Section 1: Current economic conditions

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Overview ¹ 

Both Canadian and US GDP showed strength in the third quarter. Canada's real GDP rose 0.3% in August, bringing the increase over the last three months to 1%. Meanwhile, US GDP rose 0.6% in the third quarter, led by business investment and auto sales.

Energy dominated the monthly gain in Canada's output in August, as this sector continued to recover from supply disruptions in the spring. Housing and retail sales also posted modest increases. Exports continued to recover slowly, with increases in shipments to emerging nations offsetting weak demand from the US and Europe.

Employment in Canada fell in October, led by a decline in manufacturing, after a sizeable advance in September. After two months of turmoil in global financial markets, equity and commodity prices rebounded sharply in October after European leaders announced the outlines of a plan to deal with its debt and banking problems. The Toronto stock market posted its largest monthly gain since 2009, commodity prices rebounded, and the Canadian dollar returned to parity with the US dollar.

Labour markets

Employment fell 0.3% in October after a 0.4% advance in September. All of the decline was in full-time positions. Despite a slight decline in the labour force, the unemployment rate rose from 7.1% to 7.3%.

Manufacturing accounted for the bulk of the job losses in October. Factory jobs expanded rapidly at the turn of the year, then levelled off before declines in the last two months leaving manufacturing employment essentially where it was last November. Construction also gave back over half of its gain in September. Services employment was unchanged, after two months of large gains. Much of the slowdown originated in public services, after a large gain in education the month before. Employment in finance was flat after a large drop in September. Natural resources posted the largest increase in employment, bringing the total increase in the last two months to almost 10%.

Ontario accounted for the largest part of the job decline in October, reflecting its large share of manufacturing jobs. All of the decrease in Ontario was in full-time jobs, and its unemployment rate rose half a point to 8.1%. Quebec's loss of jobs also was also concentrated in manufacturing, while BC saw about equal losses in construction and manufacturing. Alberta posted a sixth straight increase in jobs, fuelled by the natural resource sector.

Leading indicators

The composite leading index was little changed in September for the fourth month in a row. In September, 6 of the 10 components continued to expand, the same number as in August. The weakness in the index was concentrated in the stock market and the manufacturing sector, largely offsetting the rebound in the housing sector.

All of the components related to household demand increased. Housing led the gains with a 1.2% increase, its largest monthly advance since the spring. The upturn in housing helped boost furniture and appliance sales by 0.4%. Demand for other durable goods increased for the third straight month. Consumer services were the leading component of the gain in services employment.

All three manufacturing components decreased, compared with two the month before. New orders fell 0.7%, after back-to-back gains of 3.4%. While sales rebounded after two straight declines, the ratio of shipments to inventories continued to fall, reflecting rising stocks of finished goods. The average workweek dipped for the fourth straight month.

Output

Real GDP increased by 0.3% in August, after revised gains of 0.4% in July and 0.2% in June. All of the advance reflected increased production of goods, especially energy products, as services output was flat. The increase in energy output reflected the continuing recovery of oil and gas from a series of supply disruptions which lowered production for four straight months starting in February. Oil and gas output in August was almost back to its January level. As well, favourable weather conditions encouraged a burst of exploration and development drilling activity, after several months of weakness.

Production of most other goods was little changed in August. However, manufacturing output declined, offsetting about a quarter of its gain in July, largely due to cutbacks in industries dependent on forestry and construction. The auto and aerospace industries continued their recovery for the third month in a row, while iron and steel posted its first gain since a sharp hike in April. Elsewhere in goods, construction was flat as a fifth straight drop in non-residential building offset further increases in residential construction as well as engineering projects. A lower grain crop this year continued to dampen agricultural production.

The main developments in services were a 1.4% drop in wholesale trade and a 1.4% gain in finance, the latter driven by heavy selling in the stock market. Most other services were little changed. Public services were flat, as a further winding down of census operations offset increases elsewhere. A small gain in retail trade was offset by a drop in travel-related industries.

Household demand

The volume of retail sales rose 0.3% in August after a 1.1% drop in July that offset much of the gain made in June. Most of the summer slowdown in sales originated in auto purchases; sales jumped in June when manufacturers signalled the resumption of more normal auto output by lowering prices, but when prices returned to more normal levels in July and August, consumer demand slowed in both months. Preliminary data show unit auto sales rose slightly in September.

Spending on non-automotive goods regained all the ground lost in July. Outlays for computers and furniture led the rebound. A slowdown in price hikes for food and energy helped boost consumption of non-durable goods, after a slow start to the year when prices rose rapidly. Clothing purchases weakened after two months of solid growth.

The housing market continued to improve gradually in September. Existing home sales rose 2.7%, after slight declines in July and August. Housing starts rebounded 7.3%, rising above 200,000 units (at annual rates) for only the second time this year. All of the increase originated in multiple units, as ground-breaking on single-family dwellings declined slowly over the last three months.

