Section 1: Current economic conditions

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Overview ¹ 

After four months of rapid growth, real GDP fell in February. However, the dip appeared to be transitory, as employment rebounded in April while the leading indicators grew rapidly.

Most of the drop in output reflected fewer auto assemblies, which reverberated downstream in transportation and wholesaling. Most services continued to expand output, and services dominated April's increase in jobs.

The improving labour market will help household demand add to its recent gains. Retail sales growth resumed in February with a 0.4% rise in volume, and auto sales picked up in March. Existing home sales in March levelled off after a one-month setback in February, while housing starts in March rose for the second straight month after a weak start to the year.

Consumer prices rose 0.8% in March, led by higher gasoline prices. So far, rising gas prices have not slowed gas consumption. Retail sales of gasoline rose 3.2% in 2010 to 39.0 million metric tonnes, its second largest annual increase on record despite rising prices, and is on track to reach another record level in the first quarter. Gasoline demand in 2008 and 2009 proved resilient despite the recession and high prices. Demand fell only 1.1% in 2008 when prices spiked to record highs and rose 1.3% in 2009, despite the 2.5% retreat in real GDP that year. In past recessions, gasoline demand fell over 10% in the early 1980s and 5% in 1990-1991.

The US economy improved as spring arrived, after adverse winter weather helped halve GDP growth to 0.4% in the first quarter. Industrial production rose 0.8% in March, after almost no growth in the previous two months. Housing rebounded across the board in March from a weak start to the year, while retail sales rose steadily.

Labour markets

Employment grew 0.3% in April, after a one-month stall in March that interrupted three months of growth at the turn of the year. Most of the gains in April were in part-time positions, a reversal from the strength in full-time jobs so far this year. With the labour force expanding nearly as fast as employment, the unemployment rate dipped from 7.7% to 7.6%.

The services sector accounted for all the job growth in April, after two months of little change. The increase was widespread, with trade the only industry that did not expand. The goods sector was dampened by construction, after a large advance in March. Following a record increase in December, manufacturing jobs have held on to that level in the first four months of 2011.

Ontario saw the largest increase in jobs, up 0.8%, all in the services sector. This helped lower Ontario's unemployment rate below 8% for the first time since December 2008. Quebec and BC posted modest gains in employment. The prairie provinces saw employment dip for the second month in a row, after a robust start to the year.

Leading indicators

The composite leading index rose 0.8% in March, after a 1.1% gain in February. Eight of the ten components advanced in March, one less than in February.

The stock market and the housing index posted the largest gains, with increases of 2.2% and 2.0%, respectively. Furniture and appliance sales increased 0.6%, and sales of other durable goods rose 0.3%.

The ratio of manufacturing shipments to inventories rose for the second straight month, as shipments turned up while stocks fell. The average workweek at factories rose for the third month in a row. New orders for durable goods fell 0.6%, after a rebound the month before.

Output

Real GDP fell 0.2% in February, its first dip after four months of growth totalling 1.8%. Most of the decline originated in manufacturing and, to a lesser extent, goods-handling services. Most other services posted small gains, while other goods were unchanged.

Manufacturing output fell 1.6%, after two large gains. Just over half the decline originated in fewer auto assemblies. Most capital goods industries also lowered output, after rising strongly earlier in the winter. Output was steady or up slightly in resource-based factories, such as wood, paper and refining. The drop in manufacturing slowed demand for wholesaling and transportation, notably those related to the auto sector.

Output in construction and the primary sector was little changed, as it has been since winter started. Mining was checked by supply disruptions that led to another sharp decline in coal production and small losses in oilsands output. These declines were offset by increased production at metal mines as prices reached record highs.

Most services posted modest gains. Professional services led the growth in business services. The public sector grew 0.1%. Consumer services were led by retail goods, which offset small declines for gambling and house sales.

Household demand

Retail sales rose 0.4% in February following declines of 0.6% and 0.8% in the previous two months. A rise in durable goods and the continued strength of demand for semi-durable goods, mostly clothing, accounted for the gain.

Sales of durable goods were up for the month as a result of increased demand for furniture and household appliances. Truck sales continued to fall for the fourth consecutive month, but February's drop was offset by a rise in new car and used vehicle sales. Clothing sales have increased for four straight months, with a large upward revision in January making a slight increase a more sizeable one. There was little change in sales of non-durable goods.

