Section 1: Current economic conditions

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Overview ¹ 

Both output and employment picked-up by 0.2% after little or no change the month before. Real GDP in the second quarter was up 0.5%, enough to return to its pre-recession level. With its gain in August, employment also has recouped all of its losses during the recession.

Final domestic demand continued to outpace real GDP growth, rising 4.7% and 3.4% respectively in the past year, one measure of the relative strength of the recovery in Canada. With domestic demand lifting imports faster than the growth of exports, the current account remained in a deficit for the seventh straight quarter.

While output slowed in the second quarter, there was an important shift in the sources of growth. Consumer spending slowed, especially for goods which, like residential construction stopped growing altogether. Together with sharply higher tax refunds, this raised personal disposable income by 3.6%, although most of this went into saving (the saving rate doubled to 5.9%). Households also were cautious in their net borrowing, which fell to its lowest level since the recession ended. Conversely, business spending picked up markedly. Investment outlays rose 3.5%, their best gain since 2005, while inventories rose $12.7 billion (at annual rates), just enough to keep pace with sales.

There are a number of reasons why the increase in business spending is significant. First, cycles in business investment tend to be longer and more durable than cycles in other sectors such as housing. Second, the increase in business spending boosts employment, which will buttress household spending against higher interest rates and prices. Private sector jobs posted their largest quarterly gain in 23 years. This is in contrast with the US, where higher business investment has accompanied only slow growth in private sector jobs this year. Together with the expiry of tax credits for homebuyers in the spring and the winding down of Census jobs, this has led to some weak months for household spending in the US over the summer.

Labour markets

Employment rose by 0.2% in August, more than offsetting a slight dip in July. Education rebounded by 68,400 jobs, recouping their loss of 65,300 the month before their seasonal contracts expired. Excluding this see-saw movement in education, employment posted a modest net gain of 24,400 over the two months. This was not enough to prevent the unemployment rate from rising 0.1 points in both months, to reach 8.1% in August.

Apart from education, the construction and natural resource industries posted large gains, bringing their year-over-year increases to just over 7%. Professional and business services also registered solid gains in the month and over the past year. Manufacturing gave back most of the ground gained in July, while most services posted small declines. Overall, employment in goods rose faster than services in the past year.

Most of the see-saw movement in education employment over the summer was concentrated in Ontario and Quebec. The rebound in education dominated their job growth in August, followed by construction. These gains were partly offset by losses in manufacturing and trade. BC led job growth in western Canada, with increases in health care and finance outweighing widespread declines in the goods sector.

Leading indicators

The composite leading index slowed to a 0.4% increase in July, after a gain of 0.7% in June. Most of the slowdown originated in the household sector, where three components fell. None of the seven other components decreased.

The housing index continued to retreat from its recent highs, declining 4.1%. Both housing starts and sales contributed to the decline. The slump in house sales was reflected in a 0.6% drop in furniture and appliance sales. Demand for other durable goods posted a fifth straight decline.

The manufacturing sector continued to recover steadily. New orders for durable goods rose 2.2%, their sixth straight advance. Rising shipments led the steady recovery of the ratio of shipments to sales. These increases in manufacturing demand are consistent with the continued growth in the US leading indicator, although it too saw growth moderate to 0.4% due to slowing household demand.

Output

Real GDP rose 0.2% in June, after little or no growth in the previous two months. Output in the goods-producing sector continued to rise steadily, led by manufacturing, while services rebounded from back-to-back declines.

Manufacturers raised output 1.3%, their first increase since March. The advance was led by capital goods and resource-based industries, notably computers, machinery and petroleum. Autos chipped in with another small gain. The increase in manufacturing was partly offset by widespread declines in mining, after large gains in the spring.

Goods-handling services benefited from the upturn in manufacturing, especially transportation. Business services continued a slow, gradual recovery. Household demand was mixed, as declines for real estate and restaurants offset increased spending at retail stores and recreational services. Public administration continued to be restrained at all levels of government, which has slowed steadily this year from monthly gains averaging 0.4% late in 2009.

Household demand

Household demand slowed in the second quarter. Consumer spending moderated to 0.7%, down from 1% growth in the first quarter. Real incomes continued to grow, with taxes falling and disposable incomes up 3.6%. This was the largest advance in disposable income since early 2006 and brought the total to over $1 trillion for the first time on record. Rebates from the renovation tax credit and HST tax credits from Ontario contributed to the rise in income. In addition to the modest gain in spending, consumers boosted savings, which jumped to a rate of 5.9%. At the same time, fewer home sales and the expiry of the renovation tax credit reduced household demand for credit, and household net borrowing eased after expanding rapidly over the two previous quarters.

