The economy experienced its first contraction since the events of September 2001, as Gross Domestic Product (GDP) fell by 0.2% in April.

Industrial production (manufacturing, mining and utilities) fell a further 0.8%, the third consecutive monthly decline. Electricity generation and natural gas distribution were adversely affected by a decline in the demand for heating fuels. There were widespread declines in production levels in the manufacturing sector. Although consumers welcomed the significant drop in energy prices it led to reduced exploration of oil and gas. In the meantime, oil production was hampered by maintenance shutdowns. Comparable US statistics on industrial production showed a 0.6% decline as a result of widespread slowdowns in their manufacturing sector.

Consumers were the source of strength during the latest economic expansion with their insatiable demand for new homes and cars. In April, a number of special domestic and international factors stalled this demand which resulted in lower output for residential construction and the retailing industry. There was a retrenchment in the travel-related industries, as both Canadians and international tourists stayed home.

Some pockets of strength in the economy this month were most notable in the finance sector, as positive conditions in the stock market led to improved output for both bank and non-bank investment dealers. Continued demand for cellular, Internet and long distance services led to increased output for telecommunication services. The health and education sectors reported higher activity levels, as did the business services sector.

Manufacturing weakness widespread

Manufacturing output decreased 0.4%, its second drop over the last three months. Although lower production levels were extensively reported among manufacturers, durable goods manufacturers were responsible for much of the weakness. Primary metal manufacturers suffered the largest setback as production problems at a uranium mine significantly hampered output in the mining sector and subsequent uranium processing in the manufacturing sector. Information and communication technologies (ICT) manufacturers reduced output a further 1.9%, reaching its lowest level since the fall of 1998. Makers of both computers and semiconductors eased back their output levels in April, while communication equipment manufacturers regained some strength, due to new product offerings and new contracts.

A drop in aircraft and aircraft parts production as well as sluggish motor vehicle parts output overshadowed the robust gains registered by the car and truck industry, leaving the transportation sector at its lowest level of the year. Production was pared back for the third consecutive month in the motor vehicle parts industry, mirroring the uncertainty in North American production of cars and trucks. Motor vehicle manufacturers, on the other hand, increased production levels of both cars and trucks. This was in part due to the termination of a labour dispute in this industry. Heavy-truck manufacturers ramped up production levels 36%, almost restoring output levels to the pre-strike levels in December and resulting in increased exports of trucks in April.

Another setback for housing boom

The housing boom was impeded once again, as housing starts declined for a second consecutive month after reaching a peak of 255,000 units in February. The residential construction industry fell 0.4% in April, although it was still 12% higher than year-ago levels. The housing construction feeder industries in manufacturing reported mixed results as producers of glass, paint and gypsum products increased output while makers of wood products, asphalt products and electric lighting equipment reported lower output levels.

Consumer purchases of new furniture continued into April, resulting in improved activity levels for wholesalers and retailers. Appliance manufacturers increased production levels while furniture makers decreased theirs. A slowdown in the resale housing market resulted in lower activity levels for the real estate agent and brokerage industry.

Retailers and wholesalers adversely affected by lower demand for new cars

Retail sales declined for the second consecutive month in April, falling 0.3%. Most of the drop was due to lower sales at gasoline service stations, which declined for a second consecutive month. There were also fewer sales of new motor vehicles. The once popular incentives by motor vehicle manufacturers were unsuccessful in luring customers into new car showrooms as sales at new motor vehicle dealers were down 1.6% from-year-ago levels. Wholesalers of motor vehicles and parts also experienced lower activity levels.

Drop in the travel sector: SARS one of many factors

During the past five years, the Canadian economy was hammered by a number of major events. In January 1998, economic output declined 0.2 % as several days of steady freezing rain blanketed major parts of Eastern Canada and caused widespread power blackouts. The events of September 11, 2001 had a huge effect on the travel sector when GDP fell 0.7%. The Severe Acute Respiratory Syndrome (SARS) outbreak that began in March was localized mostly in the Toronto area and even though this had a direct influence on the same set of travel-related industries, April’s decline in the travel sector is only about half that seen during the month of September 2001.

