advanced for the second consecutive quarter.

Personal spending decelerates

Growth in the volume of personal spending slowed to 0.2% in the third quarter. This was the third consecutive quarter of deceleration, and was the weakest growth since the fourth quarter of 2003. Slower growth was registered for spending on both goods and services.

Transportation expenditures were particularly weak, as purchases of motor vehicles fell 2.5%, on the heels of a 0.8% decrease in the second quarter. The declines in spending on motor vehicles followed two substantial increases in motor vehicle purchases during the fourth quarter of 2007 and the first quarter of 2008, influenced by manufacturer incentives and a one percentage point reduction in the GST. Demand for consumer credit was lower in the third quarter influenced by declining motor vehicle purchases.

Chart B.4 Personal spending on motor vehicles falls

Spending on motor vehicle parts and repairs as well as motor fuels and lubricants were also down.

The slowdown in spending on consumer services reflects decreased spending on travel abroad, on restaurants and accommodation services and on purchased transportation.

There was continued strength in personal expenditures on household furniture, furnishings and household equipment, which increased 1.3% this quarter. Personal expenditure on these household items posted its seventh consecutive quarterly increase of over 1%.

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Housing investment remains unchanged

Residential construction remained virtually unchanged in the third quarter, following two consecutive quarterly declines. The value of new housing construction edged up as did renovation activity, helping sustain housing investment. Resale activity, as reflected in ownership transfer costs, posted its fifth consecutive quarterly decline, falling 1.5% in the quarter.

Business investment in plant and equipment edges up

Business investment in plant and equipment expanded 0.2% in the third quarter. In the first three quarters of 2008, investment growth has averaged 0.6% per quarter, about half the pace registered in the last two quarters of 2007.

Investment in engineering projects remained strong (+1.5%), growing for a third consecutive quarter. On the other hand, investment in building construction was down for the second quarter in a row.

Investment in machinery and equipment slipped 0.2% in the third quarter, following a 0.1% decline in the previous quarter. Declines in other machinery and equipment, other transportation equipment, and industrial machinery were partly offset by increases in computers and office equipment, software and trucks.

Chart B.5 Machinery and equipment investment declines

Inventories build up again

Inventories accumulated again this quarter as stocks increased for non-farm businesses, on par with the previous quarter. Retail inventories, particularly of motor vehicles, increased as consumer spending softened. Wholesalers accumulated both durable and non-durable goods.

Overall farm inventories expanded, mostly as a result of the accumulation of grain inventories.

The economy-wide inventory-to-sales ratio edged up to 0.701, equivalent to 64 days of sales.

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Profits grow strongly

Corporations recorded strong profit growth in the third quarter (+5.7%), on top of the robust pace set in the second quarter (+8.6%). This represents the largest back-to-back quarterly growth since 2004. Non-financial corporate profits posted strong growth for the second consecutive quarter. Financial corporation profits were also up after several quarters of weakness.

Chart B.6 Corporate profits advance

Farm income was up substantially this quarter, spurred by high grain and oilseed prices. Farmers have been recording strong increases in net income since the beginning of 2008.

Personal income continues to advance

Labour income advanced 0.8%, decelerating for a third consecutive quarter. Employment was down 0.1% in the quarter, while hours worked were virtually unchanged.

Growth in total wages and salaries in services-producing industries outpaced that of the goods-producing industries again this quarter. In the goods producing industries, they were up in mining and oil and gas extraction, and construction, partly offset by declines in manufacturing.

Overall, personal income grew 0.7%, a slight acceleration from the second quarter. Personal outlays outpaced income, and the saving rate slipped to 3.0%. Price increases, notably for food and fuel, contributed to a 1.2% increase in nominal personal purchases of consumer goods and services; even though the growth in volume of these purchases was much lower (+0.2%).

Interest expenses for the persons and unincorporated businesses sector moved downward in the quarter. The debt service ratio (the proportion of interest expenses to personal disposable income) was 7.8% in the quarter, lower than in the previous quarter. The interest burden remains below the 8.2% average since 1990.

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Chart B.7 Debt service ratio moves downward

Economy-wide price increases moderate

Prices rose at a slower rate in the third quarter than in the second quarter, largely due to slower growth in energy prices. Although the price of crude petroleum averaged $123 Canadian per barrel during the three-month period from July to September, similar to the previous three months, the price trended down throughout the third quarter.

The price of goods and services produced in Canada advanced 0.9% compared to 2.6% in the second quarter. Export prices were up 3.9% but did not grow as quickly as in the second quarter (+8.4%).

Prices for consumer goods and services advanced 0.9% in the quarter. Increases in the prices of food and energy outweighed price declines for durable goods, such as motor vehicles.

Import prices (+4.8%) increased more than export prices in the third quarter, reflecting the depreciation of the Canadian dollar. It was the third consecutive significant quarterly increase in import prices. This follows a five-year period where import prices dropped more than 16% as the Canadian dollar appreciated against its US counterpart.

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Chart B.8 Import prices increase

The Canadian dollar depreciated 3.1% in the quarter relative to its US counterpart, but stayed well above 90 US cents.

National saving expands again

Corporations and government business enterprises saving rose 7.8%, contributing to the expansion in national saving in the quarter. The national saving rate rose to 13.8% from 13.6% in the previous quarter.

Chart B.9 National saving moves upward

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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.