The year ended strongly as Gross Domestic Product (GDP) increased 0.5% in December. For the first time in this latest expansion of the economy, the business sector was the source of strength in GDP. Since the second half of 2000, the consumer had been responsible for most of the strength in the economy.

The strength was focused in the goods sector of the economy as industrial production rose 1.2%. Higher manufacturing and mining output were responsible for the strength in industrial production offsetting a slight decline from utilities. Higher oil and gas production and demand for exploration services spurred the mining sector 1.2%, following two months of decline. Cooler than normal temperatures in the US north-east, prompted increased exports and pipeline distribution of natural gas. Continuing strength in base metal prices was behind increased output in metal mines. In comparison, the Index of Industrial Production in the United States was flat in December as lower utilities output offset gains made in manufacturing and mining.

The finance sector continued to enjoy the benefits of a recovering stock market as most North American stock market indexes maintained their upward momentum in December. In addition, higher output was reported by the health, education and government administration sectors.

Consumer demand for goods and services was found lacking in December as retailing activity fell 1.0% in the month. A further slump in new car sales was behind the weakness for retailers. Retail sales excluding new motor vehicle dealers declined a slight 0.1%. In addition, consumer demand for new homes waned, with new home construction flat for the month of December. The real estate agent and brokerage industry also reported reduced activity reflecting a decline in housing re-sales.

On the other hand, a resurgence in demand for international travel by Canadians helped lift the output of the air transportation industry. This industry has increased 23% since the lows reached in May 2003, when SARS and the war in Iraq severely hampered demand for air travel. Meanwhile, a drop in the number of international tourists to Canada held back the output of other travel-related industries.

Broad strength in manufacturing sector

Manufacturers increased production 1.4% in December with most sub-sectors reporting gains. Although new motor vehicle sales tanked in Canada, motor vehicle and parts production increased substantially reflecting increased demand from the US. Makers of primary metal and fabricated metal products, benefited from the strength in the motor vehicle and parts industry. New-found strength in the ICT industry pushed output a further 1.4% in December as production levels reached highs not seen since the summer of 2001, although it remains 39% below its August 2000 peak.

The strength in the manufacturing sector was mirrored in the wholesaling sector. Wholesalers of automotive equipment, lumber, beverages and computers all reported increased activity in December. The rail transportation industry also reflected the strength in the manufacturing sector as output rose 2.8%.

Fourth Quarter, 2003

A surge in manufacturing output and supporting industries helped end the year on a solid note. Continuing strength in residential construction and the mining sector were also large contributors. Industries in the travel-related sector enjoyed a brisk quarter as gains were reported for air travel, gambling, hotels and restaurants. In addition, higher output was reported by the health, education and government administration sectors. Meanwhile, curtailed sales of motor vehicles translated into a drop in activity for the retail sector.

Industrial production (manufacturing, mining and utilities) surged 1.6%, following a depressed first half of 2003. Increased manufacturing and mining production more than offset reduced output in the utilities sector, as electricity generation declined for the third consecutive quarter. Higher energy prices provided the impetus for increased crude oil and natural gas production and pipeline distribution as well as increased oil and gas exploration. Metal ore mining jumped 7.7% in the fourth quarter, after labour disputes depressed output in the previous two quarters. In comparison, in the United States, industrial production advanced 1.3% as all major components registered gains.

Manufacturing output rose 2.0%, the first increase since the third quarter of 2002. The surge in manufacturing partially reflects reduced output last quarter due to the electricity blackout in Ontario, the re-opening of international borders to some Canadian beef products, robust housing construction in both Canada and the United States and higher demand for motor vehicle parts from American motor vehicle assembly plants. ICT manufacturers registered a significant gain of 4.4%, only the second in the last six quarters.

Higher manufacturing production translated into increased activity for wholesalers. Wholesaling activity increased 3.5%, following two consecutive quarters of decline. Wholesalers of automotive products, computers, machinery, beverages and grains all registered gains. Firms involved in the transportation and storage of goods also benefited from increased manufacturing as truck transportation, rail transportation and warehousing industries all posted increases.

Historically low interest rates continued to fuel demand for new housing. New home construction advanced a further 3.6% in the fourth quarter, the tenth consecutive quarterly increase. An increase in single-family dwelling housing starts contributed to the strength in new home construction. Manufacturers, wholesalers and retailers of furniture and appliances benefited from the boom in housing construction. Meanwhile, a downturn in the resale housing market translated into lower output for the real estate agent and brokerage industry, which registered a 4.8% decline, the first downturn since the third quarter of 2002.