The number of existing homes remained unchanged in March while average prices continued to increase, partly as a result of higher-priced homes in Vancouver continuing to sell, which boosted average prices. Housing starts increased 2.8% to 188,800 units (at annual rates). The increase was concentrated in multiples, offset by single-home construction dropping 8%. Rural construction also rose 20%.

Merchandise trade

Exports and imports retrenched in February, after rising in December and January to their highest levels in over two years. Autos and energy products accounted for nearly 80% of the decline in both exports and imports, after sharp gains in recent months.

Exports fell 4.9%, with autos and energy products contributing equally to the drop. Energy exports retreated 8% after expanding 41% over the previous four months, when cold weather in the US combined with expanded pipeline capacity to boost crude oil exports by 71%. Auto exports slumped, after rebounding in January from their low levels in November and December (when retooling and poor weather depressed output).

Elsewhere, exports of industrial goods dipped 3%, but remained 20% ahead of their level a year earlier. Forestry products continued to slump early in 2011, as renewed weakness in US housing demand lowered lumber exports by 10% in January and February. Machinery and equipment exports also fell 10% so far this year, mostly due to lower aircraft shipments.

Imports declined 4.0% in February, led by a 12.5% drop for auto products after a sharp gain in January. Energy imports fell 9%, after rising nearly a third between September and January (mostly due to higher volumes). Machinery and equipment exports dipped due to a decline in aircraft, its most volatile component.

Prices

The CPI rose 0.8% between February and March, lifting the year-over-year increase from 2.2% to 3.3%, the highest since September 2008. The Bank of Canada's core index rose 0.5% in the month, the most since November 2008. However, the 1.7% year-over-year increase for the core index remained below its gains of 2% early in 2010.

Over half of the monthly increase in prices originated in food and energy. Food prices rose 1.6%, led by a spike in vegetable prices due to poor weather in the US and Mexico. Gasoline and fuel oil led the increase in energy prices.

The CPI excluding food and energy increased 0.3% in the month and 2.1% from last March. The latter was higher than the 1.7% increase in the Bank of Canada's core index, reflecting that the core index excludes indirect taxes which have added 0.7 points to core inflation in the past year. Including indirect taxes raises inflation above the CPI excluding food and energy, reflecting that the core CPI includes food items where prices have begun to rise significantly, such as meat, bread and coffee.

Elsewhere, clothing prices posted the largest increase, as the rising cost of inputs such as cotton led to a much larger than usual hike in March for the spring line of clothes.

Commodity prices continued to increase, led by energy prices. After a $10 hike in March, crude oil prices rose $7 a barrel for West Texas Intermediate (WTI) the benchmark price for prices in North America. The gap between the price for WTI crude and Brent crude in Europe widened to $13 a barrel in April. Metals prices set new record highs, led by increases for gold which surpassed $1500 (US) an ounce for the first time ever. Agricultural prices continued to rise on concern about drought in the US.

Industrial prices rose 0.9% in March, largely due to higher petroleum prices. Elsewhere, nearly half of commodities saw small price declines, especially for exported goods as the exchange rate continued to appreciate.

Financial markets

Prices on the Toronto stock market fell 1.1% in April, the second small dip in a row. Despite the surge in oil prices over the last two months, energy stocks led the decline for a second straight month. However, metals stocks rebounded from back-to-back declines.

The Canadian dollar rose above $1.04 (US) on average in March, its highest monthly average since October 2007. Interest rates in Canada were little changed across the spectrum, except for slight increases for mortgages of one to five years.

Business credit dipped 0.2%, resuming the slight downward trend posted in the second half of 2010 which was interrupted by increases of 1% in both January and February 2011. The drop in March slowed total fund-raising by firms, although it remained positive due to increased issues in both stock and bond markets. Household credit growth moderated in half to 0.4% in February, with a slowdown in both consumer and mortgage debt after a one-month surge in credit in January.

Regional economies

Retail sales in Quebec started the new year with back-to-back declines, the only major province to post consecutive drops. Some of this weakness reflects the January hike in the provincial HST rate, which shifted some sales from early 2011 to the fourth quarter of 2010 (when sales rose 2.9%). Housing starts continued to hover around 40,000 units (at annual rates) for the eighth straight month. Manufacturing sales gave back nearly half of January's 8% gain, mostly due to a drop in aircraft shipments.

