11-010-XIB
Canadian Economic Observer
June 2008

Summary table - key indicators

Overview*

Real GDP dipped 0.2% in March, capping its first quarterly decline since 2003. Irregular events again played a determinant role in the drop, notably retooling and strikes in the auto industry and heavy snow in eastern Canada that paralyzed movement outdoors. Domestic spending remained buoyed by another large gain in incomes from exported commodities. Employment growth early in the second quarter continued at a modest pace, suggesting the underlying trend of the economy remained mildly positive.

The first-quarter dip in output was driven by a sharp slowdown in inventories after large build-ups in the second half of 2007. This shift appears to reflect a number of factors. Clearly, retailers built-up inventories late in 2007 in anticipation of a surge in consumer spending after the GST rate was reduced on January 1, and this scenario was borne out (especially for autos). The supply of goods from both domestic manufacturers and importers fell sharply, notably as retooling, strikes and weak US demand hampered auto output. As well, the difficulties caused by a winter characterized by unusual cold in western Canada and record snow in eastern Canada hampered the production and transportation of both domestic and imported goods.

The irregular sources of the slump in manufacturing output in the first quarter opens the possibility that manufacturing will rebound in the second. Preliminary data indicate auto output began to recover in April, partly as the interruption to the flow of parts eased, while labour disputes at suppliers were settled in May. Manufacturing employment led job growth in May, recouping all of its losses since the start of the year.

Consumer spending posted a solid gain, driven by big-ticket durable goods. While rising food and energy prices siphoned off some purchasing power, real disposable income growth remained robust at 1.8%. The housing market cooled in the first quarter, after large price hikes reduced affordability.

Business investment rose nearly 1%, and corporate profits continued to grow (notably in the energy sector). Structures remained the driving force behind growth, as outlays for machinery and equipment rose only 0.3%.

Export volume edged down for the third straight quarter, falling 1%. Most of the decline originated in a 13% decrease for autos. Forestry exports also continued to tumble due to the ongoing slump in the US housing market. Despite these losses, overall export earnings continued to rise, reflecting soaring commodity prices for energy, agricultural and industrial goods.

Labour markets

Employment eked out a marginal gain in May, after slowing to 0.1% growth in each of March and April. Youth employment fell sharply, especially full-time jobs. The unemployment rate was steady at 6.1%. Year-over-year employment growth remained at about 2%, even as US payrolls have come to a near-standstill. The unemployment rate in Canada (5.3%, adjusted to US concepts) fell below the 5.5% rate in the US for the first time since 1982.

Private sector payrolls expanded, after a pause in April. The increase was led by a 34,000 gain in manufacturing, lifting its net change since the start of the year to a slight positive. Factory jobs were driven by transportation equipment and computer and electronics. Construction jobs also continued to grow.

Offsetting these gains were declines in agriculture and services. Despite high prices, farming was hampered by a late spring and wet fields, which delayed planting even as high prices boosted the seeding plans of farmers. Services were slowed by a setback in business and public services and more losses in trade and transportation.

Ontario and Quebec dominated job growth in May, a reflection of the recovery in their manufacturing base. So far this year, Ontario job growth (1.2%) remains above the national average (0.8%), while Quebec trails with no change. Employment in May fell in all four western provinces, especially services. However, the west continues to lead year-over-year growth, partly due to booming construction activity.

Leading Indicators

The composite leading rose 0.1% in April after no change in March. Only three of the ten components declined, the fewest since turmoil erupted in global financial markets last summer. As recently as December, six components were declining. The stock market posted the largest turnaround.

Prices on the Toronto stock market rebounded in April, after trending down for five straight months. Subsequently, the market hit a new record high in May.

Household demand was sustained by further gains in spending on durable goods. These offset a seventh straight decline for housing, notably as housing starts retreated sharply in April after a strong start to the year.

The leading indicator for the United States pointed to continued weakness, falling 0.2% for its eight consecutive decrease. Housing and auto sales remained the major drags on the economy.

