11-010-XIB
Canadian Economic Observer
February 2004

Summary Table - Key Indicators

Overview*

Total GDP in November held onto its recent gains, while jobs in January increased for the fifth straight month. The sources of growth, however, were reversed in the fourth quarter. Export volume recovered, outstripping imports, while slower auto sales dampened consumer spending. Housing rose steadily, but non-residential building construction apparently declined due to high office vacancy rates and excess plant capacity.

Manufacturing recovered its footing, after a weak first half of the year. From January to June, factory output fell 3.5%, while employment fell about 3%. Since then, output has recovered 2.3% and jobs 1%. The upturn in manufacturing occurred despite a further appreciation of the dollar, which was widely-cited as the main source of the slump in the first half of the year. Instead, the upswing of the US economy has taken over as the driving engine of growth, at least in key export sectors such as autos, computers and electronics, lumber and primary metals (aided by the easing of supply disruptions for lumber, nickel and beef). Overall, export volume has risen 3.4% from its summer-time lows, double the gain in import volume. The more optimistic mood in manufacturing was reflected in the January 2004 results of the business conditions survey, with 16 of 21 industries expecting to boost first-quarter output, partly because they are satisfied inventories are now at desirable levels.

Housing remained a constant source of strength, even before another drop in mortgage rates early in the new year. Interestingly, lower interest rates have not boosted auto sales, which have pulled down retail sales in three of the last four months despite healthy gains in non-automotive demand. The weakness of auto sales in Canada (they were strong in the US) is partly attributable to price hikes, despite the rise in our dollar. More generally, consumer prices in Canada rose slightly faster than in the US in the past year, also reflecting tax hikes for tobacco and rising home prices.

Labour Markets

Job growth slowed to 0.1% in January after four straight solid gains averaging 0.3% per month. But the mix of jobs was favourable for incomes, with full-time positions growing 0.4% while part-time jobs fell. The shift from part-time to full-time was widespread among the labour force. The unemployment rate was steady at 7.4%, unchanged from a year ago.

Construction and the primary sector, the fastest-growing areas in 2003, cooled off in January with declines of over 1%. Work in these industries, much of which is outdoors, was hindered by a prolonged cold snap in many regions. The public sector also contracted after expanding in the second half of last year, despite gains in health care which jumped to the head of the pack in terms of year-over-year growth. Services employment also was buoyed by increased demand for business services, while the loss of manufacturing jobs has stopped over the last three months.

The drop in primary and construction jobs affected virtually all regions, lending credence to the notion that weather played the largest role in these decline (the lone exception was a gain in construction in BC). BC continued to lead employment growth, adding another 1%. Ontario followed, with increases in business services and health care offsetting the drop in construction. Quebec and the prairies posted small declines, as losses in the primary and construction sectors were not offset by gains in services.

Leading indicators

The composite leading index grew 0.8% in December, comparable with its revised increases of 0.9% in November and 0.8% in October. Domestic demand remained strong, leading to further improvements in demand for labour. The labour-related components also sustained growth in the US leading index. The majority of components (7 of 10) continued to increase.

Business services, notably temporary help, continued to raise their payrolls for a fourth straight month, while manufacturers extended their workweek for a second month in a row. Construction-related industries contributed to another rapid increase in new orders and the first back-to-back gains in the ratio of shipments to stocks of finished goods in a year and a half. The bright outlook for firms was again evident in the stock market, which ended the year 25% above its level a year-earlier.

Household demand slowed, accounting for two of the three components that declined. The housing index fell slightly from its 30-year high. Durable goods sales posted their first retreat in seven months due to weak auto sales. Furniture and appliance sales growth was cut in half, from 1% to 0.5%. Household spending will be buttressed by the strong job gains at year-end.

The US leading indicator rose by 0.4%, after its trend since July was revised up. As in Canada, the labour components showed a marked improvement. Initial claims for unemployment insurance were particularly strong, and are down nearly a quarter from their peaks late in 2001. The average workweek rose to 40.8 hours, recouping all its losses over the past year. Elsewhere, all 10 components posted gains, reflecting an upturn in consumer confidence.

Output

GDP in November was little changed for the second straight month, after the sharp gyrations related to the blackout in August and subsequent rebound. Housing and the resource sector remained the fastest-growing areas of the economy, ICT services the weakest.

