Section 1: Current economic conditions

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Overview ¹ 

Output and employment have rebounded following a short slowdown in mid-2010. Output rose 0.4% in November, its third increase in four months, while employment kept pace with a 0.4% gain in January.

The upturn in demand was led by exports. After struggling to rise above $33 billion all year, exports exceeded $34 billion in both October and November. The increase reflected rising commodity prices, notably for metals, and strengthening US demand. Real GDP growth in the US picked up to 0.8% in the fourth quarter, due to stronger consumer and business spending. In Canada, temporary shutdowns for retooling dampened auto assemblies and exports.

Household demand in Canada was mixed. Retail sales in November posted their largest monthly gain since March, led by durable goods. However, the housing sector continued to cool, with existing home sales levelling off and housing starts falling to their lowest level of the year.

Labour markets

Employment rose 0.4% in January, adding to a 0.2% gain in December that snapped a 5-month span of little growth in jobs. The increase was about evenly-divided between full-time and part-time positions. With the labour force expanding 0.6%, the most since April 2010, the unemployment rate increased to 7.8% in January.

The good and service sectors grew at about the same rate. Natural resources led the gain in the goods-producing sector, while manufacturing held onto its large increase in December. Services were buoyed by widespread advances in business and public services.

Ontario and Alberta accounted for almost all of the expansion of employment. Ontario was led by construction, as services remained restrained by large losses in accommodation and food. Conversely, services drove job growth in Alberta, notably business services. Quebec held on to its December gains in employment. BC saw a second straight employment decline, notably in manufacturing, and unemployment posted the largest increase in Canada.

Leading indicators

The composite leading index rose by 0.5% in December, matching its gains in October and November. Five of the ten components advanced, led by stock market prices and household spending. Most components related to manufacturing softened in the latest month.

The housing index increased 1.5%, its second straight gain after six consecutive declines. The upturn was led by a continued rebound in existing home sales. The gradual improvement in existing home sales was also reflected in a slower rate of decline in furniture and appliances sales in the last two months compared with the previous four. Consumer spending on other durable goods rose 1.2%, the largest advance in over a year.

Most manufacturing components weakened. New orders for durable goods fell 1.7% after a small gain. The ratio of shipments to inventories posted its first dip since May 2009, as inventory levels increased in recent months while sales growth slowed. In contrast, there were some positive developments in manufacturing: the US leading index rose 0.5%, a sign of strengthening US demand, while manufacturing employment in Canada rose sharply in December and held this level in January.

Output

Real GDP expanded 0.4% in November, its third gain in four months. Over the last four months, GDP increased 0.8%, double the increase during the previous four months ending in July. This doubling of growth was led by services, which increased by 1.1% after a 0.2% dip between March and July. Conversely, goods output dipped 0.3% in the last four months, after a 1.6% gain in the previous four.

Services and mining led November's advance. Wholesale and retail trade both posted large gains, matched by finance and real estate. Business services stalled after two consecutive monthly increases. Public services continued to grow modestly.

Mining remained the fastest growing sector, with a 9.3% gain in the past 12 months. Oil and gas led November's increase, reflecting rising exports to the US. Metal and non-metallic mines both edged down after large gains earlier in the autumn.

Manufacturing output fell 0.8%, its third straight drop of comparable magnitude. All of November's decline reflected a 16% drop in auto assemblies. The November decrease in auto assemblies reverberated among suppliers, notably in auto parts, iron and steel and metal fabricating. Non-automotive output was buoyed by large gains in petroleum and computers and electronics.

Household demand

Retail sales volumes rose 1.3% in November, following no change in October. The increases were widespread. Durable goods led with strong sales of new cars and trucks, as well as furniture and appliances. Building supplies posted a sizeable gain, the first since March 2010. Higher clothing sales bolstered semi-durables while increased food purchases accounted for the rise in non-durable goods. Aside from two isolated spikes in September 2009 and March 2010, after which consumer demand returned to its post-recession trend line, retail sales growth has been steady since early 2009.

