Section 1: Current economic conditions

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Overview ¹ 

Output continued to recover in the first quarter, capped by a 0.6% gain in March. Quarterly growth of 1.5% was the fastest among the G7 nations, and twice the gain in the US. Employment rose in May for the fifth straight month.

Household demand posted its fourth straight gain. Consumer spending rose at a steady clip of 1% while housing slowed slightly as the renovation tax credit expired at the end of January and existing home sales slowed from their record high late in 2009. The slowdown in house sales was reflected in slower household net borrowing in the first quarter. However, labour income continued to grow over 1% as employment strengthened into the spring.

Exports continued to rise steadily for a third consecutive quarter, recovering nearly half of their losses after the recession began late in 2008. This reflects the slow but steady recovery of global trade from its sharp contraction during the 2008-2009 recession. Resource-based products replaced autos as the growth leader.

Business investment continued to lag the recovery of spending elsewhere with no change in the first quarter, after falling over 20% during the recession. However, firms began to accumulate inventories in the first quarter, after four straight reductions. Also, business payrolls rose sharply in April and May, another sign that firms were beginning to spend more after rebuilding their net lending to a record high in the first quarter.

Labour markets

Employment rose 0.1% in May, consolidating its 0.6% advance in April. Full-time positions accounted for all of the increase, rising 0.5%. While the initial upturn of jobs in 2009 was concentrated in the self-employed and the public sector, so far in 2010 private sector payrolls have driven almost all of the 1.3% increase.

Services dominated the May increase, especially transportation where jobs had not kept pace with output growth earlier in 2010. Professional, scientific and technical services added to their large gains, lifting year-over-year growth to 7.1%, the most of any industry. Goods were hampered by losses in natural resources and construction, which gave back some of their gains in April.

Ontario led job growth for the second straight month, led by transportation and business services. However, Ontario also led the growth of the labour force, and unemployment edged up to 8.9%. Alberta posted a solid gain, led by construction and business services. Employment fell in BC and Quebec, nudging unemployment up in both provinces.

Leading indicators

The composite leading index rose 0.9%, continuing a stretch of eleven straight increases averaging 1.0% a month. Eight of the ten components advanced, led by housing and the stock market, while one was unchanged and one fell.

The housing index rose 0.8%, as higher housing starts outweighed lower house sales. The increase in housing starts, however, was not enough to reverse the downward trend of unsold vacant units. Existing home sales softened early in 2010 after reaching a record high late in 2009. Furniture and appliance sales continued to strengthen, while demand for other durable goods fell 0.7%.

Manufacturing continued to recover. New orders rose for the third straight month, their longest string of increases since March 2008. Higher sales drove the advance in the ratio of shipments to inventories, which hit its highest level since February 2008. Firms used the recovery in demand and output to raise productivity, as both the average workweek and employment in factories remained little changed.

The leading indicator for the United States kept pace with Canada, rising 0.9%. The labour market continued to recover in response to gains in consumer spending and exports and an upturn in inventories.

Output

Real GDP rose by 0.6% in March, its fourth increase of 0.5% or more in the last five months. The only exception to rapid growth was during the Olympics in February, when growth slowed to 0.2%.

Manufacturing consistently led growth over the last five months, with the 1.8% advance in March the largest. Manufacturing has rebounded by 9.3% from its low in May 2008, the most of any sector except wholesaling. The March gain was very widespread, with notable increases in such bellweather industries as chemicals, iron and steel, machinery and autos.

Mining rebounded from a dip with a 2.7% gain, the most of any sector. Metal mines such as gold, copper and nickel led the advance. Oil recovered from supply disruptions caused by fires. Exploration and drilling posted its first decline in eight months, after natural gas prices slumped anew following the end of winter.

With more goods circulating in the economy, goods-handling industries led the 0.3% gain in services. This offset a post-Olympics letdown in industries such as broadcasting, spectator sports and accommodation. Government services barely increased for the third straight month, while business services continued to languish.

Household demand

Consumer spending rose steadily in the first quarter, as borrowing increased and disposable incomes advanced 0.4%. Both labour and personal income rose by over 1% in the first quarter of 2010 but disposable income was slowed by a decline in transfers from government (mostly EI benefits) and higher taxes as employment rose.

Retail sales volumes accelerated in March, rising 2.2% on top of upward revisions to both January and February. As a result, quarterly sales were up 1.9%, their fourth straight advance. Relative to pre-recession levels, monthly sales volumes were 3.1% higher.

Durable goods led the monthly increase, although gains were widespread. Most of the higher spending was on autos, with the rise in sales of used vehicles doubling that of new vehicles. Sales of building materials and electronics also contributed. Building materials recovered most of the drop that occurred in February as a result of the expiration of the renovation tax credit. Clothing added to the March gains with its fourth consecutive increase.

