Gross domestic product by income and by expenditure

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Fourth quarter 2008

Real gross domestic product (GDP) declined 0.8% in the fourth quarter, weakening progressively each month. This was the sharpest quarterly decline since 1991. Declines in exports, capital investment and personal expenditures all contributed to the economic contraction. Final domestic demand fell 1.2%. Government current and capital expenditure rose.

GDP growth for the year was positive at 0.5%, a sharp deceleration from 2.7% in 2007.

The volume of imports fell faster than exports. Both registered their largest quarterly decline since 1982. Prices of imports climbed, notably because the Canadian dollar depreciated 14% in the quarter relative to its U.S. counterpart. This is the largest quarterly depreciation relative to the U.S. dollar since Canada returned to a floating exchange rate in 1970.

The Canadian economy contracted at an annualized rate of 3.4% in the fourth quarter, compared with a 6.2% decline in the U.S. economy. The European Union registered a decline of 5.9% in the quarter, while Japan's economy was down 12.7%.

Chart B.1 Final domestic demand declines

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

Exports continue to fall

Exports of goods and services were down 4.7% in the fourth quarter. This was the sixth consecutive quarterly decline; a first in Canada since quarterly estimates began over 60 years ago.

Automotive products were down 19%, accounting for nearly half of the quarterly decline in total exports. Industrial goods and materials also decreased significantly in the fourth quarter. Forestry products continued to fall.

Partially offsetting these declines were further gains in exports of other consumer goods, although their growth slowed markedly in the fourth quarter. There were also gains in agricultural and fish products. Energy exports were up 1.1%, following two quarterly declines.

Exports of services were flat in the fourth quarter, following three quarters of declines. Increases in exports of travel services and government services offset declines in transportation and commercial service exports.

Chart B.3 Exports and imports fall

Imports decline sharply

Imports dropped sharply in the fourth quarter (-6.4%). Declines were registered for both goods and services imports, as domestic demand faltered and prices for imported goods and services rose.

Imports of automotive products declined 16% while other consumer goods were down 9.0%, reflecting a downturn in consumer spending. Decreases in imports of machinery and equipment and industrial goods and materials reflected lower business investment and manufacturing activity. In contrast, imports of energy products advanced 4.8% in the fourth quarter.

Imports of services, which have trended down throughout the year, fell again in the fourth quarter (-5.3%). The decrease was widespread, led by transportation and travel services.

Personal spending declines

After decelerating since the start of the year, personal spending fell for the first time since the fourth quarter of 1995. Both goods and services contributed to the 0.8% decline. Personal spending excluding rent fell 1.2%.

Expenditures on new and used motor vehicles dropped 5.5% in the fourth quarter, following declines in the second and third quarter. Despite these declines, spending on motor vehicles grew 3.7% in 2008. In the last quarter of 2007 and the first quarter of 2008, manufacturers' incentives and a one percentage point reduction in the GST contributed to substantial motor vehicle purchases.  Spending on motor fuels and lubricants rose 1.4% in the quarter.

After 15 quarterly advances, spending on furniture, furnishings and household equipment and maintenance fell 2.3% in the fourth quarter.

Chart B.4 Household demand retreats

Purchases of food, beverages and tobacco also fell as did clothing and footwear.

Spending on services was down 0.4%. This was the first decrease since the second quarter of 2001. Financial services declined as stock and bond commissions and fees related to mutual funds dropped significantly. Spending on restaurants and accommodation services fell for the second consecutive quarter.

After peaking in the fourth quarter of 2007, spending by Canadian households travelling abroad dropped throughout 2008. The fourth quarter was no exception, with a decline of 6.1%. Nonetheless, travel spending was up 4.2% in 2008.

Investment in residential structures retreats

Investment in residential structures (-6.1%) fell again in the fourth quarter, posting its largest quarterly decline of 2008. Resale activity, as reflected in ownership transfer costs, dropped 24% in the quarter. Renovation activity fell 4.2%, after small declines in the previous two quarters. The volume of new housing construction also slipped, after remaining flat in the third quarter.

Business investment in plant and equipment down

Business investment in machinery and equipment contracted 7.5% in the fourth quarter. All categories recorded declines, notably automobiles, trucks, and industrial machinery. Investment in non-residential structures was unchanged in the fourth quarter, following three quarterly increases.

Chart B.5 Machinery and equipment investment declines

Inventories build up again

Inventories accumulated again in the fourth quarter for both farm and non-farm businesses.

For non-farm businesses, the increase in stocks was at a slower rate than in the previous seven quarters. Retail inventories, particularly of motor vehicles, increased as consumer spending softened. Wholesalers drew down their durable goods inventories in the fourth quarter, while manufacturers of non-durable goods increased their stocks.

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

The economy-wide stock-to-sales ratio rose to 0.726, equivalent to 66 days of sales, up from 64 days last quarter.

Corporate profits down sharply

Corporate profits declined 20% in the fourth quarter, after trending upward for nearly seven years. A similar quarterly decline occurred in 1991. A sharp downturn in energy and metal prices was a major factor in the fourth quarter decline.

