Gross domestic product by income and by expenditure

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Third quarter 2007

Economic growth moderated in the third quarter as real gross domestic product (GDP) advanced 0.7%, down from 0.9% in the second. Final domestic demand remained buoyant (+1.1%), outpacing GDP for the eleventh quarter in the past twelve.

Chart B.1 Final domestic demand outpaces GDP

Consumer spending eased in the third quarter from its robust showing in the second, while retailers and wholesalers added significantly to their inventories. Imports outpaced exports by a wide margin, as the Canadian dollar once again appreciated sharply (+5.1%) against its U.S. counterpart.

Businesses took advantage of lower prices to invest heavily in machinery and equipment. Housing investment remained strong, propelled by new home construction, while the resale market retreated.

Chart B.2 Contributions to percent change in GDP, third quarter 2007

Labour income grew at a slower pace than in the first half of 2007, while personal disposable income was up moderately. Corporate profits advanced on strong bank earnings.

The Canadian economy grew at an annualized rate of 2.9% in the third quarter, compared to 4.9% for the U.S. economy.

Pace of consumer spending eases

Growth of consumer spending eased to 0.7% in the third quarter, less than half the pace posted in the second quarter and the weakest gain in two years. Consumption of durable and non-durable goods both edged down owing to weakness in demand for automotive and energy products.

Chart B.3 Consumer spending decelerates after strong second quarter

After increasing 3.9% in the second quarter, consumer purchases of new and used motor vehicles were down a sharp 2.6% in the third. Spending on motor vehicle parts and repairs as well as on motor fuels was also down. Consumption of electricity, natural gas and other fuels all declined.

Continued strength in the housing market stimulated spending on household furniture and appliances. Outlays on recreational, sporting and camping equipment and on clothing and footwear were also strong.

Consumption of services was up 1.1% in the third quarter, matching its pace in the second. Net expenditure abroad was up sharply for a second consecutive quarter, as the stronger dollar boosted Canadians' travel spending abroad (which includes cars and trucks purchased in the U.S. and brought back) and restrained spending by visitors to Canada.

Large build-up of inventories

Businesses added $15 billion worth of goods and materials to their non-farm inventories in the third quarter following two quarters of small increases.

Retailers accounted for just over $9 billion of the inventory accumulation, with motor vehicles responsible for nearly half of the build-up. Wholesalers also added significantly to their inventories of motor vehicles and machinery and equipment.

Chart B.4 Large build-up of inventory at retail level

Despite a 0.7% reduction in output, manufacturers built up stocks for the second consecutive quarter as higher inventories of finished goods more than offset lower inventories of raw materials. Farm inventories dwindled for the third consecutive quarter, as farmers sold off grains at prices driven higher by demand for bio-fuels.

The economy-wide inventory-to-sales ratio rose to 0.66 leaving just enough inventories to satisfy 61 days of sales, at the current pace, and in line with its average (0.67) over the preceding four quarters.

Imports outpace exports by wide margin

Imports of goods and services jumped 4.4% in the third quarter, following a 1.9% gain in the second. Imports have outpaced exports now in twelve of the past seventeen quarters. Increases were recorded across all major categories of imported goods, with the exception of energy products.

Machinery and equipment imports jumped 6.4% as Canadian businesses invested heavily in new machinery and equipment. Aircraft, engines and parts led in this category. Automotive products and other consumer goods were both up sharply.

Travel imports were up sharply for the second consecutive quarter as the soaring loonie stimulated Canadians' travel spending abroad.

Chart B.5 Imports outpace exports

Exports of goods and services increased 0.6% in the third quarter, after growing 0.8% in the second. Since the fourth quarter of 2002, when the Canadian dollar began to appreciate against its U.S. counterpart, exports have grown only 7.7%. Imports of goods and services, on the other hand, have grown 34%. The difference is not as marked however on a current price basis, as exports increased 9.3%, while imports grew only 15% over the same period.

Industrial goods and materials, automotive and energy products shored up export growth during the quarter. Industrial goods and materials were up 4.5%, the strongest pace in a year, driven notably by higher shipments of nickel ores. Shipments of automotive products were up 2.0%, rebounding from two consecutive quarters of declines. Exports of energy products advanced 1.4% on increased oil and natural gas deliveries south of the border.

Labour disputes in the B.C. forestry sector as well as continued softening in U.S. residential construction contributed to a sharp 6.2% drop in forestry exports, led by lumber and other wood fabricated materials. Output of the forestry and logging industry slid 7.2%.

Heavy investment in machinery and equipment

Business investment in machinery and equipment picked up steam in the third quarter, advancing 3.6%, more than twice the pace set in the second quarter and the fastest pace in ten quarters.

Chart B.6 Business investment in machinery and equipment posts solid gains

Investment in other transportation equipment jumped 14%, owing mainly to capital outlays by the airline industry. Outlays for telecommunications, computers and other office equipment and software posted solid increases.

On the down side, capital outlays for trucks slipped 2.8%, their third consecutive decline.

Continued gains in housing investment

Investment in housing posted another solid gain during the third quarter. Over the past three quarters, total investment in residential structures has grown 4.8%, compared to a decline of 2.9% over the preceding three quarters.

Chart B.7 Another solid quarter for housing investment

The strength in housing stemmed from new residential construction, as housing starts jumped to 247,400 at annual rates in the third quarter. Renovation activity gave an added boost, advancing 1.2% in the third quarter, twice its pace in the second.

The resale market cooled over the summer months, as ownership transfer costs (which include real estate commissions) slipped 1.6%, following two quarters of solid gains.

Labour income slows from first half of 2007

Labour income advanced 0.5% in the third quarter, less than one-third its pace in the first and second quarters, when special pay equity payments in Quebec and special pension contributions in Newfoundland and Labrador boosted labour income. Excluding these special payments labour income would have grown 1.2% in the third quarter, 1.6% in the second and 1.8% in the first.

Both employment and average weekly earnings were up during the quarter, and the unemployment rate edged down to thirty-year lows. The wage bill in construction jumped 3.3%, while that in manufacturing slipped 0.9%.

Personal disposable income advanced in the third quarter. Income tax payments by persons decreased 1.3% from a high second quarter level that was boosted by taxes on capital gains reported with income tax returns. The personal saving rate slipped to 1.3%, while households increased their mortgage borrowing significantly for the third consecutive quarter.

Corporate profits boosted

Corporation profits before taxes increased 2.6%, the fastest pace in nearly two years. Profits were boosted by earnings in the banking sector. The oil and gas extraction industry, petroleum refineries and coal products, retailers and wholesalers also fared well.

Lower exports and labour disruptions in the B.C. forestry sector contributed to lower profits for wood and paper producers, while lower commodity prices reduced profits in mining (excluding mineral fuels).

Economy-wide prices

The chain price index for GDP edged down 0.3% in the third quarter, after advancing 1.3% in the second.

Lower prices for energy exports played a role, as the price index for GDP excluding energy, edged up 0.2%. The special payments included in government labour income (mentioned above) also played a role; excluding these payments in addition to energy, economy-wide prices would have increased 0.5% in the third quarter and 1.4% in the second.

The Canadian dollar appreciated 5.1% against its U.S. counterpart in the third quarter, while the chain price index for imports slipped 2.8%. Consumers paid lower prices for goods during the quarter, while businesses paid lower prices for machinery and equipment.

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.