House construction rose 1%, its fifth straight month of rapid growth. It continued to generate spin-offs in related sectors from retailing to non-metallic minerals. The resource sector also received a boost from energy, notably the oilpatch. Total mining output was dampened by the exhaustion of a particularly rich diamond vein, which was exploited over the previous two months.

Manufacturing was flat for a second straight month. Overall, these firms appear to be adjusting to the higher exchange rate in the second half of the year, helped by the upturn in US growth, especially for our motor vehicles and ICT goods. As a result, only 8% of manufacturers felt inventories were too high in January, down from 19% in October. Not every sector benefited; clothing has not recovered from a 13% drop in the first half. Other sectors never slumped, notably non-metallic minerals (thanks to the housing boom) and some resource industries.

Services were held in check by a fifth straight drop for information and culture, notably broadcasting and telecom services. Consumer demand also slowed, particularly for gambling. Government expanded, especially health and education.

Household Demand

Household demand remained torn between disinterest in autos and improvements elsewhere. Since July, auto sales have fallen 10%, and higher prices deepened the slump at year-end. Instead, increased consumer spending was concentrated on other durable goods, which benefited from lower prices and a strong housing market.

Retail sales volume fell 0.6% in November, its third drop in four months. Over this period, consumer demand has fallen 1.3%, with a sharp drop for autos offsetting a 1.0% increase for non-automotive outlays.

Consumer resistance to spending more on autos was deepened by the sharp hike in prices for the new models introduced in November. Preliminary data point to an even sharper decline in December. One reason for the much poorer performance of fourth-quarter auto sales in Canada than in the US was that prices continued to fall steadily in the US (despite the weakness of the US dollar). The slump in sales in Canada was most pronounced for the truck category.

Non-automotive retail sales continued to strengthen, up 0.2% in November. Durable goods led the way, fuelled by computers and home electronics, while furniture and appliances rebounded from two months of slower sales. Colder temperatures helped pull clothing demand out of a four-month tailspin.

Housing starts edged up in December to an annual rate of 218,000 units, matching their average for all of 2003 which was their best year since 1988. Multiple units bounced back from a sharp decline in November, but ground-breaking on single-family dwellings slipped for the first time since August. However, strong sales lowered the backlog of vacant units in November and December, even before mortgage rates fell in the new year. Conversely, existing home sales retrenched in the last two months of 2003.

Merchandise trade

Rising imports and falling export receipts squeezed the trade surplus to $4.3 billion in November, equalling its low for the year. Import demand was strong for business and consumer goods. Export receipts were dampened by another drop in prices.

Export receipts fell 1.1%, with gains for natural resources offset by losses for end products from manufacturing. Food posted the largest advance, as the wheat crop continued to recover from the previous year’s drought and more borders re-opened to Canadian beef exports. Energy was buttressed by a growing volume of demand, which offset a sharp drop for gas prices. Forestry continued to be buoyed by strong construction demand for lumber. Metals were an exception, as the burst of demand for nickel after the Inco strike ended began to subside.

Autos posted the largest drop, down 6%, but relatively firm sales in the US kept our exports above their lows for the year. Machinery and equipment remained the weakest area in exports, off 13% from a year ago mostly due to lower prices. Industrial and farm machinery hit a new low for the year, aircraft tumbled to near a 5-year low, while the ICT sector showed gains recently.

Imports rose by 1.7% in November. While the volume of imports has risen nearly 6% in the past year, this accompanied a 13% drop in prices, mostly due to the rising Canadian dollar. With import prices edging up in November after back-to-back declines, the underlying strength of real import demand was also reflected in their nominal value.

Demand rose for most components of imports. Machinery and equipment led the way, up 3.6%. About half the increase originated in aircraft (which also have above-average prices). Consumer goods also rose nearly 3%, boosted by housing-related items. The price of imported shoes and clothing fell 16% in the past year. Along with the rising dollar, Canada also lifted quotas and tariffs on these goods from the 48 least advanced countries. Energy imports rose despite a dip in prices. The auto sector was alone in posting a decrease, the direct result of the slow pace of sales in Canada.

