Economic activity edged up in May, as gross domestic product (GDP) increased 0.1% after a set-back in April.

The economy gained strength from sharply higher sales of motor vehicles which propelled the retailing and wholesaling sectors. The financial sector expanded due to a recovering stock market. The real estate agent and brokerage industry benefited from a stronger resale housing market. Although the residential housing industry declined for a second consecutive month in May, non-residential and engineering construction again registered gains. The agricultural sector benefited from increased crop production, as weather conditions continued to improve in Western Canada after two years of severe drought. Industries in the tourism sector reported mixed results after a SARS-affected April lowered activity levels throughout the sector. Restaurants posted gains, hotels were flat and airlines and travel agents continued to register lower activity levels.

Areas of the economy that were weak in May included the industrial production sector, the transportation sector (affected by fewer tourists and lower manufacturing output) and the education sector where activity levels were hampered by strike activity.

Industrial production (manufacturing, mining and utilities) fell a further 0.3%, the fourth decrease in as many months, as all components registered a decline in May. Substantial reductions in the production of food, paper, wood and fabricated metal products were responsible for the bulk of the weakness in the manufacturing sector. Further declines in natural gas production and reduced gold mine output led to a reduction in the mining sector. Lower natural gas distribution more than offset a slight increase in electricity generation to reduce total utilities output. Comparable US statistics on industrial production showed a 0.1% increase in May, after two substantial consecutive monthly declines. The US utilities segment was the only area to register weakness in May.

Manufacturers continued to curtail output

Manufacturers reduced production levels for the second consecutive month, resulting in the lowest output levels since March 2002. Manufacturers of exported goods faced lower demand as a result of price increases from a significantly stronger Canadian dollar. Substantial reductions in the production of food, paper, wood and fabricated metal products were responsible for the bulk of the weakness in the manufacturing sector.

Food manufacturers were adversely affected by the revelation on May 20th that an Alberta cow died of bovine spongiform encephalopathy (BSE or mad cow disease) which closed most of the international export market for Canadian beef. Many farmers held back their slaughter cattle thereby reducing production levels at meat-packing plants. Production levels in the animal slaughtering industry were curtailed a significant 9.3% while the rendering and meat processing industry cut back production levels 7.9%. Exports of meat and meat preparations fell 20% in May.

Wood and pulp and paper product manufacturers curtailed production in response to a stronger Canadian dollar, which increased almost 5% against the US dollar in May. High tariff rates coupled with a strong Canadian dollar made it almost impossible for sawmill producers to earn a reasonable rate of return. Fabricated metal products producers trimmed production back 1.7% as a result of lower demand from transportation equipment parts manufacturers.

Transportation equipment manufacturers scaled back production slightly as increased production of cars and trucks was not enough to offset the larger drop in the motor vehicle parts industry. Lower motor vehicle production in the US translated into reduced manufacturing of motor vehicle parts in Canada.

New car sales surged

Activity levels in the retail trade sector increased 0.7% as most store types registered gains. Confident consumers returned to new car showrooms in droves in May after staying away the previous two months. The number of new motor vehicles sold surged 8.4% and was responsible for much of the strength in the retail trade sector. Sales were propelled by the continuing generous incentives offered by North American vehicle manufacturers. These higher new motor vehicle sales coupled with strong motor vehicle imports were responsible for increased activity levels in the wholesale sector as well. Wholesaling activity increased 0.6% on the strength of motor vehicle wholesalers.

Tourism sector results mixed

The results in the tourism sector were mixed in May as a number of industries improved over the month of April while a number of industries reported poorer results. The World Health Organization lifted a seven-day SARS travel advisory in Toronto on April 30, but it seemed to have had little influence on the number of international tourists travelling to Canada. Travellers to Canada from the United States (-4.1%) and overseas (-13.4%) continued to decline in May.

The restaurant industry improved compared with April, as output increased 1.1% in May. There was a corresponding drop in sales at retail grocery stores in May after they reported a surge in sales last month. Restaurant sales in Ontario jumped 3.4% after declining 3.8% in April. Other tourism-related industries reported slight gains in May: performing arts and spectator sports (+3.6%), taxi and limousine services (+1.1%) and car rental agencies (+0.8%). Activity levels in the hotel industry were virtually unchanged from April’s levels, as another decline in the occupancy rate for Toronto hotels was offset by increases for most other major markets, particularly Vancouver, Ottawa and Montreal.

The air transportation industry fell a further 7.2% in May, after declining 4.8% in April. This industry had yet to fully recover from the events of September 2001 when the war in Iraq in March and the SARS outbreak in April further hobbled the industry. The output level in May was actually 6.5% lower than in September 2001. The travel agent industry also suffered large drops in activity levels. This industry registered a decline of 5.9% in May following a 6.3% drop in April.