Chart B.6 Corporate profits drop sharply

Both non-financial and financial corporate profits fell in the quarter. In addition to oil and gas extraction and mining, manufacturers and retailers posted lower earnings in the fourth quarter.

Farm income slowed in the fourth quarter, as grain prices declined. However, income for farmers in 2008 remained well above the level recorded in the previous three years.

Personal income increases

Personal disposable income continued to advance (+0.4%) as increases in labour income and government transfers to persons more than offset declines in investment income. Labour income advanced 0.7%, growing at a similar rate as the third quarter. Employment was virtually unchanged in the fourth quarter, while average weekly earnings were up and hours worked were down slightly.

Chart B.7 Personal saving increases

The downturn in spending (in nominal terms) combined with increased disposable income led to $45 billion of personal saving in the fourth quarter; $15 billion higher than in the third quarter. This level of personal saving was the highest since the fourth quarter of 1995, and led to a saving rate of 4.7%, the highest rate recorded since the first quarter of 2002.

The debt service ratio (the proportion of interest expenses to personal disposable income) was 7.9% in the quarter, up slightly from the previous quarter.

Export prices drop as import prices climb

The price of goods and services produced in Canada dropped 2.7% in the fourth quarter, largely due to declines in energy and metal prices. Export prices were particularly hard hit, falling 4.1%. Declining prices were a major contributing factor to the 3.5% fall in nominal GDP.

Import prices increased significantly throughout 2008. The 5.5% increase in the fourth quarter reflected the depreciation of the Canadian dollar.

Chart B.8 Import prices increase again

The price of final domestic demand increased 0.5%, following a 1.1% increase in the third quarter.

Falling commodity prices and a depreciating dollar led to a 9.0% deterioration in Canada's terms of trade.

National saving declines

National saving declined as both corporations and government saving were reduced substantially. Corporate outlays did not fall as quickly as corporate profits resulting in reduced savings. Government income was down while current expenditures and transfers rose. The national saving rate moved to 9.9%, the lowest since 2003.

Chart B.9 National saving declines

Year-end review 2008

Real gross domestic product (GDP) grew 0.5% in 2008, registering its lowest growth since 1991. Declining exports contributed to the overall weakness in GDP.

The engine of economic growth since 2001, final domestic demand slowed to 2.5% in 2008 from 4.2% in 2007, partly due to weakening expenditures on consumer goods and services and a softening of the housing market.

Chart B.10 Final Domestic Demand Slows

Consumer spending slows

Growth in consumer spending on goods and services decelerated to 3.0% in 2008, down from 4.5% in 2007. This was the slowest growth in consumer spending since 2003.

Spending on durable goods such as motor vehicles and household items contributed to the slower growth in 2008. Nonetheless, purchases of durable goods still grew 5.2% in 2008, after having posted average growth of 7.3% over the previous two years. Overall, the slower growth in 2008 was widespread among semi and non-durable goods, as well as services.

Business investment in plant and equipment expands

Business investment in plant and equipment expanded 1.7% in 2008. Investment in engineering structures was up 1.8%, whereas investment in non-residential buildings declined 0.6% in 2008. Construction of engineering structures tends to be related to large projects that are difficult to halt or scale back during uncertain times. Once projects are launched, businesses tend to complete a given phase rather than lose their initial investment. In contrast, growth in business investment in machinery and equipment was less robust in 2008, slowing to 2.0%, down from 7.1% in 2007.

Investment in residential structures contracts

Investment in residential construction, which includes new housing construction, ownership transfer costs and renovation activity, declined 2.9% in 2008, the first decline since 1998. Resale activity, as reflected in ownership transfer costs, posted its largest decline (-17%) since 1990. In contrast, renovation activity was up 3.2%, and has been expanding since 1999.

Exports down

Foreign demand for Canadian products declined 4.7% in 2008. Exports of forestry and automotive products dropped 14% and 23% respectively in 2008.

Imports registered a modest gain of 0.8% in 2008 following five years of over 4% growth in imports of goods and services.

Import and export prices up

Prices of goods and services produced in Canada advanced 3.8% in 2008, up from 3.1% in 2007. Export prices of goods were up 11% in 2008, the highest rate of increase since 1980. Import prices of goods increased 5.7%, after a decline of 2.5% in 2007.

Corporate profits expand

Corporate profits grew 6.4% in 2008; the largest increase since 2005. Strong commodity prices in the first half of the year had a positive impact in some key sectors of the economy.

Farm income benefited from both high crop yields and high commodity prices.

Growth in labour income slows

While growth in labour income slowed to 4.9% in 2008, down from 6.1% in 2007, many of the job losses occurred in the latter half of the year and overall growth was not far off the average of 5.6% recorded since 2001.

Personal disposable income rose 6.0% in 2008 up from 5.7% in 2007. The personal saving rate also rose to 3.7% in 2008 up a full percentage point from 2007.

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.