Despite the slack in auto and lumber exports to the US, Canadian manufacturers recorded their first back-to-back gains in new orders since June 2007. This largely reflected strong demand for airplanes. However, there are long lags in building planes, which helps explain why output and shipments continued on a slight downward trend. The cuts to output kept the downward pressure on inventories, leaving the ratio of shipments to stocks unchanged. The average workweek in manufacturing fell again, and last posted an increase in April 2007.

Output

Real GDP shrank 0.2% in March, its third decline in four months. All of the March drop was attributable to the auto industry, which was affected by a labour dispute in the US that cut off the flow of parts late in February. While alternative supply sources were found late in April, and the strike was settled in May, key production lines in Canada were shut down for all of March. As a result, auto assemblies fell 13%. As well, the closing of dozens of assembly plants across North America due to the strike triggered a drop in demand for auto parts. The retrenchment in the auto sector of course had negative spin-off effects on feeder industries elsewhere in manufacturing as well as downstream in transportation and wholesaling.

Outside of autos, the economy was split between widespread losses in manufacturing and diffuse gains in primary industries and services. The drop in manufacturing has been severe for some industries over the last six months. The loonie’s reaching parity with the US dollar last fall compounded long-term structural declines. For example, clothing output has shrunk over one-third in just six months, while the collapse of US housing demand helped send output of sawmills tumbling 20% over the same period.

Some manufacturing industries where demand had been strong saw pronounced losses last month, notably non-metallic minerals (especially cement and concrete), construction machinery and computers. The drop in manufacturing sales of many of these products was concentrated in Quebec, which bore the brunt of a paralyzing snow storm in mid-March; monthly shipments in Quebec fell 15% for non-metallic minerals, 10% for computers and electronics, 6% for machinery and 5% for fabricated metals. Aerospace remained on a strong upward trend, although the industry continues to see unfilled orders surge as output cannot keep pace with the influx of new orders.

Output continued to grow in the primary sector. Mining and forestry were buoyed by operations returning to more normal levels after exceptional cold hampered output in western Canada in February. Elsewhere in goods, utilities output rose, while construction was dampened by a retreat in housing starts.

Services advanced across the board, except for wholesaling. Finance rebounded as trading on stock and commodity markets strengthened. Transportation got a lift from air travel and a partial rebound in surface transport, although heavy snow in eastern Canada remained a problem. Consumer, business and government services all saw modest gains.

Household demand

Retail sales volumes rose 0.5% in March, their fourth gain in five months. The increase would have been larger but for storms that sharply curtailed nominal sales in Quebec (-2.3%) and New Brunswick (-3.1%).

Durable goods again led the increase in demand, partly due to the stimulus of more price cuts. Both new and used vehicle purchases eked out small gains (although new auto sales slowed in April). Demand for TVs rebounded from a rare decline in February, while computers posted their first drop since last September.

The unusually wintery weather in eastern Canada dampened clothing purchases. Not only were shoppers discouraged from venturing out by heavy snow, but the persistence of cold temperatures dampened the usual pick-up in sales of spring fashions.

Housing starts fell to 214,000 units (at annual rates) in April. This was equal to their fourth-quarter average, after a surprising jump to 243,000 units in the first quarter. Double-digit declines were recorded for both single-family and multiple-unit dwellings. So far in 2008, starts of singles are running 15% behind last year’s pace. New home sales slowed early in 2008, boosting the overhang of unsold new homes, especially in Alberta. Starts of multiple units remain on an upward trend (despite the dip in April), partly because vacancies have fallen from their high in the autumn of 2007. Existing home sales recovered slowly in April, after a sluggish start to the year.

Merchandise trade

The current account surplus rose in the first quarter, after the preliminary estimate of a deficit in the fourth was revised to a small surplus. Most of the first-quarter increase reflected higher prices for goods, notably energy. As well, the travel deficit shrank, reversing a trend to large increases last year, as Canadians spent less in the US.

In March, commodity price gains pushed up exports for the third consecutive month. Rising prices for energy, food, fertilizer and metals explained the higher export receipts as export volumes remained stable in the first quarter.

Energy and agricultural exports both set monthly and quarterly records. Energy exports have soared since October 2007, to a record $10.4 billion in March and nearly $30 billion for the first three months of 2008, a $6 billion increase over fourth quarter. This was the largest quarterly gain on record, surpassing the boost from the hurricane damage in the US in 2005. Crude oil accounted for more than half of the advance in the quarter, although higher prices for natural gas and gasoline also contributed to the increase in energy exports.