The housing market continued to moderate, with new home sales and housing starts down in December while existing home sales remained unchanged. Housing prices were stable for their second consecutive month. A 12.5% decline in housing starts followed a spike in November, both accounted for by Ontario. New home sales had been relatively stable for four months before declining to its lowest level in a year in December. The vacancy rate has increased steadily since March.

For the year, housing starts were up 27%, remaining below 2008 levels by about 10%. While Ontario and British Columbia were the main drivers of the yearly gain, the Atlantic Provinces, Quebec and Manitoba all surpassed their record highs. Existing home sales in 2010 were down 3.9% from 2009.

Merchandise trade

Exports surpassed $34.0 billion in both October and November. Together with a 3.2% drop in imports, this shrank the trade deficit by $1.4 billion to less than $100 million. All of the increase in exports reflected rising prices, which hit their highest level since December 2008. Temporary shutdowns in auto assemblies in Canada helped lower the volume of both exports and imports.

Industrial goods, mostly metals, led the growth in exports over the last two months. Exports of industrial goods hovered around $8.0 billion thru most of 2010, before rising to $9.0 billion in October and $9.5 billion in November. Exports of precious metals led this surge, doubling to $2.1 billion between September and November, reinforced by gains for iron ore, aluminum and copper.

Auto exports fell 10%, mostly due to fewer car assemblies. Most non-automotive exports were little changed. Energy received a boost from crude oil, where the volume of exports jumped by over a third in the last two months to their third highest level on record.

Energy led the drop in overall imports, returning to a more normal level after a spike in October. Machinery and equipment imports also retreated, after breaching the $10.0 billion mark in both September and October for the first time since 2008. The volume of consumer goods imports reached their highest level since mid-2008.

Prices

Consumer prices rose 0.3% in December, their sixth straight monthly increase after a 5-month string of either declining or flat prices. As a result, the year-over-year rate of inflation has risen from a low of 1.0% in June to 2.4% in December.

Six of the eight components of the CPI rose in December. Clothing posted the largest monthly hike. Transportation followed, as higher gasoline prices offset lower vehicle prices. Food prices rose 0.3%, their first increase since September. The cost of shelter, the fastest-rising component in the first half of 2010, has slowed in recent months as housing demand has moderated.

Commodity prices continued to increase in January. Agricultural products took the lead, led by a $2 a bushel increase for wheat as poor weather dampened the grain crop in the southern hemisphere. Energy rose slightly, as crude oil hit a 2-year high. The gap between oil prices in North America and Europe reached a record of $10 a barrel, partly due to a cold winter raising demand in Europe. The recent surge in metals prices paused early in the new year.

Prices for manufactured goods rose 0.7% in December, the largest of five straight increases. Most of the increase originated in petroleum and metals. The rising Canadian dollar dampened prices for other exports, notably paper and autos.

Financial markets

The stock market edged up 0.8% in January, enough to extend the string of consecutive monthly gains to six. Energy led the gain in January, while metals levelled off after leading the rally in prices late in 2010.

Firms accelerated their shift from debt to equity with new stock issues of over $13 billion in December, easily the most in 2010. Meanwhile, short-term credit resumed its downward trend. Household credit demand picked up in November. Consumer credit expanded again after levelling off in October.

Regional economies

The prairie provinces continued to lead the growth in retail sales with a 2.0% gain in November. This was the largest of six straight increases, lifting year-over-year growth to 7.3% (led by an 8.8% gain in Alberta). Housing starts ended the year just below 30,000 units, down from their high of 36,000 in the spring. Manufacturing sales increased 0.5% in November, their fifth consecutive gain, as an increase in chemicals outweighed a dip in petroleum.

Household demand also strengthened in BC at year-end. Retail sales posted a fourth straight advance, but after declines over the spring and summer this left year-over-year growth at 2.7%, the lowest in Canada. Housing starts rebounded 47% in December, leaving BC the only region where starts at year-end were above their annual average. Manufacturing sales recovered the ground lost in October, led by paper.

Retail sales in Ontario posted their fourth gain in a row after a decline in July. Housing starts fell 45% in December, capping a third straight small quarterly decrease. Monthly manufacturing sales fell 2.3%, almost entirely due to temporary closures in the auto industry.

