Section 1: Current economic conditions

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Overview ¹ 

Both output in October and employment in December posted modest gains, a further indication the economy was picking up after its recent stall.

The upturn in demand was led by exports. This accompanied a noticeable improvement in the US economy in the fourth quarter, especially retail sales. Overseas, growth remained buoyant in emerging markets, which has been important in supporting higher commodity prices, notably for metals.

Metals have moved to the forefront of growth in several areas. Prices for metals and minerals in the Bank of Canada Commodity Price Index have almost recovered to their record highs set in the summer of 2008, the only commodity group that had essentially recouped its recession losses. With prices soaring, metals have led the rise in the Toronto stock market with a gain of over 500% since early 2009.

Metal ores and alloys dominated the growth of exports in October. Led by metals, industrial goods have surpassed energy as our leading export in the last eight months, for the first time since late 2007. Metals exports soared $1.0 billion between September and October, led by gold, copper and nickel which have spearheaded the surge starting in May 2009. At $4.9 billion, exports of metal ores and alloys were just shy of their record high of $5.2 billion set in August 2008. Metal mining also has been the fastest-growing industry in real GDP, with an 80% increase since mid-2009. While mining is not very labour-intensive, employment in natural resources has trailed only construction for the fastest recovery, with an 11% gain.

Labour markets

Employment rose by 0.1% in December, as full-time positions (which account for 81% of all jobs) expanded by 0.3%. Most of the increase in jobs was among youths, which recouped some of their losses over the previous three months. The labour force kept pace with employment, leaving the unemployment rate unchanged at 7.6%.

Manufacturing dominated job growth with their largest monthly percent gain on record back to 1976. About half of the increase represented a rebound from a sudden drop in November. Conversely, construction gave back some of its recent gains. Services employment dipped 0.1%, as a large gain in transportation was offset by losses in trade, business services and health care.

Central Canada dominated job growth, not surprising given that it accounts for nearly three-quarters of manufacturing jobs in Canada. Ontario and Quebec also contributed most of the growth in transportation. Meanwhile, employment edged down on the prairies and in BC, mostly due to losses in construction.

Leading indicators

The composite index rose 0.3% in November, the same as in October. Six of the 10 components posted gains, while three were unchanged and one declined.

The housing index recorded the largest turnaround, increasing 2.0% after six straight declines averaging almost 3% a month. Both housing starts and existing home sales firmed after sizable retreats from their highs in the spring. The upturn in housing was reflected in a levelling off of furniture and appliance sales, after four straight declines. Spending on other durable goods continued to advance steadily.

Manufacturing demand continued to improve slowly. New orders rose 0.7%, as gains for investment goods offset a slowdown for autos. The ratio of shipments to inventories was unchanged at 1.93 for the third straight month, as the growth of inventories has caught up to the recovery of sales. However, manufacturers remained focused on raising productivity and not labour inputs. The average workweek equalled its lowest level over the past year, and employment did not begin to recover until December.

Elsewhere, the Toronto stock market continued to trend up with a 2.8% gain in November, driven by the strength in commodity prices. The US leading indicator again rose slowly, up 0.2%.

Output

Monthly real GDP grew by 0.2% in October, resuming the growth established in August after a 0.1% setback in September. Goods and services grew at an equal pace.

Goods production increased solely due to strength in mining. Metal mining expanded by 4%, bringing growth in the last four months to over 20% and in the past year to a 48% (just shy of its record 49% gain in March 1984). Copper and nickel mines led these increases in response to rising exports, supplemented by the end of a long labour dispute. Oil and gas production partly recovered its losses in September, while exploration and development rose sharply as energy prices firmed. Production of non-metallic minerals fell, led by a third straight decline for potash.

Manufacturing output fell 0.6% after a 1.1% drop in September. All of the decline originated in a 10% decline in petroleum, partly as a refinery was mothballed. Elsewhere, auto assemblies rebounded 9% in response to stronger sales in the US and before some plants stopped producing in November to accommodate re-tooling their operations. Resource-based industries outside of petroleum raised output, led by smelting and refining and lumber.

Construction output fell 0.5% after back-to-back increases. Residential construction dropped 1.7%, its largest decrease since the recession. Non-residential building and engineering both continued to advance.

