Section 1: Current economic conditions

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Overview ¹ 

Output and employment fell markedly in the latest month, after the rate of declines had slowed perceptibly over the previous three months. The May drop in output partly reflected shutdowns in the auto industry. Some of July’s loss of jobs appears related to record rainfall in parts of central Canada.

Financial markets continued to improve. The stock market resumed its recovery in July, after a pause in June. The increase was encouraged by the upward trend of commodity prices since the spring, especially for metals. This also helped send the Canadian dollar above 90 cents (US).

The improvement in financial markets also reflected a stabilization in the OECD economies. The housing market in the US showed clear signs of bottoming-out, as sales rose for a third straight month. The rate of decline of US industrial output slowed in June, even before the re-opening of plants closed during the bankruptcy procedures for Chrysler and GM. Overseas, industrial production in Japan rose for the fourth straight month in June, while Europe posted its first gain since last September.

Firms now plan to cut business investment in 2009 by about $30 billion, versus their forecast of a $20 billion (or nearly 10%) drop at the start of the year. This was the finding of a special mid-year update of the survey of private and public investment, conducted to see how investment was reacting to the rapid change in the economic climate this year. Since the forecast for 2009, large downward revisions to spending plans occurred in mining ($4.0 billion, with three-quarters in oil and gas) and manufacturing ($2.4 billion), two industries where output continued to contract as summer began. Finance and wholesale trade explain most of the remaining scaling back of investment plans between the start of the year and mid-year. The drop in business investment was partly offset by a near-doubling of the increase in the public sector to over $6 billion.

The downward revision to business investment at mid-year does not contradict other signs of an upturn in the economy. Research on business cycles has shown that investment invariably lags in a recovery (see the article in the September 2005 CEO). Instead, upturns are led by housing, consumer spending and inventories.

Labour markets

Employment dropped by 0.3%, in July, after levelling-off over the previous three months. Most of the decline was for youths, especially in Quebec where record rainfall in July dampened hiring in seasonal industries such as accommodation and food, recreational services and agriculture. Overall, services jobs fell in July after four straight gains.

Employment in goods-producing industries continued on the downward trend that began last October. Construction fell anew, especially in Ontario, after levelling off over the previous two months. But the recent sharp slide in factory jobs slowed markedly in July, helping Ontario’s employment rise in July.

Employment fell slightly in Alberta and BC, after gains over the previous three months. As well, BC has seen the largest shift to part-time jobs over the past year in Canada. Part-time jobs account for 22.1% of employment in BC, compared with just under 20% in the rest of western and central Canada.

Leading indicators

The composite leading index fell by 0.1% in June, after the rate of decline had slowed markedly from 1.0% in April to 0.1% in May. Four of ten components rose, the same number as in May. Housing and the stock market continued to post the largest gains, while all the manufacturing components declined.

The housing index advanced by 4.9%, led by the recovery of existing home sales. The other components of household demand continued to decline, although at a much slower rate than at the turn of the year. New motor vehicle sales have risen 8% since December, led by higher demand for trucks.

The growth of the real money supply continued to moderate, to 0.4%. It was expanding by 1.7% at its peak in January, when it was the only one of the ten components that increased significantly.

All three manufacturing components declined. Shipments fell faster than inventories, even before further cuts in the auto industry in May. The average workweek turned down again, after a string of five straight declines was interrupted in May.

One positive sign for exports was an increase in the leading indicator for the United States, its first advance since the credit crisis began in August 2007. Healthier financial markets and rising consumer confidence led the advance.

Output

Real GDP fell by 0.5% in May, after downward-revised declines of 0.2% in April and 0.4% in March. The services sector was stable for the fourth month in a row. But losses in the goods sector widened to 1.6%, nearly matching their peak rate of decline between November 2008 and January 2009. Shutdowns in the autos industry and large cuts to energy output drove these losses.

Manufacturers lowered output 1.6%, with the bulk of the drop originating in a 21% decline in auto assemblies. Auto output had recovered over the previous three months from extensive shutdowns in January. Auto output in June rose very slowly, as some plants that were closed in May did not open until late in June (one closure of a truck plant was permanent). Most of the shutdowns were in plants owned by North American-based producers. With production steady at Asian-owned plants, their share of auto output in Canada rose to a record 47% in June. June also marked the first month that an Asian-based company produced the most vehicles in Canada.