Quebec posted gains across the board. Retail sales rose 1.3%, leaving year-over-year growth near the national average of 5.3%. Housing starts rebounded 14%, and Quebec was the only region where starts were near their pre-recession high. Manufacturing sales added to their sizeable gain in October, partly as other refiners stepped in to replace output lost after a refinery was closed.

International economies

In the United States, real GDP rose 0.8% in the fourth quarter, enough to return its level to its pre-recession peak set in the second quarter of 2008. Final sales posted their largest gain (1.8%) since 1984. Consumer spending grew 1.1%, its largest quarterly advance since early 2006. Business investment matched this increase, buttressed by the first gain in structures in over two years. Export volumes hit a record high, while imports fell sharply, which was reflected in a sharp deceleration in inventory accumulation. For 2010, real GDP rose 2.9%.

Retail sales continued to strengthen in December despite heavy storms in the Northeast after Christmas. The 0.6% increase was the sixth straight gain, as higher auto sales were accompanied by gains for housing-related stores. Existing home sales jumped 12% in December, their largest monthly gain since 1999 as sales continued to recover from their slump after the expiry to tax credits in the spring. New house sales also rose sharply at year-end. Housing starts fell 4%, although some of the drop may reflect the impact of storms as building permits increased. The level of starts was 530,000 units at annual rates, equalling its low for the year.

Industrial production rose 0.8%, fuelled by weather-related demand for utilities. Manufacturing output rose 0.4%, checked by another drop in auto assemblies. Overall, output of consumer goods (notably autos) fell in the fourth quarter, despite the surge in consumer spending. This implies inventories are at low levels and will likely need replenishing early in 2011 if demand growth continues. Business equipment sustained the growth of manufacturing output throughout the fourth quarter.

Industrial production advanced for the second straight month in the euro-zone in November, with strong gains in every sector except consumer goods. New orders followed suit, with consumer goods also weak. Construction retreated due to severe winter weather, which also dampened consumer spending. External trade remained brisk, although the energy deficit offset a rise in the manufactured goods surplus. Exports to Brazil and China were particularly strong. Inflation rose to 2.2% in December, while the unemployment rate was stable at 10.1% in November.

The German economy expanded by 3.6% in 2010, recovering from a 4.7% contraction the year before. Growth was driven by strength in domestic demand, particularly business investment. Industrial production fell slightly in November, after robust growth the month before. New orders ramped up, however, with a 5.3% gain. Construction turned down, dampened by winter storms, while consumers held on to their wallets despite the impending holiday season. Exports remained buoyant, with the strongest growth to the US, China and Russia. The unemployment rate was unchanged at 6.7% in December, while annual inflation of 1.9% was one of the lowest in the euro-zone.

Industrial production rebounded 2.3% in France in November, while new orders grew for the second straight month. Construction remained downbeat, falling for the fifth month in a row. Consumers ventured out, however, even as the unemployment rate rose to 9.8%.

Fourth-quarter real GDP in the UK contracted 0.5%, following a 0.7% gain in the third quarter, due in part to heavy snows. Retail sales were weak in December, despite the holiday season and the impending hike in the VAT from 17.5% VAT to 20% on January 4^th. Unemployment rose for the first time since June 2009 and inflation hit 3.7%.

Japan's export growth accelerated for the second straight month in December, boosted by shipments of machinery and autos. Exports to China continued to climb, accounting for over 19% of all exports. Consumer spending remained weak as prices fell for the 22^nd consecutive month. The unemployment rate fell to 4.9%, the first reading below 5% in ten months.

The Chinese economy grew 9.8% year-over-year in the fourth quarter, prompting further interest rate hikes and increased reserve requirements for banks to dampen growth. Inflation continued to mount, with consumer prices up 4.6% in the year to December. Food prices alone jumped 10% over the past year, leading to a series of minimum wage increases and government price controls on a number of staple goods. Exports remained robust, while imports were boosted by the spike in oil prices at year end.

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