Merchandise Trade

Exports continued to recover gradually from their setback in the spring, with a 0.5% gain in August after a 3% hike in July pushed exports to their highest level since January. With exports to the US languishing near their lows for the year, the recent rebound in exports has been propelled by demand from emerging markets. All of the increase in exports in August reflected higher prices, which recovered from a dip in July to equal their cyclical high. Import growth kept pace with exports, also due to rising prices, leaving the monthly trade deficit little changed at $0.6 billion.

Higher export earnings continued to be driven by industrial goods and machinery and equipment. Industrial goods rose above $10 billion for the first time since they hit a record in mid-2008. Industrial goods exports hit a low of $6.1 billion in the spring of 2009. Metals again accounted for most of the advance. Machinery and equipment exports rose 7% to their highest level since March 2009; however, at $7.4 billion they remain well below their pre-recession high of $8.2 billion and their record of $10.0 billion set at the peak of the ICT bubble in December 2000. Aircraft have driven the recent gains in machinery and equipment, with four consecutive increases totalling about 70% as shipments begin to respond to the influx of new orders for aerospace products in the first half of the year.

Most other export sectors declined in August. Auto exports gave back all of the ground gained in July, falling below their level in the spring after production was disrupted at Japanese-owned plants. Energy exports continued their declining trend so far in 2011, hitting their lowest level since November 2010 (although the preliminary estimate of a drop in energy exports in July was revised to an increase). A small rally in forestry exports in the spring dissipated over the summer.

Imports returned to their level set in May, before the arrival of a large drilling platform sent imports sharply higher in June and lower in July. Excluding this drilling equipment, imports of machinery and equipment have been steady at about $10.5 billion over the last five months. Auto imports added to their gain in July, as dealers continued to rebuild inventories. Energy imports fell sharply, mostly the result of lower oil prices.

Prices

Consumer prices rose 0.3% between August and September, nudging the year-over-year rate up to 3.2%. Core prices kept pace with the monthly CPI, rising 0.3%, and 2.2% in the past year.

The increase in monthly prices was largely confined to two of the seven components of the CPI. Clothing prices rose 1.0%, reversing most of their declines over the previous three months. Transportation prices rose slightly more, boosted by higher gasoline prices as well as vehicle prices. Food prices edged up 0.2%, the smallest increase since February when shortages began to boost the cost of some commodities. Three other components (household operations, health, and recreation) each posted 0.1 point increases. The price of two components fell slightly (shelter and alcohol and tobacco).

Commodity prices posted a small gain for the month. Energy drove the increase, largely reflecting a rebound in the price of crude oil in North America (the gap between the price of a barrel of WTI and Brent crude narrowed after the successful conclusion of the overthrow of the Libyan regime). The price of metals posted smaller gains, with advances for copper and nickel.

Manufacturing prices rose 0.4% in September, the second straight increase after three declines in a row. All of the September increase originated in a lower exchange rate, which boosted the price of exports such as automotive and forestry products.

Financial markets

The Toronto stock market rebounded 5.4% in October to snap a string of seven consecutive monthly declines, and its largest monthly increase since May 2009. Energy and metals led the way with double-digit gains.

The Canadian dollar returned to parity with the US greenback by the end of October, after averaging less than $0.96(US) in September. The trade-weighted exchange rate index did not appreciate as rapidly, especially after the euro strengthened at month-end.

Short-term business credit was essentially unchanged in September, the first month it did not increase since March. However, total fund-raising by firms continued to grow steadily, as the late summer dip in the stock market did not slow new equity issues. Household credit growth kept pace with a 0.5% increase in August, led by mortgages as house sales rebounded over the summer.

Regional economies

Housing and manufacturing led growth in Quebec. Housing starts jumped 32% in September, enough to reverse three consecutive declines and leave the third quarter up 3%. Manufacturing sales in August rose 4%, the most in Canada, after a 2% gain in July as the aerospace industry continued its recovery. Retail sales were little changed for the second straight month, holding on to the 1.7% advance in June.

In Ontario, retail sales rose 0.9% in July, resuming their upward trend from the spring after a brief interruption in July. Manufacturing sales added slightly to their 5% hike in July, spearheaded by the transportation equipment and primary metals. Housing starts fell 4% in September, leaving the third quarter flat after double-digit gains in the first two quarters of the year.

Retail sales in the prairie provinces grew 1.1% in August, the fourth advance in five months. Manufacturing sales were little changed, as a decline in receipts for petroleum refining offset further gains in capital goods. Housing starts dipped 12% in September, but for the quarter they continued to rise at a double-digit clip.