Agricultural exports reached $3.3 billion for the month and $9.6 billion in the quarter. As with energy, the advance in agricultural exports in the first quarter of 2008 was the largest on record, climbing over $1 billion on the strength of wheat and canola prices.

After retreating late in 2007, industrial goods in 2008 are trending up toward their April 2007 high of $9.2 billion, reaching $8.8 billion in March. Fertilizer exports hit a record $460 million in March and increased 30% so far this year, mostly as a result of soaring prices. Nickel and copper also were up for the month.

Imports fell slightly, with a drop in volumes more than offsetting a rise in prices. Despite the increase in energy prices and a recovery of natural gas imports after a pause in February, a labour dispute at a major US parts supplier drove the decline. This dispute disrupted imports of parts and trucks as well as truck exports.

Prices

The implicit price index for GDP rose 1.3% in the first quarter, mostly due to higher prices for energy exports. Consumer price increases were steady at 0.3% while housing prices levelled off after two straight years of 7% increases (the most of any sector). The steep decline in import prices in 2007 when the loonie soared came to an end, with their 3.3% increase the most since mid-2004.

Consumer prices jumped 0.4% between March and April, after rising only 0.2% in the first three months of the year. Most of the upturn reflected higher gasoline prices, which hit a record high (surpassing their previous peak set in September 2005 in the wake of Hurricane Katrina). As well, food prices rose 0.7%, mostly for bread.

Excluding food and energy, monthly prices rose 0.3% and were just 1.1% ahead of a year-earlier. The cost of goods was little changed, as the recent heavy discounting for autos and clothing did not continue. Services were boosted by housing as well as air transport, where rising fuel costs began to affect travellers.

Prices for manufactured goods rose 1.4%, in April, their sixth straight increase. Over this period, prices recovered all of their declines during the rapid appreciation of the loonie in mid-2007, and industrial prices hit a new high in April 2008. Resource-based products led the increase, notably petroleum. But prices also strengthened for autos and capital goods, helped by a slight drop in the exchange rate in April. Manufacturers continue to see sharp hikes for commodity inputs, up 23% in the year to April.

Commodity prices surged across the board in May. Energy led the increase, with crude oil surpassing $130 a barrel. Futures prices point to a prolonged period of very high prices. Natural gas prices also hit their highest level outside of the aftermath of Hurricane Katrina in 2005. Food prices rebounded slightly, after a sharp retreat in March from their record high set in February. Nickel tumbled to a 2-year low after a new mine opened in Australia.

Financial markets

The Toronto stock market continued to set record highs, rising 6% in May after a 4% gain in April. And while energy and mining stocks continued to profit from high commodity prices, both industrial and consumer staples also advanced sharply in May (industrials include aerospace and transportation companies).

Interest rates and the Canadian dollar were essentially unchanged in May. The dollar has hovered around parity with the US greenback since last November, its most stable six-month period since October 1997.

Corporations continued to run large surpluses, lending a net $15 billion to the rest of the economy in the first quarter. Firms continued to issue large amounts of equity in April as the stock market set new highs. Equity issues also may have been stimulated by a slight drop in short-term business credit in April, after the growth of bank loans slowed noticeably over the last two quarters.

Regional economies

Poor weather appears to have dominated the economy in the central part of the country. In Quebec, retail sales and housing starts dropped sharply in March, coinciding with the biggest snowstorm in the past generation. Fourteen of the 20 manufacturing industries posted declines, most of them producers of goods shipped by truck or train. A measure of the underlying trend of manufacturing employment in April was that 9 of the province’s 15 economic regions expanded. Compared to last year’s levels, employment in the manufacturing sector rose in almost every region outside Montreal (the centre of the clothing industry). Overall, shipments rose in March due to a second consecutive strong increase in aerospace. Employment in manufacturing has remained stable throughout the province since early 2008 compared to the heavy losses incurred the year before.

