The Canadian economy expanded a healthy 0.4% in July, following a 0.1% increase in gross domestic product (GDP) in June. Industrial production rose 1.5% in July, due to solid gains in the manufacturing sector. Meanwhile, US industrial production grew 0.4% in July. While both economies registered sharp increases in utilities’ output, the growth seen in the manufacturing sector north of the border, did not occur in the South.

Manufacturers led the growth in Canada as strong demand and new US emission regulations on truck engines boosted Canadian production of both cars and heavy trucks. Utilities output also surged, due to the heat wave which affected eastern Canada and the north-eastern United States during the early part of July.

Although home re-sales slowed in July, robust demand for new housing continued to boost construction and its feeder industries in manufacturing. The value of building permits hit an all-time high in July, surpassing the record set in the late 1980s. An increase in residential loans helped the finance industry expand for the seventh consecutive month.

US demand for cars and trucks boosted manufacturing

Manufacturing rebounded after a weak June, led by the transportation sector. Canadians’ appetite for new cars took a pause in July and was replaced by our car-hungry Southern neighbours. Higher production levels resulted from the introduction of new car models as well as additional production capacity. New emission regulations in United States, which are scheduled to come into force on October 1st, and the resolution of a strike, boosted production of heavy trucks.

This new production capacity as well as shorter summer shutdowns produced an unseasonably high flow of new cars to the wholesale market in July. Canadian exports of cars hit their highest level since January 2000, as US auto sales surged in July, stimulated by low interest rates and continued big price incentives. Sales at Canadian car dealerships, on the other hand, declined and were the largest contributor to the contraction in retail trade.

Increased activity in sawmills, particularly in British Columbia where many mills did not take their usual summer shutdowns in July, accounted for most of the strength in wood product manufacturing. Exports of lumber regained some strength after the sharp drop registered in June, but remained 10.2% below last July's levels.

The pulp and paper industry also rebounded in July encouraged by higher pulp prices. Exports for pulp and paper were at their highest levels in about a year as manufacturers ramped up production. The second quarter capacity utilization rate in paper manufacturing reached 90.1%, the highest level in just over a year.

The continuing weakness in the ICT manufacturing industry dragged down the total ICT sector. The GDP of ICT manufacturing reached its lowest level since November 2001. Although the drop was widespread, the telephone apparatus industry contributed the most to the decline, as sluggish demand caused several permanent and temporary shutdowns. Wholesaling of computers regained some strength in July, but remained short of May levels.

Utilities propelled by the heat wave

The heat wave in eastern Canada and north-eastern United States pushed up electricity demand. Electricity generation and transmission reached its highest level since December 2000. Consumer electricity prices in Canada increased 3.2% as Ontario broke energy consumption records early in July and forced the import of electricity from the US and other provinces.

Consumers pull back their spending

Canadian consumers did not spend as freely on non-house related goods and services in July as they did in June, leaving the output in the retail trade industry slightly lower. Although most types of retail stores registered a decline in July, auto dealers contributed the most to the contraction. Significant increases in spending at service stations and grocery stores were not enough to offset the drop at car dealerships. Lower activity levels were reported in the travel-related industries, including air transportation, hotels, gambling and spectator sports industries.

Drought in western Canada affecting crops

The output of the agriculture, forestry and fishing industry dropped significantly in July. Crop production fell to its lowest level in years, due to the most severe drought experienced in the western provinces in 40 years. Exports of wheat, rapeseed and other cereals fell sharply in July, resulting from a shortage of these grains. Reduced inventories in July pushed up prices of wheat and rapeseed to levels not seen in three years.