Atypically warm weather in Quebec and Ontario provided a boost to retail sales in these provinces, pushing the increase to the largest since February 2004.

The housing market remained robust, with housing starts edging up and new home sales rising to levels unseen since late 2008. Existing house sales slipped 2.6% from March, hovering just below record levels. Sharp increases in home prices across Canada encouraged the number of real estate listings to hit a record-high in April.

Merchandise trade

The current account trade deficit shrank for a second straight quarter to $8.0 billion, mostly because higher prices gave an added boost to exports while import prices continued to fall. The volume of exports and imports both rose about 3% for the second straight quarter.

Exports dipped 0.7% in March after six consecutive gains, as a drop in prices outweighed a 1.9% increase in volume. Imports rose 2.0% as higher volume offset lower prices. As a result, the monthly trade surplus fell nearly $1 billion.

The volume of exports has risen 15% from its low in May 2009, recovering exactly half of its losses during the recession. The recovery has been very uneven by sector. Agriculture and energy have essentially returned to their pre-recession level in terms of volume (prices remain weak for natural gas). Exports of autos, industrial goods and forestry products all have recovered to about 10% below their pre-recession levels of the summer of 2008, after declines ranging from 46% to 22% during the recession. However, machinery and equipment and consumer goods have not seen any sustained recovery in exports, and remain 20% or more below pre-recession levels.

The monthly drop in nominal exports mostly reflected a drop in energy exports as a result of lower prices for oil and gas. Exports of machinery and equipment, autos and consumer goods all were little changed in the month. Non-energy resources strengthened across the board. Metals rose on the back of record exports of precious metals. Forestry posted a seventh straight gain as pulp and lumber both advanced.

Imports in March were led by industrial goods, notably precious metals that were imported for refining and then destined to be re-exported. The recovery of industrial output in Canada also boosted demand for chemicals. Imports of energy and agricultural products also rose. Imports of consumer goods fell to their lowest level in almost two years, as prices have tumbled 16% since March 2010 when the exchange rate hit bottom. With prices falling and retail sales rising, the volume of consumer goods imports increased by 13% in the past year.

Prices

The price of goods and services produced in Canada rose 1.0%, matching its average increases in the previous two quarters. With import prices falling, prices paid by spenders in Canada rose only 0.3%, including declines for import-intensive sectors such as machinery and equipment and some consumer goods. Construction costs were a notable exception, posting their first increase in a year. Rising energy prices led the increase in export prices.

Consumer prices edged up 0.1% between March and April, their first increase since January. This helped lift the year-over-year rate of inflation to 1.8%. Energy prices led the advance, notably for gasoline and home heating. Auto prices also increased for a third straight month. Clothing prices rebounded, after steep discounts over the winter. Food prices dipped for the first time since last summer.

Prices for manufactured goods rose 0.3% in April, their fifth gain in six months. The rising exchange rate dampened prices for exported goods such as autos, paper and capital goods. However, petroleum and metals overcame the exchange rate effect due to strong demand in global markets.

Commodity prices fell in May to their lowest level of the year, with declines across the board. Energy prices retreated as crude oil fell below $80 (US) a barrel. Metals retrenched as copper, zinc and nickel gave back some of their recent gains. Lumber prices ceded their gains earlier in the year to pull down the forestry index. Agricultural prices posted small decreases.

Financial markets

Sectoral net lending continued on their recent trend. Governments reduced their borrowing for the third straight quarter, especially at the federal level. The corporate surplus hit a record high, as spending restraint offset only a partial recovery in profits. Household borrowing rose, but at a slower pace than in the fourth quarter, reflecting higher incomes and lower house sales. Net borrowing from non-residents fell for the second straight quarter as exports recovered.

The stock market fell 4% in May, as markets around the world slumped (only Germany posted a smaller decline than Canada). The Canadian dollar fell against the US dollar but both rose relative to the euro where the sovereign debt crisis that began in Greece spread to other countries. The outflow of funds from Europe in March was evident in record long-term capital inflows into the US. As well, there was a record £20.4 billion net inflow into the UK in the first quarter. At the same time, the recent large inflows of investment into Canada slowed to less than $1 billion in March, down from an average of $7.3 billion over the previous 14 months.

Regional economies

Household demand continued to lead the recovery in the prairie provinces, with housing starts up 7% in April, the only region where starts were clearly ahead of their first quarter average. Retail sales increased 1.5% in March, their fourth straight gain of at least 1%. However, sales have not recouped their level of September 2008, largely because of a 3.2% shortfall in Alberta. Manufacturing sales advanced 2% for their fifth straight gain in March, led by chemical products in Alberta.