Services were buoyed by gains in transportation and wholesale trade, reflecting the increase in the production and trade in goods. Business services continued to pick-up, led by a second straight 0.4% gain for professional, scientific and technical services. Consumer services were mixed, with dips for retailers and restaurants and increases for recreation and real estate. The public sector continued to grow slowly but steadily.

Household demand

Retail sales volume dipped 0.2% in October, its first decline since April. This followed a downward revision in September to 0.3% growth. Clothing purchases led October's decline. Sales of clothing rose sharply between April and July but had moderated in recent months. Spending was buttressed by robust demand for durable goods.

Despite ongoing weakness in building supplies, outlays for durable goods rose as demand for autos, appliances and electronics was strong. In non-durables, gasoline sales rebounded from a similar decline in September while food was little changed.

Both housing sales and starts rose in November. Existing home sales were up 4.8%, their fourth consecutive rise. This climb from July's low has returned sales to just below their pre-recession levels. Housing starts continued to show volatility, rising 12% to 187,200 after a 9% drop in October. The increase was primarily due to a jump in multiples in Ontario following low activity the month before. Construction of single-homes also edged up, again primarily in Ontario, but the level remained the second lowest of the year, with 30,000 fewer homes breaking ground in November than in January.

Merchandise trade

Exports rebounded by 3.1% in October, their second gain in three months. Imports rose 1.2%, as lower prices partly offset higher volumes. The net result was to reduce the trade deficit below $2.0 billion for the first time in four months.

Export growth was driven by industrial goods, which jumped by over $1 billion in the month. Industrial goods have risen by $3 billion from their recession low in May 2009, led by a $2.2 billion increase for metal ores and alloys. Copper ore exports more than tripled, after a sharp drop in September. Copper and nickel exports already had doubled earlier this year, before receiving another boost over the summer when a long labour dispute was resolved. Exports of precious metals also have nearly tripled from their lows early in 2009.

While metals have nearly recovered all of their recession losses, energy products continued to slide to $6.4 billion, a $2.2 billion drop so far this year and exactly half their record high set in July 2008. Natural gas continued to fall, not surprising in light of weak prices. However, crude oil also has declined steadily this year, down by $2 billion to near their recession lows despite high prices. Volumes have been hampered in recent months by a lack of pipeline capacity, partly due to ruptures in the US.

Elsewhere, exports of manufactured goods were little changed, as a small gain for autos offset a dip for machinery and equipment. Food exports posted their first significant increase since May, led by grains.

Energy products dominated the recent gyrations in total imports, with a large gain in October after a sharp drop in September. However, machinery and equipment and consumer goods continued to dominate the upward trend of imports in 2010, a reflection of the buoyancy of domestic demand. Machinery and equipment imports eked out an increase to extend their consecutive monthly gains to a record of nine (the previous record of eight was set in 1974). Consumer goods rebounded, and in volume are less than 2% below their all-time high set in May 2008.

Prices

Consumer prices rose 0.2% between October and November, their fifth straight increase after five months when prices did not rise (including three declines). As a result, the year-over-year rate of inflation returned to 2.0% after spiking to 2.4% the month before. Prices fell for a wide range of goods excluding energy, while gasoline and services rose.

The cost of durable and semi-durable goods retreated after large increases in October. Auto prices dipped, but remained nearly 4% ahead of a year-earlier. Clothing prices resumed their downward trend. Food prices continued to moderate, notably vegetables. Housing led the increase in the cost of services.

Commodity prices continued to strengthen. Metals rose across the board, led by copper, which hit a record high. Energy prices were buoyed by crude oil, which reached a 2-year high of $91 (US) a barrel with a fourth straight increase. Natural gas could not add to November's increase. Food prices were boosted by drought in the southern hemisphere.

Financial markets

The stock market rose 3.7% in December, continuing a string of five straight increases. The Toronto market ended the year 47% above its monthly low in March 2009, but remains 13% below its peak in June 2008. Metals continued to lead the way, hitting a record high for the third straight month. Energy stocks hit their highest level since September 2008, but remain nearly one-third below their record high.

The Canadian dollar returned to parity with the US greenback for the first time since spring 2010, and up from a low of 95 cents (US) over the summer. The dollar rose even more against European currencies in the wake of the IMF bail-out of Ireland.

