Section 1: Current economic conditions

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Overview ¹ 

There were further indications that the economic upturn was gaining strength. Real GDP rose 0.4% in November, matching its average increases in the previous two months. Employment grew by 0.3% in January, its fourth advance in six months.

The gains in output and employment were consistent with other signs of a rebound in the economy. Trade flows continued to improve, with both exports and imports up over 10% from their lows in the spring. The gain in exports accompanied a further acceleration in US GDP in the fourth quarter, which posted its largest gain in over six years.

Housing continued to strengthen at year end. Existing home sales in December set a new record, while housing starts hit their high for the year. Retail sales dipped in November for the first time in seven months, but auto sales rebounded in December.

The renewed signs of growth follow a steady improvement in the leading index. The composite index rose 1.5% in December, matching its largest gain in several decades. The index has posted average gains of over 1% over the last six months.

Labour markets

Employment in January rose by 0.3% to more than recoup a revised drop of 0.2% in December. However, the increase was dominated by part-time positions among youths. With the labour force little changed for a second straight month, the unemployment rate edged down to 8.3%: unemployment hit a high of 8.7% in August 2009.

Services accounted for all of January’s job growth. Trade added to its December advance. Business services and finance rebounded from declines in December. More cuts in manufacturing pulled down employment in goods-producing industries.

Ontario and BC posted the largest job growth, up 0.5%. Trade employment rose in both provinces, supplemented in Ontario by business services. Alberta saw jobs soften after two months of growth, notably in factories.

Leading indicators

The composite leading index rose 1.5% in December, its seventh straight increase and matching February 1983 for the largest monthly advance since September 1958. For a second straight month, growth was widespread as none of the ten components fell. The largest gains continued to originate in household spending and the stock market.

The housing index rose 3.0%, its eighth consecutive increase. Existing home sales led the initial upturn, which has sent sales to a record high in December. The strength in sales was followed by a recovery in housing starts, which began slowly in July and continued to gather pace by year-end. Consumers also stepped up their purchases of durable goods. Services employment turned up in the last two months, after lagging the rebound earlier in the year, with gains for both personal and business services.

The leading indicator for the United States increased 0.8%, matching Canada with a seventh straight advance. In response to rising US demand, Canada’s export volumes have risen 11% since their low in May 2009. The upturn in export demand was reflected in higher new orders for manufactured goods in Canada. As well, manufacturing sales volume rose for a second straight month. Together with steadily declining inventories, this raised the ratio of sales to stocks for the fifth month in a row.

Output

Real GDP rose 0.4% in November, after gains of 0.3% in October and 0.5% in September. This marks the fastest three months of growth since August 2005. The diffusion index (which measures the percent of industries expanding output) was above 60% for the third straight month for the first time since early 2006. This index hit a low of 28% in April. Goods production continued to recover, as increases in mining and construction outweighed a slowdown in manufacturing, and this spilled over into higher demand for goods-handling services.

Primary industries raised output the most of any sector, led by mining. Oil and gas production over the last three months was buoyed by the end of shutdowns for maintenance and new oil projects coming on-line, while exploration and development began to recover gradually as natural gas prices firmed. Forestry output also increased for the third month in a row. Construction rose 1.1%, as home-building accelerated in response to the steady recovery in housing starts. Utilities posted a large decline in response to unusually warm weather.

The summer rebound in manufacturing stalled in October and November. Resource-related manufacturers continued to boost output, notably those related to mining, forestry and petroleum. However, these gains were offset by a slowdown in auto assemblies and continued weakness for capital goods such as computers, machinery and aerospace.

Services expanded 0.4%, matching their largest increase of the year. With more goods circulating in the economy, wholesale trade increased by 2.4% and transportation by 0.5%. Finance and real estate also continued to expand steadily. The consumer sector softened after several months of solid gains. Business services continued to languish.

Household demand

Retail sales volume fell 1.0% in November, their first decline since April. Demand weakened across the board for durable, semi-durable and non-durable goods.

Auto products posted the largest drop, falling 3%. However, preliminary data point to a rebound in December. Spending on non-automotive durable goods bucked the trend of lower sales, buoyed by demand for electronic goods and computers.