Prices

Consumer prices rose 0.4% in December, after a 0.3% increase in November: these were the largest back-to-back hikes since the start of 2003. Along with rebates to electricity users in Ontario, which had lowered the December 2002 price level, this boosted the year-over-year rate of inflation to 2.0%.

The largest monthly increase in prices was for tobacco products, as several provinces raised taxes. Higher house prices helped to push up the cost of services, while rising fuel prices raised the cost of running a home. But the price of durable and semi-durable goods fell sharply, especially those with a large import content. These include clothing, automobiles, appliances, and a wide range of electronic goods.

The Bank of Canada commodity price index strengthened for the fourth month in a row, returning to its early 2003 level. The cold snap in January helped to raise energy prices, with crude oil testing last year’s peak of $34 (US) a barrel. Industrial prices hit their highest level since their cyclical peak early in 2000, again led by metals. Food prices went against the grain, with the mad cow scare in the US causing livestock prices to drop.

Producer prices edged up in December, after the rising exchange rate pushed prices down sharply in the previous two months. Most industry prices were little changed, apart from a sharp hike for metals and petroleum.

Financial markets

The Canadian dollar went on a roller-coaster ride in January, soaring to 79 cents (US) before tumbling below 76 cents at month-end. Another cut in the Bank Rate, the third since last April, encouraged the reversal. Slow, steady declines in bond yields also resulted in lower mortgage rates.

The stock market began the new year with a 4% gain, extending its streak of increases to seven of the last eight months. The sources of growth shifted markedly, as metals and energy tumbled after a double-digit gain in December. Instead, information technology posted an advance of over one-third, while lower interest rates gave a boost to financials.

The strength of demand for equities encouraged firms to step up new issues in December, exceeding $2 billion for only the second time in 2003. Some of this was at the expense of bonds, which fell in the month. The downward trend of short-term business credit also moderated at year-end.

Regional economy

In Ontario, sources of growth were increasingly tenuous. Capital spending, one of the few growth sectors in recent months, was unable to maintain October’s gain. Retail sales registered their fifth decline in six months. Exports fell again, reaching a level 15% lower than a year earlier to worsen the slide that began at the start of last year. Of the 97 commodity groups, 67 were down compared to November 2002, six more than in October. Pharmaceutical products were the most notable exception. However, their 56% ($0.8 billion) gain so far this year, which accounted for almost the entire increase in chemical products, offset only a small part of the $7 billion decline in autos and the $4 billion drop for capital goods (including $1 billion in aircraft). Manufacturing shipments slipped 1.6% in October; for transportation equipment, shipments were at their second lowest level for the year (exceeding only the August level, which was pulled down by the power blackout).

The weakening of exports was not as pronounced in Quebec, but this was only because that province has no dominant export such as autos in Ontario. The drop of exports in Quebec was as broad-based as in Ontario. The demand for housing remained the high point in household spending, with housing starts still nearly a quarter above last year’s level. Thanks to the strength of household consumption and construction, manufacturing shipments declined only 0.2%.

The West was the only area of Canada where domestic demand remained strong and broad-based. House sales grew strongly in December, especially in Manitoba (11%) and Saskatchewan (8%), where grain exports increased by more than half following the 2002 drought. In 1997, when grain exports peaked, they accounted for one-third of Saskatchewan’s total exports, compared to only slightly more than 15% in 2002. The Prairies and British Columbia registered Canada’s only increases in retail sales. It was also in the West that the trend in non-residential building permits showed the greatest strength. Shipments were especially strong in British Columbia with a 1% increase their fourth in five months, buoyed by household demand, construction and capital spending.

International economies

In the United States, fourth-quarter GDP rose 1% in volume, after a 2% advance in the third. Most of the slowdown originated in household spending, where the huge lift from the advance payment of the child tax credit sent in the third quarter was not repeated and consequently disposable incomes fell. Partly as a result, outlays for durable goods and housing slowed markedly from increases of over 5%.

Elsewhere, business spending continued to recover, although the mix shifted from machinery and equipment to rebuilding inventories. Exports posted a second straight sharp increase, as the lower value of the US dollar helped pull shipments abroad out of a prolonged slump. The depreciation of the dollar has pushed up import prices slightly (2.7%) in the past year, but this has had little discernible impact on consumer price inflation, which remained below 2%.