Corporations in November issued the most stocks and bonds so far in 2010, taking advantage of strong demand for both. With funds available from these sources, demand for short-term business credit resumed its downward trend.

Regional economies

Ontario was the only region where demand rose across the board. Housing starts soared 85% to an annual rate of 77,400, the highest since October 2008 due to ground-breaking on a number of large multi-unit buildings. Factory shipments rebounded 2%, as auto sales recovered part of their drop in September while petroleum and primary metals continued on a strong upward trend. Retail sales continued to recover from their drop in July.

In Quebec, manufacturing and retail sales both posted solid gains in October. Retail sales rose 1.0%, their fourth straight increase. Manufacturing sales advanced 4%, driven by aerospace and primary metals. Petroleum sales were checked by the winding down of an oil refinery in Montreal. Housing starts fell for the third time in four months, to their lowest level since June 2009.

Retail sales growth in BC led the country with a 1.2% gain in October. This was the clearest sign that consumer were getting over their slump in the summer when the HST was introduced. However, housing remained weak, equalling their lowest level so far in 2010. Manufacturing sales gave back some of their third-quarter advance, notably in paper.

The economic indicators for the prairies were little changed. Retail sales rose 0.4%, matching the smallest of four straight gains. Manufacturing sales also eked out a fourth consecutive increase, mostly due to petroleum in Alberta. Housing starts fell for the fourth month in a row, to their lowest level in a year.

International economies

In the United States, consumer spending continued to lead growth. Retail sales gained 0.8% in November, their fourth straight large advance. Excluding autos and gasoline, retail sales have expanded by an average of 0.8% over the past four months. Growth was led by seasonal items such as clothing and recreational goods. Housing-related sales continued to lag. However, housing in November showed small gains across the board, a sign it had bottomed-out.

Industrial production rebounded by 0.4% in November, with a second straight 0.3% gain in manufacturing production. Auto assemblies relapsed after a gain in October. However, factory output excluding autos posted its largest gain since May, led by business equipment.

The current account deficit widened slightly to $127.2 billion in the third quarter. Relative to GDP, the current account deficit was 3.5%, compared with a high of 6.5% before the recession. The monthly trade deficit in goods and services shrank in October, as exports jumped 3% while falling oil imports lowered the total import bill.

Growth rebounded in the euro-zone in October, with capital goods leading a 0.7% gain in industrial production. Germany has been the driving force with a 12% increase in the past year, more than twice the pace in France, three times the rate in the UK, and quadruple the growth in Italy. Construction was flat in October following three months of decline. The external trade surplus widened with a decrease in the energy deficit and a gain in the surplus for manufactured goods. While the trade surplus with the US expanded, so did the deficits with China, Russia and Norway. Retail sales picked up in October after being flat the previous two months. Inflation remained stable at an annual rate of 1.9% in November.

The German economy continued to power forward in October, with industrial production up 3%, fuelled by strength in capital goods. Construction had a strong rebound after slowing in the previous two months. External trade remained brisk with exports far exceeding their year-ago level. Germany's surplus of $113.5 billion euro in the January-September 2010 period led the euro-zone.

Industrial production contracted in France in October, after being flat the month before. The external trade deficit continued to widen to the second largest in the euro-zone, after the UK. Consumers remained cautious despite easing in both the unemployment and inflation rates.

Real GDP growth in the UK in the third quarter was revised to 0.7%, due to lower output in construction and business services, even as employment grew 0.6%. Industrial production was flat in October, following slight gains in the previous three months and construction stalled after strong summer demand. Consumers ventured out in advance of an increase in the VAT sales tax in the new year. Inflation hit a six-month high in November, boosted by higher food and clothing prices.

Exports remained the driving force in Japan's economy, albeit at a slowing pace. Exports rose 9.1% in November from a year earlier as demand from China and the EU improved. On a monthly basis, they rose 0.1%, after a 0.4% gain in October and a 0.5% fall in September. Weak domestic demand prompted the government to institute a new stimulus package for small businesses and regional economies in November and to cut corporate taxes in December.

India's economy grew 8.9% in the third quarter from a year ago, slightly above its second quarter pace, buoyed by increased agricultural output and a rebound in the services sector. Persistent inflation, due in part to drought-induced hikes in food prices, has led to six interest rate hikes since the start of the year.

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