Ontario posted advances across the board. Retail sales rose 2.7% in March to regain their September 2008 peak. Housing starts rebounded from a drop in March. Manufacturers posted a 0.7% increase in sales, capping their third straight quarterly advance, led by primary metals and chemicals.

In Quebec, only retail sales posted a notable increase, rising 3% in March to add to its Canada-best 3.9% growth in the first quarter. Manufacturing sales stalled over the past four months, reflecting declines for aerospace and petroleum refining.

Manufacturing sales in BC rose 4% in March, the most of the major regions. A recovery in lumber led the way, up 24% since December. However, household demand remained skittish. Retail sales gained only 0.6%, the least in Canada, after stalling during the Olympics in February. Housing starts continued to hover around 25,000 units so far in 2010, double their annual average in 2009.

International economies

In the United States, the housing market continued to recover, aided by the impending end of the homebuyer tax credit at the end of June. Existing home sales rose 7.6% in April to their highest level since 2008, while prices posted their largest year-over-year increase since 2006, rising 4%. New home sales surged by nearly half in March and April, sending the inventory of unsold homes to 5.0 months of sales, their lowest since 2005. Inventories fell because housing starts rose only 11% in March and April, much less than the advance in sales. The increase in housing demand also fuelled retail sales, with most of the 0.4% increase in April originating in building materials.

Industrial production continued to recover steadily, up 0.8% in April. Manufacturing gained 1.0% for a second straight month, led by business equipment and construction materials as auto assemblies fell.

The monthly trade deficit topped $40 billion in March for the first time since late 2008. Both exports and imports rose about 3%. Net long-term capital flows surged to a record inflow of $140.5 billion in March. With concerns growing about European government debt, investors snapped up US government securities as well as corporate bonds and stocks.

The euro-zone economy grew 0.2% in the first quarter of 2010, after a flat fourth quarter. Industrial production doubled its pace to 1.3% in March, led by strong gains in capital and consumer goods. New orders followed suit, gaining 5.2%, with demand strong across the board. More temperate weather lifted construction 7.6% in March after a similar decline the month before. External trade was upbeat, boosted by exports to China. Consumers remained cautious about spending, with real retail sales down in April after declines to start the year. Inflation inched up to an annual rate of 1.5% in April, led by increased prices for transport, alcohol and tobacco.

The German economy grew 0.2% in the first quarter as the global recovery buttressed export demand. Fourth-quarter growth was also revised to 0.2% from an earlier estimate of no growth. Industrial production picked up in March, rising 2.6% after a slight decline the month before. New orders also strengthened, in tune with rising demand. Construction soared in March, fuelled by pent-up demand as weather conditions improved. Consumers opened their wallets, as real retail sales in April rose for the second time in three months as jobs improved.

The pace of recovery slowed in France to 0.1% in the first quarter from 0.5% in the fourth. Industrial production rebounded in March, along with new orders that picked up after two consecutive declines. Construction eked out a slight gain and consumers ventured out to shop for a third straight month.

Real GDP in Italy rose 0.5% in the first quarter, after a 0.1% drop in the last quarter of 2009. After a strong start to the year, industrial production fell in March. New orders continued to advance, albeit at a slower pace than the preceding months. Consumer spending remained tepid amid high unemployment and rising inflation.

Industrial production strengthened in the UK in March and new orders posted their sixth straight gain. Construction continued to recover, buoyed by low interest rates and improved weather. Consumer demand rose for a third consecutive month in April, despite an increase in the VAT tax.

Japan’s economy grew 1.2% in the first quarter, fuelled by strong export demand and a pickup in housing. This marked the fourth consecutive quarter of growth. Exports in April rose for the fifth straight month, led by demand for autos and high-tech goods, particularly from the US and Asia. Consumer spending was upbeat as tax breaks and government incentives spurred shopping. Prices declined for the fourteenth month in a row, while the unemployment rate rose for second straight month to 5.1% in April.

China continued to power forward with growth of 11.9% in the first quarter. April retail sales rose 18.5% year-over-year, while industrial production gained 18.8% and business investment jumped 26.1% in the January-April period over a year ago. The strength in demand also boosted inflation and housing prices.

Thailand posted its fastest rate of growth in 15 years, with real GDP up 12% in the first quarter from a year ago, as exports recovered. Brazil’s economy expanded 9.8% year-over-year in the first quarter. Mexican industrial production in March rose at its fastest annual rate in nearly four years. Manufacturing jumped 13% from year earlier, with auto output up 70% in April and exports by 56.7%. India’s economy grew 8.6% year-over-year in the first quarter, its quickest pace in two years.

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