Section 1: Current economic conditions

View the most recent version.

Overview ¹ 

Output rebounded 0.2% in June after a 0.3% drop in May, resulting in a 0.1% dip for the second quarter. Meanwhile, employment levelled-off in July and August, after steady gains in the second quarter.

Real GDP in the second quarter was constrained by supply disruptions in the auto and energy sectors. These occurred against a backdrop of continued slow growth in the US, Europe and Japan. With domestic demand in Canada growing steadily, notably business spending, this resulted in a sharp decline in net exports.

Despite the dip in total GDP, a majority of industries continued to raise output: the diffusion index for 67 industries showed 54.2% continued to expand in the second quarter, close to the 56.2% average in the first quarter when output rose 0.9%. This comparison shows that the decline in production in the second quarter was confined to a small number of industries, notably oil and gas and autos. Oil and gas output was hampered by wildfires in northern Alberta, while auto output was reduced by a shortage of parts from Japan after its tsunami in March.

Business investment continued to lead the expansion of domestic demand in the second quarter. Firms raised spending on fixed capital nearly 4%, with an extra boost from the arrival of an imported natural gas platform in June. The continued growth of private sector jobs in the second quarter and into the summer reflects the confidence firms had that the slowdown in output would be temporary.

Global financial markets experienced considerable turbulence in August, notably in Europe and the US, reflecting growing concerns about sovereign debt levels and the raising of the US debt ceiling (although interest rates for government bonds stayed low for most major nations). Amid this turmoil, it is notable that the rate of decline for Canadian stocks moderated in August, while foreign investors continued to purchase large quantities of Canadian securities in the second quarter, particularly bonds and money market funds.

Labour markets

Employment in August was little changed for the second consecutive month, although full-time jobs continued to displace part-time positions. Over the past year, full-time employment expanded by 300,000 people, while there were 77,000 fewer part-time jobs. Partly as a result of this shift, hours worked rose 2.6% in the past year, with half the increase occurring in July and August. With the labour force recovering some of its July decrease, the unemployment rate edged up to 7.3%.

Private sector employment fell 0.2% after a 0.9% gain in July. Construction led the reversal, notably in Ontario, while employment fell in natural resources in Alberta and in utilities in BC. Employment growth resumed in services, led by the public sector which rebounded from declines in July. Central Canada recorded the largest increases in education and health care. Quebec's unemployment rate rose the most in Canada, mostly due to an increase in its labour force.

Leading indicators

The composite leading index rose 0.2% in July after a 0.1% gain in June. Six of the ten components advanced, one more than the previous month. In particular, household demand was firm, reflecting the steady growth in the hours worked. These gains were partly offset by declines in the stock market.

Furniture and appliance sales rose 1.2%, their largest monthly advance of the recovery. Spending on other durable goods rebounded 0.1%, as auto sales remained slow. The growth of services employment was driven by gains in personal services.

The manufacturing sector showed some improvement in new orders, which recovered 3.4% after a dip the month before. However, the average workweek fell again, while the ratio of shipments to inventories fell due to the first drop in shipments since November 2010 and higher stocks.

The Toronto stock market trended down by 1.7%, its largest monthly decline since 2009.

Output

Real GDP rebounded 0.2% in June after a 0.3% drop in May. Auto and energy output both began to recover from supply disruptions in the spring. The lockout at Post Canada shaved 0.1% from GDP growth.

Goods-producing industries raised output 0.2% after a 1.6% drop in May. Mining output rose 0.7%, led by oil and gas after wildfires in Alberta had led to a 4% drop in May. Manufacturing output was little changed (-0.1%) after modest declines in the previous two months. Auto assemblies rose 4%, recouping about a third of their losses in the spring. Aerospace production posted its first increase of the year. New orders for aerospace totalled $15 billion in the first half of 2011, their best two quarters since the second half of 2008. New orders were negative in the first half of 2009, when airline customers cancelled previous orders. The increase in output of transportation equipment was offset by declines in high-tech and resource-based industries, notably metals and wood. Construction output rose 0.6%, its first increase in three months as residential construction strengthened.

Services output expanded 0.2% for the second straight month, despite a 34% drop in postal services due to the lockout. The increase was widespread. Consumer-related services posted the largest gains, notably retailers and recreational services. Real estate demand rebounded from consecutive declines. Business services and finance posted their largest gains since January. The public sector services of education, health care and public administration all expanded by 0.2%.

Household demand

Household spending picked-up in the second quarter, as outlays for personal goods and services recovered from no change in the first quarter. The upturn was led by services, notably travel abroad. Spending on durable goods remained constrained by weak auto sales and rising prices for food and energy. Residential construction held on to its advance in the first quarter, as a rebound in new home-building offset a slump in home sales.

The gradual improvement of retail sales in the spring gathered steam in June, when the volume of sales rose 1.6%. Auto sales led the way, as consumers responded to deep price discounts after the supply of autos began to recover from shortages experienced during the spring. Spending on non-durable goods also picked-up as food and energy prices began to ease.