To date, for several reasons, it is impossible to isolate the total impact of SARS on GDP. The war in Iraq, a weaker-than-expected US economy, a stronger Canadian dollar, fluctuating crude oil prices and other events had inter-related effects in some industries. GDP excluding the travel-related sector declined 0.1%, somewhat better than the 0.2% decline for the total economy. Although the World Health Organization (WHO) lifted its Toronto travel advisory warning on April 29, a second smaller wave of the disease was identified on May 22.

International travel in and out of Canada suffered an across-the-board slowdown in April (-5.8%). Continuing a long declining trend that began in September 2001, same-day trips to Canada from the United States dropped in April (-5.6%). Some of this downturn may also be attributable to a slower US economy, concerns related to the war in Iraq, but over the longer term it was partially impacted by newly constructed casinos in the US that dampened cross-border gambling. In overseas markets, travel from Hong Kong plummeted 32%, closely followed by South Korea (-29%) and Japan (-29%). April recorded the lowest monthly number of visitors to Canada since May 1994. The number of US residents who came to Canada for a stay of at least one night dropped in April (-15%).

Air travel slump worsens

The air transportation industry, which has yet to fully recover from the events of September 2001, fell a further 6.3% in April. The number of aircraft movements, capacity (the number of available seats) and the load factor (the number of filled seats) fell. Almost half of all incoming and outgoing international passengers go through Toronto/LB Pearson airport. This accounts for 45% of all transborder and international travellers moving in and out of Canada. Total aircraft movements at Toronto/LB Pearson airport were down 7.9% in April. Overall weakness in the air transportation industry was responsible for a significant reduction in manufacturing shipments of jet fuel. Otherwise, so far, Canadian manufacturers seemed unaffected by SARS. Remarkably, however, Canada imported a normal year's worth of surgical masks just during the month of April alone.

Hotels occupancy rates low

Activity levels in the hotel industry were down 6.0% compared to a 12.8% decline in September 2001. The hotel occupancy rate in downtown Toronto was in the 40% range instead of its usual seasonal range of 70% in April. Major conventions in Toronto were reportedly cancelled because of SARS and participation at other conferences was affected. Events that were to be held in Toronto but were moved to other Canadian cities do not influence national GDP, while cancelled or postponed events do have an effect.

Restaurants hit hard; grocery store sales increase

Restaurants and bars posted a decline of 0.3% compared to a 0.7% decline in September 2001. Ontario total restaurant receipts declined (-1.6%) in April. Contributing to April’s decline in Ontario were reductions in full service restaurants (-3.9%), food service contractors including those serving airlines (-9.2%), social and mobile caterers (-4.5%) and drinking places (-2.6%), with growth in limited service restaurants (0.5%).

The restaurant industry would have been affected by reductions in travellers to Toronto and Toronto residents avoiding public places. However some substitution occurred, as companies offering take-out and delivery services were busier than usual as consumers tried to stay away from crowds to avoid the possibility of contracting SARS. Retail sales at grocery stores were up 1.4% in April, partially reflecting Torontonians’ aversion to public places including restaurants.

Cocooning affects other industries

With the general population more inclined to stay home in April, output in the Pay TV and specialty TV industry increased (0.6%). However, other tourism related industries showed significant weakness. Performing arts and spectator sports declined 2.4%, car rental and leasing dropped 3.2%, output of travel agents fell 6.2%, taxi and limousine services decreased 3.6%, while that of scenic and sightseeing slumped 1.9%.

Hospital activity increases

In the health care sector covering services such as hospitals, ambulance and home care, two opposite effects of SARS were at play. Work related to the fight against SARS increased, but some medical tests and surgeries were postponed. Health care workers in quarantine, specialists without work and those performing lower skilled jobs were kept on the payrolls. In hospitals, many of the affected employees reportedly used "working quarantine" by going to work but isolating themselves from friends and family while at home. In other words, affected hospitals continued to function and employees continued to work there. In addition, deferred medical procedures at hospitals in the Toronto area may create pent up demand for medical services in the future.