Housing starts in BC continued to be extremely volatile on a monthly basis, rising 19% in September. Over the last five months, the average absolute percent change has been 25%. However, starts on a quarterly basis have been much more stable, increasing 8% in each of the last two quarters. Manufacturing sales rose about 1% for the third straight month, despite a slowdown in the forestry-related industries. Retail sales remained weak, and were nearly 1% below their level in April.

International economies

In the United States, real GDP increased 0.6% in the third quarter. This was the ninth straight quarterly increase, but the economy has only just regained its pre-recession level, a reflection of both the severity of the recession and the slow pace of the recovery. Business investment led the third-quarter increase, rising 4%. Consumer spending expanded 0.6%, as a replenishing of auto supplies offset the dampening effect of price hikes for food and energy. However, residential construction remained dormant, while government spending was flat. The trade deficit continued to shrink, as exports grew faster than imports. Inventories shrank in the quarter, despite the replenishing of stocks by retailers of Japanese vehicles.

Household demand was surprisingly buoyant in September, possibly reflecting that some spending had been delayed from late in August by Hurricane Irene. Retail sales jumped 1.1%, led by autos while non-automotive sales rose 0.5%. Housing starts jumped 15%, with almost all of the increase in the multiple units component which can be particularly affected by high winds as occurred on much of the eastern seaboard in August. New home sales posted their first increase since April. A small dip in existing home sales followed a larger gain in August.

Industrial production rose 0.2% in September after no change in August. Output in both months was dampened by a large drop in demand for utilities, reflecting below-seasonal temperatures. However, manufacturers ramped up output for the third straight month, led by motor vehicles and business equipment. Mining was more buoyant, posting a sixth straight increase as natural gas production rose due to new techniques.

While August saw a sharp sell-off in the stock market, data on capital flows show an inflow of $74.7 billion in net long-term security purchases, the most since the $55 billion increase in January. Almost all of this was purchases of Treasury bills and bonds, which helped send the yield on 10-year bonds below 1.90%, their lowest on record back to 1951 (when the Fed and the Treasury agreed to cease pegging yields on US government debt). As a result, average 30-year conventional fixed-mortgage rates fell below 4% for the first time ever in early October, also a consequence of the Fed's move to sell its short-term assets and replace them with longer-term bonds.

Industrial production was upbeat in the euro-zone in August, gaining 1.2% on the heels of a 1.1% rise in July, led by capital and intermediate goods. New orders rebounded 1.9%, as every major sector recovered with the exception of durable consumer goods. Construction posted its fifth gain in six months. External trade increased with imports of energy rising more than exports of manufactured goods. Consumer spending tapered off in August, after brisk sales earlier in the summer. The unemployment rate rose to 10.2% in September, while the annual rate of inflation climbed to 3% from 2.5% in August.

German industrial production contracted 1% in August, following a 3.9% rise the month before, as output fell for energy and consumer goods. New orders were down for the second month in a row. After a respite in July, construction fell in August for the fifth time in six months. Exports continued to drive the economy with Germany consistently having the largest external trade surplus in the euro-zone. Consumers reined in spending in August, and inflation rose to 2.9% in September, boosted by higher oil prices and less discounting on clothing.

Industrial production in France rose 0.6% in August, after a 1.8% gain in July. New orders recovered from a decline the month before due to a drop in demand for heavy transport equipment. Construction saw a rebound, after stagnating for most of the year. Retail sales volumes rose for the third straight month. Prices were flat in September and the unemployment rate was steady at 9.9%.

Industrial production in the UK rose 0.2% in August, recovering only half of the dip the month before. New orders remained brisk, up for the fifth straight month. Construction was flat, after being upbeat earlier in the summer. Imports continued to outstrip exports, which remained dampened by the strength of sterling and waning demand. Consumers reined in spending as real wages and confidence sagged. The annual rate of inflation rose to a three-year high of 5.2% in September, driven by rising cost of electricity, gas and clothing. The unemployment rate hit a 15-year high of 8.1% as the government cut jobs as part of its austerity plan.

Japanese industrial production rose for the fifth consecutive month in August, almost restoring output to levels before the March tsunami. Production was fuelled by transport equipment, electronic parts and iron and steel. Shipments rose 0.3%, while inventories expanded 2.1%. Exports posted a gain for the second month in a row in September, up 2.4% from a year earlier, led by exports to China.

China's real GDP grew 9.1% in the third quarter from a year earlier, following rates of 9.5% in the second quarter and 9.7% in the first. Trade growth in September decelerated with export growth at 17.1% year-over-year (down from 24.5% in August), and import growth at 20.9% (down from 30.2% the month before). The annual rate of inflation eased slightly in September to 6.1%. Inflation has been mostly driven by food costs due to shortages of pork, vegetables and other basic items. The government has launched measures to increase supplies but this has been set back by summer storms.

Inflation in India rose to 9.7% in September year-over-year, fuelled by a sharp increase in food prices, prompting twelve interest rate hikes since March 2010.

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