Clothing accounted for all of the 1.3% decrease in semi-durable goods. Clothing sales were hampered by unseasonably warm weather, which allowed households to delay the purchase of winter clothes. Consumption of non-durable goods was depressed by higher prices, especially for gasoline.

Housing in December continued its recovery. Existing home sales again set a new record, with a 2% gain in December lifting year-over-year growth to 72%. Housing starts rose 6% to 175,000 units (at annual rates), their highest level of the year. Ground-breaking on single-family homes posted an eighth straight increase in response to higher sales of new homes, a shrinking inventory of unsold homes and rising new house prices across the country.

Merchandise trade

The rise in imports outpaced exports in November, increasing 3.9% while exports grew 1.1%. The result was a shift from a trade surplus to a deficit of $300 million. Import gains were widespread while export growth was due primarily to increases in energy products.

Import volumes increased 3% in November, and are up 13% from April’s low. Autos led the advance, boosted by a large shipment of trucks. There has been some volatility in truck imports in recent months as a result of the switch from domestic production to imports. Machinery and equipment posted a strong gain. This followed three consecutive declines for both values and volumes, despite the strengthening Canadian dollar. Gains in both crude petroleum and natural gas explained the increase in energy products. Only industrial goods fell, the result of gold imports, which returned to normal levels after a jump in October.

November marked the fifth increase in exports since May for a total rise of 12% during that period. Energy prices drove the gain in export values in November while export volumes were stable. Exports have been increasing since their April low, led by autos and energy. Machinery and equipment exports have stabilized in recent months and were unchanged in November. Forestry has stabilized but at a low level of $1.5 billion, only marginally larger than consumer goods.

Prices

Consumer prices dipped 0.1% between November and December after four straight increases. The year-over-year rate of inflation rose to 1.3%, as the effect of the sharp drop in gasoline prices late in 2008 disappeared from this calculation.

The monthly dip in prices largely originated in lower energy prices. Clothing and durable goods prices also dropped. All three of these areas where prices fell have a large import content, and the price of imports has fallen steadily this year as the exchange rate rose. One exception was vehicle prices, where the heavy discounting since the summer eased at year-end. The cost of services increased modestly, led by rising house prices.

The recent rally in commodity prices stalled in January, as most prices were little changed. The main exception was a $6 drop in crude oil prices. Metals were little changed, while a cold snap in Florida boosted the price of some fruits and vegetables.

Prices for manufactured goods were little changed in December, and overall have not moved since June. While the rising dollar continued to exert downward pressure on export prices, this was offset by higher prices for metals and petroleum.

Financial markets

The Toronto stock market fell by nearly 6% in January, only its second setback in the last ten months. The retreat affected most sectors, with energy posting the largest drop in reaction to the decline in oil prices.

Between March and December 2009, investors steadily switched funds from money markets (down $19.5 billion) into non-money market funds (up $34.5 billion).

Domestic credit demand growth continued to be led by household demand for both mortgage and consumer credit. Business credit demand levelled off in November after three straight increases. While stock and bond issues continued to rise, they no longer outweighed accelerating declines in short-term credit.

The Canadian dollar hovered around 95 cents US for the third month in a row. Still, the trade-weighted exchange rate rose steadily, reflecting gains against overseas currencies in Europe and Japan.

Regional economies

In Quebec, housing starts rose 18% in December to 44,400 units, its highest level of the year. For all of 2009, starts fell 12%, the smallest regional decline in Canada (starts fell by one-third in Ontario and the prairies and by over one-half in BC). Manufacturing sales in November edged up after a 7% jump in October, as increases for chemicals (notably medicinals) and petroleum offset a drop in aerospace.

Manufacturing sales in the prairies continued to rebound with a fourth straight increase, although they remain 25% below their peak in July 2008. Petroleum in Alberta has led the upturn, rising nearly 50% since July as prices firmed and new projects started. Both housing starts and retail sales retreated after two months of modest gains.

Household demand in BC continued to recover. Retail sales rose 0.6% in November, the only increase in Canada and reinforcing gains of nearly 2% in each of the previous three months. Housing starts rose 10% for their third straight advance.

Housing starts in Ontario resumed their upward trend after a setback in November. The 24% increase in fourth-quarter starts was the most in Canada. However, retail sales slipped 0.8% in November, the largest drop of any region. Manufacturing sales also fell 0.8% due to a softening in the auto industry.