Retail sales volumes rose 0.9% in June. Including June’s increase, sales volumes have recovered just over half of April’s decline, remaining about 1% below March’s peak. The increase was concentrated in durable goods, especially trucks. However, a sharp rise in sales of computers and electronic equipment also contributed, reaching its highest volumes on record.

The housing market softened in July. New home sales fell after gaining throughout the first six months of the year. Sales of existing homes were down 6.8%, with most of the decline concentrated in British Columbia and Ontario. In order to avoid paying the HST on the purchase of a new home in these provinces, consumers needed to take possession or ownership of the home before July 1^st, which moved these purchases ahead to early 2010. Housing starts also edged down, as a result of reduced construction in rural areas and single family urban homes, which was partially offset by a rise in multiples. Prices continued to go up, albeit at a slower pace than earlier months.

Merchandise trade

The current account trade deficit widened to $11.0 billion in the second quarter, as the balance for goods slipped back into a deficit after two consecutive surpluses. Partly, this reflected a levelling off of the terms of trade, after four straight increases. The financial account surplus was bolstered by the record purchase of $32.2 billion of Canadian bonds by non-residents. Bond purchases in the first half of the year were on track to slightly exceed last year’s record of $84.0 billion.

Exports fell more than imports in June, pushing the monthly trade deficit in goods past $1 billion for the first time since August 2009. Export earnings dipped 2.5% in June, slowing the quarterly increase to the smallest since recovery began a year ago. Most of the June drop reflected lower energy and metal exports. Energy has fallen 16% from their high in January about equally due to lower prices and volumes. Metal exports were reduced by precious metals, a volatile series on a monthly basis.

Imports also slipped 1.2% in June, but accelerated overall in the second quarter. As for exports, much of the monthly drop originated in energy products, which fell to their lowest level of the year. Machinery and equipment and consumer goods hit their highest level so far in 2010.

Prices

Consumer prices rose 0.6% in July, their largest monthly increase since mid-2008. Most of the hike reflected the move of Ontario and BC to the HST, and a 2 point hike in the HST rate in Nova Scotia.

Prices for services saw the largest increases, as many that were not taxed under the provincial sales tax in Ontario and BC were subject to the HST. Prices for goods were dampened by declines for durable and semi-durable products, which offset further increases in food prices.

Commodity prices retreated in August, after recovering earlier in the summer from a spring slump. Energy prices fell to their lowest level since May, with both oil and gas ceding some of their recent gains. In particular, natural gas fell below $4 per mbtu for the first time in a year. Grain prices levelled off after large increases in the summer due to drought in Europe and heavy rain on the Canadian prairies. Metals posted small gains.

Prices for manufactured goods were little changed in July after their 0.9% drop in June. Primary metals posted the only significant increase, while a lower exchange rate dampened prices for a range of exported goods.

Financial markets

The stock market rose 1.7% in August, after rebounding in July from its June swoon. Materials posted the largest gain, fuelled by a takeover bid for Potash. Financial and information technology stocks also advanced, while energy eked out a small gain despite weak prices in commodity markets.

Most interest rates were little changed in August, other than a small decline for 5-year mortgages and bond rates. The Canadian dollar retreated to about 94 cents (US), giving back its increase in July.

Short-term business credit demand levelled off in July, after increasing in the previous two months. However, total fund-raising picked up due to new bond and equity issues.

Regional economies

Manufacturing sales in BC rose 2.1% in June, the only significant change in Canada. The increase followed a similar gain in May, and was led by paper and aerospace as lumber sales levelled off. Retail sales dipped 0.3% in June, but this followed a Canada-high gain of 0.9% in May. Over the past year, retail sales growth of 6.8% was twice the national average, despite having the slowest gain in labour income. This suggests sales received some lift from the impending introduction of the HST. Housing starts fell 15% to 20,100 units, their lowest level of the year.

The prairie province eked out small gains in most sectors. Housing starts rose 5% to 38,800 units, their highest level since 2008. However, the drop in existing home sales in the first half of the year was slightly more pronounced on the prairies than the rest of Canada. Manufacturing sales edged up 0.3%, as increases for petroleum offset declines for chemicals. Retail sales were little changed for the second straight month as labour income stalled.

Quebec posted small losses across the board. Retail sales dipped 0.2%, after large declines in April and May. Housing starts hovered around 47,000 units, about where they have been all year. Manufacturing sales slipped 0.2%, as petroleum receipts fell without offsetting gains in primary metals or aerospace.