International Trade

The current account trade deficit widened to $15.3 billion in the second quarter, after narrowing over the previous two quarters to reach $10.1 billion in the first. Most of the increase in the deficit originated in trade in goods, which swung from a surplus of $1.8 billion in the first quarter to a deficit of $3.5 billion in the second, mostly due to lower exports of oil and vehicles. The current account deficit was financed by increased foreign purchases of Canadian securities, mostly bonds and money market funds.

Merchandise trade flows continued to slow in June, as exports fell 1.7% while imports dipped 0.2%. The drop in exports was mostly due to energy and autos, capping a weak quarter for both. Still, after surging 38% over the winter, the 4.5% dip in crude oil exports left them at their second highest quarterly level on record. Industrial goods hit a new high for the year, mostly on the strength of metals exports.

Nominal imports in June slipped 0.2% due to lower prices, as the volume of imports rose 1.9%. Demand for imported machinery and equipment remained particularly strong, as the volume of imports hit a record high. Some of the gain in June reflected the arrival of a large natural gas platform, but this was nearly matched by a large decline in aircraft imports. Consumer goods posted a third straight increase. Nominal imports were dampened by a sharp drop in both the price and volume of energy, after extended maintenance at refineries in the second quarter raised imports.

Prices

Prices for spending in Canada slowed to a 0.3% increase in the second quarter, half their average rise in the previous two quarters. The moderation largely originated in consumer prices, reflecting price discounts for non-automotive durable goods and a slight easing in the recent surge in food and energy prices. Prices for business investment fell for the fourth consecutive quarter, notably for imported machinery and equipment. The implicit price index for Canadian output rose 0.5%, as export prices increased slightly faster than imports.

Consumer prices rose 0.1% in July, after a 0.4% drop in June. The year-over-year rate of inflation fell to 2.7%, partly as the price hikes associated with the introduction of the HST last July no longer impacted this calculation. The core CPI rose 0.2%, reversing its decline in June.

Food led the monthly increase in prices, up 0.5%. In the past 12 months, food prices have risen 4.3%, compared with a recent low of 1% in mid-2010 and a peak of 8% early in 2009. Other notable price increases included autos, where the increase reversed about a third of the discounts offered in June. Partly offsetting these increases were a second straight drop in the price of gasoline and clothing.

Commodity prices retreated in August, ceding the ground gained in July. Most of the decline was in energy and metals. Crude oil prices fell about $7 a barrel, continuing its recent see-saw pattern of monthly gains and losses. Natural gas prices fell below $4 per mmbtu, despite the recent authorization of liquefied gas exports from the US (prices in Europe and Asia were over $10 per mmbtu). Nickel and copper posted the largest drops in metals, while gold soared to a new record high of over $1800 an ounce.

Industrial prices fell 0.3% in July, their third straight monthly dip after nine consecutive increases. Most of the decline in prices reflected the 2.2% appreciation of the Canadian dollar, which dampened prices for exports such as autos, paper and chemicals. These declines were partly offset by higher prices for refined metal and petroleum products.

Financial markets

The pattern of net lending by sector underwent some notable changes in the second quarter. Net lending by firms retreated to $55.5 billion (at annual rates), about where it was before surging to near $80 billion in the previous two quarters. The drop in net lending reflected slightly lower profits (after rising $25 billion in the previous two quarters) and higher outlays for fixed capital and inventories. With household and government net lending little changed, the drop in corporate net lending was offset by increased net lending by non-residents. This mostly took the form of purchases of bonds and money market funds.

Despite considerable turbulence early in the month, the rate of decline of prices on the Toronto stock market continued to moderate, from 3.6% in June to 2.7% in July and 1.4% in August. Metals led the decline, except gold stocks which hit a record high. Financials and consumer discretionary stocks posted additional losses after double-digit drops in July. These declines were partly offset by increases for utilities and materials.

The relative stability of stock markets in Canada contrasts with those in the US and Europe. The S&P 500 index in the US fell 5.7%, while the FTSE 300 index for Europe declined 10.6% in August. As well, several measures of volatility hit their highest levels since the 2008-2009 recession.

Regional economies

Retail sales in Quebec rose 1.5% in June, their first significant advance of the year. Nevertheless, sales remained below their level in December 2010, a reflection of the drop in demand after the provincial sales tax was raised in January. Housing starts were unable to hold on to their second-quarter gain, falling 8% in July. Manufacturing sales in June posted a third straight decline, as petroleum refining shrank while aerospace remained weak.

In Ontario, manufacturing sales fell another 2.0%, capping a 3.4% drop in the second quarter, the largest decline in Canada. All of the second-quarter slack in sales originated in transportation equipment and petroleum refining. Household demand fared better, with retail sales posting a third straight increase of about 0.5% after a slow start to the year. Housing starts rose 2% in July, reinforcing their 11% gain in the second quarter.