International economies

In the United States, real GDP grew by 1.4% in the fourth quarter after a 0.6% gain in the third and the most since the second quarter of 2003. Household spending led the third-quarter upturn, but was more subdued in the fourth (partly because auto sales levelled off following the expiry of the ‘cash for clunkers’ program). Instead, business spending took the lead. Investment rose 0.7%, its first advance after plunging 21% between the second quarter of 2008 and the third quarter of 2009. Firms also continued to slow the pace of inventory liquidation to one-quarter its peak rate of $160 billion in the second quarter. Exports rose at a steady clip of nearly 5%, while imports slowed.

Household spending ended the year on a weak note, following the expiry of a tax credit for first-time home buyers as well as poor weather. Existing home sales fell 17% after sales jumped just before the expiry of the credit (since then the credit was extended and expanded). Still, sales remain nearly 20% ahead of their lows early in 2009, and median home prices posted their first year-over-year increase since mid-2006. Housing starts fell 4%, especially in the Northeast and Midwest which were hit by several winter storms. However, permits rose 11%, a sign that the lull in construction was temporary. Retail sales dipped 0.3%, capping a solid gain of nearly 3% in the last three months of 2009. Sales were 5% ahead of a year-ago, a marked improvement from the 10% drop as recently as May.

While the coldest December in nine years dampened housing and retail sales, it helped send industrial production up 0.6%, its sixth straight increase. Utility output rose 6% in response to higher heating demand. Manufacturing output was flat after a 0.9% gain in November, partly as auto assemblies slowed, although higher new orders point to a stronger underlying trend. Demand for high tech goods continued to expand, symptomatic of a sixth straight increase in exports. Higher oil and gas imports raised the trade deficit in November.

Industrial production rebounded 1% in the euro-zone in November, boosted by manufacturing which more than offset a sharp decline in energy. New orders recovered from their October dip, with demand up in every major sector. However, trade flows with all major partners fell, with the exception of exports to China which remained stable. Construction retreated in November for the third straight month and consumers reined in spending. The unemployment rate inched up to 10% in December and inflation rose to 0.9% from 0.5% the month before.

German industrial production rebounded in November, recovering half of its loss the month before, led by consumer goods. New orders followed suit, posting their fifth gain in six months. Exports rose for the third straight month, boosted by emerging nations. Imports, however, continued to retrench due to weak consumer spending. The unemployment rate in December was steady at 7.5% and the annual inflation rate rose to 0.8% from 0.3% in November.

Industrial production rose in France in November for the first time in two months, even as new orders retreated for the second straight month. Both foreign and domestic demand were weak and France continued to post the largest deficit in the euro-zone. Construction continued its downward trend in November after a brief hiatus two months earlier. The unemployment rate was steady at 10% in December.

Real GDP grew 0.1% in the United Kingdom in the last quarter of 2009, following a 0.2% drop in the third. Industrial production rose slightly in November, its fourth gain in six months, while construction softened for the second consecutive month after buoyant growth throughout the summer. Consumers remained willing to spend, albeit at a slower pace. The annual rate of inflation jumped by a percentage point to 2.9% in December.

Japanese industrial production was upbeat in December, gaining 2.2%. Exports grew for the first time in 15 months, fuelled by robust Asian demand. In 2009, China surpassed the US to become Japan’s biggest export market. Consumer spending was upbeat, even as prices and wages continued to fall in December. Prices dropped 1.3% from a year-ago, while the unemployment rate eased to 5.1% from 5.2% in November.

Real GDP in China rose 10.7% in the final quarter of 2009, bringing growth for the year to 8.7%. Exports surged in December, up 17.7% year-over-year and their first increase in 14 months shipments to both the US and the EU recovered. Imports rose 56%, primarily driven by manufacturers buying materials to process into exports. Rising inflation prompted the government to institute measures to curb credit.

South Korea’s year-over-year growth slowed to 0.2% in the fourth quarter, down from 3.2% in the third, due to weakness in manufacturing, construction and exports. Russia’s economy expanded by 1.9% in the final quarter of 2009, after a 1.1% rise in the previous three months. Real GDP fell 8.5% overall for 2009, while inflation rose 9%, marking only the second time this decade that inflation was below double digits.

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