Household demand showed no sign of faltering at year-end. Housing starts rose again in December, besting November’s 20-year high by 1.7%. For all of 2003, starts increased 8.4% to their best level since 1978, still not enough to keep up with a 12% gain in new home sales. Existing home sales rose 7% in December. Meanwhile, retail sales gained 0.5%, on top of an upwardly revised advance of 1.2% the previous month. Unlike in Canada, motor vehicles led the recent expansion. Conversely, the housing-related components cooled off, after leading growth most of the year. Food sales fell as news spread of the first case of mad cow disease in the US.

The manufacturing sector continued its revival, with output up 0.3% in December after a 1% hike the month before. Overall, the recovery in manufacturing was widespread, with 70% of industries posting growth. Auto assemblies pulled out of a 2-month slide, although most other consumer goods retrenched. Business equipment remained the fastest-growing sector, with a 3.5% gain in the past year. However, weakness in new orders for capital goods pulled down total orders for durables in November and December.

A turnaround in external trade in November helped manufacturers to recover. The year-long slide in the US dollar helped boost exports for a the sixth time in seven months, led by capital goods (where manufacturing output rose the most). Since April, exports were up 11.7%, more than twice the increase in imports. With imports falling, the trade deficit for goods and services shrank nearly 10% to $38 billion, well below its record of $43 billion in March.

Industrial production in the euro zone gained a further 0.1% in November, after a solid hike the month before. Although most sectors continued to expand, overall output was dampened by a 3.3% drop in energy. Consumer demand began to stir with retail sales volumes picking up, led by clothing and footwear. The unemployment rate was stable at 8.8%, while the annual inflation rate fell to 2% in December. The external trade surplus contracted again in November as exports declined in tune with the strength of the euro. Industrial new orders fell slightly in the month due to another drop for transport equipment.

The German economy shrank 0.1% in 2003 following two years of stagnation, marking the longest slump since reunification in 1990. The decline was widespread, affecting consumer demand, business investment and housing. Exports gained only 1.1% as the euro’s sharp rise against other currencies dampened foreign demand. Inventories expanded, along with government spending (which caused Germany to once again exceed the EU’s budget deficit limits). Manufacturing orders continued to rise in November, helping to boost business confidence, while inflation ended the year at 1.1%, the lowest in the euro-zone. While firms discounted prices to boost sales, consumers cut spending 2.3% in December after a 3% drop the month before.

Economic growth stalled in France in November as industrial production fell 0.4% after a 0.8% rise the month before. New orders also contracted, down 1.4% after being essentially flat in October. Consumer spending continued to weaken with retail sales falling for the second month in a row in October. Exports held steady in November, while imports dipped, resulting in a slight increase in the trade surplus. The unemployment rate was unchanged at 9.5% and the annual inflation rate inched up to 2.4% in December.

The pace of growth accelerated in Britain at year-end. Real GDP rose 0.9% in the fourth quarter, its fastest rate since the beginning of 2000, driven by strong domestic demand. Growth for the year was 2.1%, up from 1.7% in 2002. Retail sales continued to advance into December, rising 0.9% to more than double their November increase. Both business and consumer confidence picked up, while inflation was unchanged at 1.3% in December.

Japan’s economy remained upbeat, with December unemployment falling to its lowest level (4.9%) in two-and-a-half years. Robust demand from China helped offset the rising value of the yen and boosted exports 8.5% in the month. For the year, exports to China rose 33%, while exports to the US fell 10%. Still, Japan spent $67 billion (US) to slow the rise of the yen in January. Industrial production contracted in December, largely due to a fall in the machinery sector after a large gain the month before, but was up 3.2% for the year, the first annual rise in three years. Prices fell just 0.1% year over year in December, the smallest decline since August 2000.

Real GDP in China grew 2.5% in the fourth quarter of 2003, led by business investment and exports. Growth for the year was 9.1%, its best performance in seven years. (The third-quarter estimate was revised up to 2.4% in the first-ever revision of quarterly data). Early in the new year, the government launched a program to recapitalize the country’s insolvent state banks, injecting $45 billion (US) into two that are preparing for stock listings.

* Based on data available on February 6; all data references are in current dollars unless otherwise stated.