The major sectors of demand showed little change for the prairie provinces after solid advances in the spring. Retail sales edged-up 0.3% in June, lifting second-quarter growth to 1.3%. Housing starts were unchanged in July, after their 12% increase in the second quarter led the nation. Manufacturing sales in June were flat for the second month in a row, leaving quarterly sales up 3% for the second straight quarter. While petroleum refining sales were dampened in the second quarter by supply disruptions in Alberta, overall growth was sustained by large increases for capital goods, notably machinery.

Retail sales in BC rose 0.4% in June, and its 1.8% increase in the second quarter was the largest in Canada and more than offset a decline in the first quarter. Monthly housing starts continued to be quite volatile, with a 33% gain in July following a 28% drop in June and a 33% increase in May. Manufacturing sales eked-out a 0.6% increase in June, but second quarter sales were depressed by declines in April and May. Most of the reversal in quarterly sales (after BC led manufacturing growth in the first quarter) originated in paper and wood.

International economies

In the United States, the University of Michigan index of consumer confidence fell for a third straight month, with a total decline of 20%. The drop reflected the uncertainty about whether Congress would raise the debt ceiling for the US government, a downgrade of this debt by a rating agency, and more losses in financial markets. Despite the drop in consumer confidence and Hurricane Irene shutting down much of the East Coast late in August, auto sales were little changed in August, as was employment.

Retail sales in July rose 0.5%, their largest gain in four months. Autos led the advance, despite ongoing shortages of Japanese models. Housing starts in July held on to most of their 11.5% gain in June, remaining above 600,000 (at annual rates) in consecutive months for the first time since March 2010 (when tax credits boosted housing). However, home sales continued to sputter only slightly above their recent lows.

Industrial production increased 0.9% in July after slowing in the second quarter. Manufacturing output rose 0.6%, with autos recovering from three straight declines. Mining continued its rapid upward trend, while a heat wave raised demand for utilities 2.8%.

Real GDP in the euro-zone grew 0.2% in the second quarter, following a 0.8% rise in the first quarter of the year, dampened by sluggish output in Germany and France. Industrial production contracted 0.7% in July as demand fell in every major sector. New orders mirrored the drop, with only capital goods posting a gain. Construction output fell 1.8%, curtailed by the slowdown in Germany. A large rise in the surplus for manufactured goods more than offset an increase in the energy deficit, boosting the external trade surplus. Trade continued to expand with India, China and Russia. Consumers boosted spending in June and July, after a drop the month before. The unemployment rate was steady at 10% in July, while the annual rate of inflation eased to 2.5% from 2.7% in June.

Growth in the German economy slowed to 0.1% in the second quarter, down from 1.3% in the first. Output was dampened by an 8.8% drop in energy production after the government shutdown all nuclear power stations in response to the radiation leak in Japan. This dampened exports and raised imports as new sources of supply were needed. Consumer spending dipped 0.7% despite stable labour market conditions. The monthly data for Germany showed an improvement as the quarter ended. Exports rose 3.1% in June from a year earlier, the smallest increase in 16 months, while construction contracted for the third month in a row. Industrial production fell 0.8%, although new orders posted their third straight gain. Real retail sales jumped 4.5% in June, buoyed by large wage settlements.

The French economy was flat in the second quarter after a 0.9% gain in the first three months of the year, hampered by weak household consumption. Industrial production contracted in June for the first time in four months. New orders rose 14%, boosted by transport equipment. Construction remained dormant, with output flat or falling since February. Exports continued to wane, widening the external trade deficit. Consumer spending in June and July recovered all of the 1.4% drop in May.

Real GDP in Italy grew 0.3% in the second quarter, up from its 0.1% pace in the first. Industrial production fell 0.6% in June, matching its May decline, although new orders have generally been upbeat. Construction remained weak, along with consumer demand. The inflation rate eased to 2.1% in July, from 3% the month before.

Industrial production was flat in the UK in June, continuing its see-saw pattern since the start of the year. New orders dipped after rising the previous two months. Construction gained for the fourth time since February as demand remained steady. Imports continued to outstrip exports resulting in the largest external trade deficit in Europe. Consumers remained willing to spend, with sales up in July for the fourth time in five months.

Japan's economy contracted by 0.3% in the second quarter, reflecting a sharp drop in net exports following the tsunami. It was the third consecutive quarterly decline. The continued strength of the yen further dampened exports and manufacturer's profits, while consumer spending remained weak in the face of steadily falling prices.

Industrial output growth in China eased to 14% in July from a year earlier, down from 15.1% in June. Retail sales also slowed, although growth in both exports and imports rebounded. Exports rose 20.4% in July, and imports 22.9%, lifting the trade surplus to a 30-month high. The annual rate of inflation rose to 6.5% in July, the highest in three years. Food prices rose 14.8%, with pork, considered an essential in most households, rising 56.1%.

Next