Mining output fell 2.8%, mostly due to large cuts in both oil and gas output and drilling. The slump in mining and manufacturing continued to hamper goods-handling services, notably pipeline and truck transport.

Services that do not handle goods continued to grow slowly. The strong recovery in home sales led the increase, followed by higher retail sales. The public sector continued to expand slowly, while business services remained weak.

Household demand

Retail sales volumes rose 0.7% in May, continuing the increasing trend that has lifted sales 3% so far this year. Durable goods drove May’s advance, with higher auto sales reinforced by the first increase for other durable goods since January. Computers led this upturn, as demand for TVs remained weak after a 16% gain in 2008. Furniture and appliance sales grew modestly for the second straight month, a reflection of the rebound in house sales. Spending on goods other than durables was little changed for the fourth month in a row, partly because a cool spring dampened demand for clothing.

The housing market in June continued to recover, with existing home sales up another 8%. On top of strong gains in the previous three months, sales have recovered all of their drop late in 2008. Housing starts also rose 8% for the second straight month in June, with gains in both single and multiple units. Despite continued sluggish sales of new homes, the steep cuts to new construction over the winter lowered the backlog of unsold homes for a third straight month.

Merchandise trade

Both exports and imports in May fell for a second straight month. The ongoing drop in energy prices and restructuring in the auto sector were compounded by another sharp increase in the exchange rate, which lowered prices of both exports and imports. The trade deficit widened to over $1 billion.

Nominal exports fell 7%, with half of the drop originating in double-digit declines for energy products and autos. Energy again was led downward by natural gas, where monthly exports fell below $1 billion for the first time since January 2000. Gas exports peaked at $3.6 billion last summer. Auto exports were pulled down by trucks, where exports hit a 23-year low of $0.3 billion after the closure of a factory. Machinery and equipment exports fell sharply for the second month in a row, after withstanding the global recession better than all other sectors over the winter.

Imports fell 3.5%, their third straight modest decline largely as the dollar strengthened. The drop was aggravated by crude oil imports, which returned to more normal levels after a spike in April due to domestic supply disruptions. Auto parts imports fell in response to lower auto assemblies in Canada, as vehicle import volume was steady.

Prices

Consumer prices rose 0.3% between May and June, after a small increase the month before. Despite these recent gains, prices fell 0.3% below their level in June 2008, which largely reflects the record high level of gasoline prices last summer and their subsequent tumble late in the year.

On a monthly basis, higher gasoline prices led the increase in the CPI. Auto prices also rebounded, after deep discounts to clear out inventories this spring. Food prices continued to level off, helped by the rise in the exchange rate. The cost of housing continued to decelerate, reflecting the recent slide in new home prices and lower mortgage rates.

Commodity prices retreated slowly after two months of large gains. A dip in oil prices led the turnaround, after five straight monthly increases, while natural gas fell steadily. Food prices also turned down on the prospect of good harvests in North America. Industrial goods prices continued to rise, led by metals such as nickel and copper (which hit a new high for the year to date).

Industrial prices rose 0.7% in June after declines in April and May. However, the increase was largely confined to petroleum and metals. Prices fell in a majority of industries, reflecting the upward pressure on the exchange rate as well as weak demand.

Financial markets

The Toronto stock market resumed its climb, rising 4% in July after a pause in June. Strength was narrowly-based in metals and financials, both of which rose sharply for a second straight month. Energy and consumer stocks were sluggish. The Canadian dollar closed near 93 cents (US), after dipping below 90 cents in June.

The upturn in the stock market accompanied a shift of investors out of money market funds. Money market funds fell by 5% between March and June, after rising 10% since the onset of the financial crisis last fall. Conversely, non-money market funds since March have recouped most of the withdrawals that occurred after last September.

Business credit demand continued to shift from short-term credit to stocks and bonds. Short-term credit posted a sixth straight decline in June. However, large new issues of stocks and bonds enabled firms to boost their overall funding, recouping declines over the previous two months.