Ontario posted a 0.2% increase in retail sales, the only gain among the four major regions as the introduction of the HST approached. However, housing starts fell 3% after a 17% drop in June, leaving starts at their lowest level since August 2009. Manufacturing sales fell marginally, as transportation equipment levelled off after its steady gains in the spring.

International economies

In the United States, second quarter GDP growth was revised down to 0.4%, partly as the June trade deficit expanded to nearly $50.0 billion. Exports fell 1.3% while imports rose 3%, especially auto imports.

Industrial production rose 1.0% in July, after a brief pause in June. Manufacturers led the gain, with auto assemblies up 10% as some plants did not close for the usual retooling after the July 4 holiday. Business equipment continued to expand rapidly (1.8%), although orders for capital goods posted a sudden drop.

Household demand was mixed. Retail sales rebounded 0.3% after two months of decline. Autos led the gain, and unit sales were steady at 11.5 million units in August. However, housing-related demand for furniture, appliances and building materials continued to slump. New and existing house sales continued to retreat for a third straight month after the April expiry of the extended tax credit for buyers. Still, the average of existing home sales over the last three months was about the same as the period after the first expiry of the tax credit last November, and better than the trough hit early in 2009. Housing starts levelled off in July, due to a gain in multiples. Jobs continued to shrink as the spring spike in hiring related to the Census was reversed. Private sector payrolls continued to grow slowly, posting a sixth straight increase in August.

The euro-zone economy grew 1% in the second quarter, its fastest pace in four years, after a 0.2% gain in the first. Strong growth in Germany compensated for slow growth in Spain and Italy. Industrial production contracted in June after three months of robust growth, with output slowing in every major sector. New orders also decelerated as demand for consumer goods waned. Construction continued to recover from harsh winter weather, while a rise in the energy deficit led to a narrowing of the external trade surplus. Consumers held on to their wallets as governments slashed spending and raised taxes to curb their rising debt levels. The unemployment rate was stable at 10% in July, while inflation rose to 1.7% from 1.4% in June.

The German economy powered forward in the second quarter, fuelled by exports and an upswing in consumer spending. The 2.2% gain was the fastest quarterly rate since reunification twenty years ago. Investment was brisk after winter weather delayed construction projects. Industrial production contracted in June following three strong monthly gains, although new orders remained upbeat. Exports rose 3.8% in June, and were up 28.5% from a year earlier. Imports grew 1.9% in the month and 31.7% year-over-year.

French GDP expanded 0.6% in the second quarter, up from a 0.2% rise in the first. Consumer spending rebounded, along with investment, while trade remained weak. Industrial production in June gave back its May gain, although new orders were upbeat. After fourth straight months of strong demand, consumers reined in their spending, in tune with rising unemployment.

Industrial production in the UK fell 0.3% in June as manufacturing retrenched. Construction was robust, posting its third monthly gain. Retailer discounting spurred sales to their largest rise in five months, even as consumer confidence fell to a 15-month low in July. Inflation remained one of the highest in the euro-zone at 3.2% in June, while the unemployment rate was unchanged.

Second-quarter GDP in Italy grew 0.4%, matching its first quarter pace. Industrial production rose for the sixth straight month in June, in tune with strength in new orders. Consumers remained hesitant to spend despite some easing in unemployment.

Japan’s economy expanded 0.1% in the second quarter, down from 1.1% in the first. Exports decelerated for the fifth straight month in July, braked by slowing global demand and a strong yen. Industrial production rose in July for the first time in two months, buoyed by renewed demand for machinery, chemicals and paper. Consumer spending received a boost from hot weather in July and from government incentives for energy-efficient household appliances. Consumer prices fell for the seventeenth month in a row, while the unemployment rate eased to 5.2% from 5.3% in June.

Economic growth in China slowed to 10.3% in the second quarter from 11.9% in the first. Industrial production decelerated for the fifth straight month in July, as demand for steel, cement and other building materials faded with the winding down of government stimulus spending on infrastructure. Exports also slowed as global demand eased. Food prices spiked when summer flooding disrupted crops and shipping.

Real GDP in Indonesia grew 6.2% year-over-year in the second quarter, buoyed by strong consumer demand. Thailand expanded by 9.1%, with strength in exports, consumer spending and investment. India grew at its fastest pace in over two years with GDP up 8.8%, powered by manufacturing as rising wages sparked consumer spending. Mexico grew 3.2% from the first quarter, its largest gain since 1996, fuelled by exports of autos and electronics predominately to the US.

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