Consumer’s appetite for large purchases was focused on new homes and home-furnishings as new car sales plunged 10%. This had negative consequences for the retail sector as it reported its first decline since the second quarter of 2002. Retail sales excluding motor vehicle dealers advanced 1.0%.

2003

The expansion in the Canadian economy was dampened in 2003, to about half the pace of that seen in 2002, by a series of unforeseen events.

SARS

The outbreak of Severe Acute Respiratory Syndrome (SARS) that began in March was localized mostly in the Toronto-area; however, its effects were felt across the country. The air transportation industry, which has yet to fully recover from the events of September 2001, fell a further 7.4% in 2003. By the end of 2003, a combination of factors including increased consumer confidence and an increase in travellers from abroad allowed this industry to surpass its pre-SARS levels and return to December 2002 levels.

The hotel industry was also adversely affected by SARS as hotel occupancy rates plunged across the country. Output in the hotel industry declined 5.4% in 2003 and although the industry performed well in the latter half of 2003, December’s output remained below pre-SARS levels. The impact on the restaurant industry was not as severe and by May 2003 was back on track. Output in the restaurant industry declined 1.1% in 2003.

Mad Cow

Food manufacturers were adversely affected by the revelation on May 20 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 at meatpacking plants. Production in the meat slaughtering and processing industry was curtailed 5.3% and exports of meat products fell 4.7% in 2003. A partial re-opening of international borders in September left the industry at pre-mad-cow levels by the end of the year. The closure of international borders to Canadian live cattle led to an increase in the size of the Canadian cattle herd, resulting in a 1.3% increase in the output of the animal production industry. Current dollar cattle receipts fell by more than one-third in 2003 to $4.6 billion, reflecting both a drop in volume and prices.

Ontario power blackout

GDP for the month of August was the weakest in 2003 as economic activity declined 0.7%. The weakness was widespread with most industries reporting slight to sharp declines in output. Much of the downturn can be attributed to the power blackout in Ontario and the subsequent request for reduced electricity consumption. Reduced electricity generation hampered manufacturing plants and service-producing establishments, hindering the production, transportation and distribution of goods as well as the sales and delivery of a wide range of business, personal and government services. However, the economy recovered completely in September bouncing back by 1.1%, registering the largest monthly gain in GDP in 2003. Electricity generation declined 2.8% in 2003, as Ontario recorded a drop of 3.1%.

British Columbia forest fires

Record dry weather conditions set the stage for huge forest fires in British Columbia in the summer of 2003. Estimates of lost timber stocks were set at the equivalent of 75% of Canada’s total U.S. softwood exports. The output of the non-business sector increased by an estimated $500 million, due to increased provincial spending on fire fighting and support services for fire evacuees. The forestry and sawmill industries were still dealing with the impact of the US-Canada softwood lumber agreement when they posted large declines in output in August as a result of the fires; but then output almost completely rebounded in September. The forestry industry increased 3.9% in 2003, while the sawmill industry reported a slightly smaller increase of 2.6%. Lumber exports to all countries increased 2.5% in 2003. Lumber prices surged during the crisis but fell back in October and November.

Canadian dollar rally

The US dollar significantly depreciated against major currencies in 2003, including the Canadian dollar. Over the year 2003, the Canadian dollar appreciated 12% (based on annual average noon spot rates) against the US dollar and from December 2002 to December 2003, it appreciated 19%. The impact on the Canadian manufacturing sector can be seen in manufacturing output which declined a slight 0.4% in 2003 and merchandise exports which fell 1.7%. Merchandise imports jumped 3.7%, while import prices fell 7.3% in 2003. Consumers paid 1.9% more for goods in 2003, while producers paid 2.0% more for their raw material inputs and charged 2.5% less for the finished goods they produced while exporters dropped the price of their goods by 0.7%.

Mining sector shines in 2003

Industrial production edged ahead 0.3% in 2003 on the strength of the mining and oil and gas sector as manufacturing and utilities output turned downwards. Higher prices spurred oil exploration and extraction activity. Canada’s diamond mining industry more than doubled its output, making Canada one of the world’s leading producers. Manufacturing edged down 0.4% in 2003 as the aerospace, machinery and clothing and textiles industries all recorded lower output. Production of motor vehicles was also lower. Manufacturing of telecommunications equipment fell sharply for a third straight year leaving output at pre-1997 levels. Industries feeding residential construction (wood products and non-metallic mineral products) fared well. Production of pharmaceutical products increased 8.9%, after three years of stellar growth.