Regional economies

Housing starts in June increased in western Canada for the first time since last September. The prairies led the way, rising to 25,000 units (at annual rates) after stabilizing around 15,000 units over the previous three months. The recovery in BC was more muted, from 10,000 units to 12,000 units. The rebound in home construction was reflected in higher shipments of non-metallic minerals. Nevertheless, overall manufacturing sales continued to decline, reflecting more losses for energy products on the prairies and forestry in BC. Retail sales in April rose 0.8% in both regions, adding to their gains in March.

Manufacturing sales in central Canada tumbled nearly 10% in April, driven by transportation equipment (mostly autos in Ontario and aerospace in Quebec). Retail sales growth resumed in both provinces, after a setback in March. Housing starts continued to recover slowly in Ontario, while Quebec posted a decline.

International economies

In the United States, the manufacturing and housing sectors were bottoming out late in the second quarter, after declines stretching back 18 months for factory output and over three years for housing.

The biggest turnaround was for housing. Existing home sales posted a third straight increase in June, their longest string of gains in 5 years. New home sales completed their first quarterly advance in 4 years with an 11% jump in June. House prices also began to recover early in the summer. Housing starts responded to higher prices and lower inventories with a 3.6% gain in June, capping their first quarterly advance since mid-2005.

Factory output fell 0.4% in June, its seventeenth drop in the last 18 months for a total loss of 15%. The upturn in housing helped slow the decline for construction materials to 0.2%, versus a peak drop of 5% last December. Auto assemblies fell for a third straight month, but are scheduled to recover in the third quarter as GM and Chrysler plants reopen and auto sales were boosted by the federal ‘cash for clunkers’ program. New orders for core capital goods rose for a second straight month.

Increased investment and industrial demand was behind improved trade flows in May. Exports rose 1.6%, despite lower auto shipments, due to gains for industrial and capital goods. Imports of capital goods also rose. Overall imports fell due to declines for oil and autos. This helped lower the monthly trade deficit to $26.0 billion.

Second-quarter real GDP fell 0.3%, while the drop over the previous year was revised down a full point to a 3.7% decline. The slower rate of decrease originated in exports and business investment (which slumped 10% in the first quarter) and an increase in government outlays. Firms accelerated their cuts to inventories.

Industrial output rose in the euro-zone in May, its first rise since last summer, as gains in capital goods production offset further declines in energy and durable consumer goods. The recovery of demand slowed the drop in new orders to 0.2% in May, with capital goods turning up. Construction slumped after small increases in the previous two months. Weak external demand narrowed the trade surplus and trade flows with all major partners fell. Firms continued to streamline, pushing the unemployment rate to 9.4% in June, up from 9.3% in May and 7.5% a year ago. The CPI fell 0.1% from a year-ago, after being flat in May.

German industrial production surged 3.7% in May, its largest advance since August 1993, fuelled by auto output as ‘cash for clunkers’ incentives boosted demand. New orders were also robust for both domestic and foreign, particularly for capital goods. Consumers continued to spend and the unemployment rate held steady at 7.7% in June.

Industrial production rebounded in France in May, gaining 2.6% after five consecutive contractions. Boosted by a slight recovery in exports, new orders rose for the second month in a row. Consumers remained optimistic and business confidence picked up in June. In a further effort to spur spending, the government cut the value-added tax for restaurants.

Real GDP in the UK fell 0.8% in the second quarter, on the heels of a 2.4% drop in the first. Industrial production and construction resumed their decline, after brief respites the month before, but new orders rose for the second straight month. Consumers reined in their spending as unemployment mounted.

In Japan, industrial output in June rose for the fourth consecutive month, up 2.4% after a 6% gain in May. However, output remains 23% below a year-earlier, a reflection of the severity of the cuts over the winter.

South Korea grew 2.3% in the second quarter, its fastest pace in five and a half years, buoyed by heavy government spending.

The Russian economy contracted 10.1% in the first half of the year, its worst decline since the early 1990s. Industrial production fell 12.1% year-over-year in June, slowing from its 17.1% fall in May. Credit remained tight as private banks, fearful of bad loans, cut back lending.

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