In March, manufacturing sales in Ontario lost some of their gains in the previous two months. The decline was widespread, suggesting that the snow also played a part. Only 6 out of 20 industries recorded increases, the same number as during the December storms. At the same time, a major auto parts supplier to North American producers was on strike, another temporary wrench in the production process. However, construction remained a source of strength. In April, non-residential permits were robust, even more than in the rest of the country (aside from the Prairies). They also grew strongly in the residential sector. Retail sales rose by 0.8%, making up half of the loss recorded in February.

Household demand remained buoyant in the West. Retail sales jumped by 1.3% in the Prairies and 2.0% in BC. These are the largest increases since November 2007 for the Prairies and since January 2006 for BC. Housing starts decreased in Alberta compared to their record levels in March. Non-residential construction remained much higher than the year before. Housing starts recovered half of their losses from March in British Columbia.

International economies

In the United States, housing remained weak and home prices declined further in April. Despite a steadying of sales and starts in 2008, inventories remained high as the number of foreclosures picked up, placing further downward pressure on prices. Existing home sales in the first four months of 2008 have been relatively stable, never straying far from 4.9 million units (at annual rates). Similarly, housing starts have hovered around 1 million units in 2008, with April showing a slight rebound from the slide in March.

Showing promise in retail sales was a rise in building supplies as well as electronics and appliances, which contributed to a 0.2% gain in total sales. Auto sales were down for their third straight month, which dampened overall sales.

A strike at a major parts supplier cut into industrial production, which fell 0.7% in April. However, new orders for core capital goods were up a strong 4.2%, following declines throughout the first quarter.

Trade flows were also affected by the labour dispute, which reduced both exports and imports of automotive products. Exports fell in March for the first time since February 2007, down 1.7%. In addition to autos, exports were weighed down by aircraft and pharmaceutical products. Lower volumes of crude oil and consumer goods brought down imports.

Real GDP grew 0.8% in the euro-zone in the first quarter of 2008, more than double its pace in the previous quarter. Output was boosted by strength in Germany and France despite severe slowdowns in Ireland and Spain, which have been battered by the slumping housing markets, and weakness in Italy. Industrial production contracted in March as every sector retrenched, with the notable exception of energy. New orders also fell, led by declines in textiles, metals and machinery and equipment. The external trade deficit narrowed as the surplus for machinery and autos outweighed the rising energy shortfall. Trade was particularly brisk with the US, China and Russia. Consumers kept their wallets closed in March, the second straight month of lower sales volumes. The annual rate of inflation eased slightly in April to 3.3% from 3.6% in March, while the unemployment rate was stable at 7.1%.

Output in Germany grew 1.5% in the first quarter to mark its best performance in over a decade, spurred by surging business investment. Industrial production picked up in March after being flat the month before. New orders, however, contracted for the fourth straight month despite strong export demand from Eastern Europe, the Middle East and Asia. Domestic demand remained driven by business, as consumers remained unwilling to spend. Retail sales fell for the fifth time in six months in March. Inflation eased in April to 2.6% from 3.3% in March. The unemployment rate fell to 7.3%, far below its 8.6% rate of a year earlier.

Real GDP growth in France doubled to 0.6% in the first quarter, while growth for 2007 was revised up to 2.1%. Industrial production fell in March after three straight gains. New orders plunged, giving back most of their rise in the previous two months. Unlike Germany, France has been harder hit by the strength of the euro and waning export demand. The external trade deficit in March was the third largest in the euro-zone.

The British economy slowed slightly to 0.4% in the first quarter. Industrial production contracted in March, its fourth drop in five months. External demand remained sluggish with Britain once again posting the largest deficit in the euro‑zone. Consumers suddenly reined in spending, after five months of robust demand. Prices shot up by 0.8% in April, their largest monthly hike in almost six years due to surging energy and food costs, raising the annual rate to 3%.

Real GDP in Spain grew 0.3% in the first quarter, its slowest pace in almost 13 years as output in construction and services collapsed. Export demand was strong, however, boosted by growth in northern Europe.

Japan’s economy grew 0.3% in the first three months of the year, its slowest pace in three years. Strong exports to China and other Asian nations failed to offset weak business investment. Consumer spending remained resilient, helped by rising wages. Unemployment hit a 7-month high of 4.0% in April, while industrial production fell 0.3%.

Note

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