In Ontario, the source of growth switched from household demand to manufacturing. Housing starts rose for a third straight month, capping an 11% gain in the first quarter after three consecutive small quarterly declines. Retail sales rebound 0.7% after two declines of 0.5%. However, manufacturing sales lost one-third of their 6% gain in January, mostly due to lower auto shipments.

Retail sales in the prairie provinces remained the most buoyant in Canada, up 1.4% in February after leading the country in the fourth quarter and into January. This strength was concentrated in autos. Housing starts in the prairies fell 3% in the first quarter, after a 17% drop in the fourth. Manufacturing sales recovered from the fire at a large refinery in January.

In BC, manufacturing remained the most consistent source of growth, with sales expanding for the fourth straight month despite a slowdown for forestry products. Retail sales rebounded 0.7%, but this followed two months of the weakest sales in Canada. Housing starts fell for the third consecutive month, leaving the first-quarter average down 5%.

International economies

In the United States, real GDP rose 0.4% in the fourth quarter, half its first-quarter growth. However, most of the slowdown was concentrated in construction, reflecting the impact of a succession of heavy snow storms in early in the year. Exports and imports were boosted by a large rebound in auto production.

Both household spending and factory output improved in March, despite rising gasoline prices and the disaster in Japan. Industrial production rose 0.8% in March, after poor weather had helped check growth to 0.1% in both January and February. Manufacturing capped its best quarter so far in the recovery with a 0.7% gain in March, with contributions from all major sectors. New orders picked up to a 2.5% increase, led by capital goods.

The housing sector rebounded in March, suggesting some of the large losses since the start of the year were weather-related. New home sales rose 11%, after upward revisions of nearly 10% to each of the previous two months left their declines at 7% in January and 14% in February. Existing home sales rebounded by 3.7%, and are 20% above their lows touched in mid-2010. An improvement in housing-related items was the largest factor in the 0.4% gain in retail sales, while auto sales fell 2%.

The trade deficit shrank slightly in February, mostly due to a 7.2% drop in imports from China. The two-week holiday associated with the Chinese New Year fell entirely in February this year. As well, both automotive imports and exports fell nearly 10%. Oil imports were little changed, but the price of imports jumped 10.5% in March.

Industrial production grew 0.4% in the euro-zone in February, its fifth straight monthly gain. Output was up in all sectors except energy. New orders followed suit with a fifth consecutive gain, led by capital goods. The external trade deficit narrowed as the surplus for manufactured goods more than offset an increase in the energy deficit. A rise in the trade surplus with the US helped offset larger trade deficits with China, Russia, Norway and Japan. The unemployment rate remained steady at 9.9% in March, while the annual rate of inflation rose to 2.7% from 2.4% in February as the monthly CPI rose by a record 1.4%.

The German economy remained robust with industrial production gaining 1.4% in February, its third consecutive gain, while new orders rose a further 3.2%. Demand has been driven by exports to fast-growing Asian countries, although domestic demand has picked up with imports outstripping exports in the month. Construction continued to recover from severe weather to start the year, while consumer spending slowed after sales were boosted by weather shifting demand from December to January. The unemployment rate eased to 6.3% in March and inflation rose to 2.3%, almost double its pace from a year ago.

French industrial production posted its fourth straight monthly gain in February, while new orders rebounded from a decline the month before. Domestic demand was slowed by both consumer spending and housing. Imports continued to outstrip exports, further widening the external trade deficit. The unemployment rate was steady at 9.5% in March, while inflation climbed to 2.2%.

Britain's real GDP grew 0.5% in the first quarter of 2011, led by strength in manufacturing and services. Construction remained a drag on growth, hampered by winter storms. Industrial production stalled in February, with weakness in energy output, while consumers reined in spending. Inflation eased to 4% in March, from 4.4% the month before.

The Japanese economy was crippled by the disaster in March which damaged many factories and led to power shortages. Exports fell for the first time in 16 months, particularly for autos as Toyota, Honda and Nissan suspended production due to shortages of components. Industrial production fell a record 15% in March, while household spending tumbled 8.5%.

Real GDP in China grew 2.1% in the first quarter of the year from the last quarter of 2010. This was the first time China published data on how GDP compares with the previous quarter instead of from a year ago, but did not publish historical data. Imports in the quarter outstripped exports, resulting in the first trade deficit since 2004. Inflation rose to a 32-month high in March of 5.4%, driven by an 11.7% rise in food costs.

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