Section 1: Current economic conditions

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Overview ¹ 

Real GDP rose by 0.2% in September, capping a 0.9% rebound in the third quarter from a 0.1% dip in the second. However, employment fell in both October and November.

Exports led growth in the third quarter, despite little recovery in the energy and auto sectors from supply disruptions in the second quarter. Over the past four quarters, export volumes have risen 5.5%, which has partly offset the slowdown in domestic demand growth to 2.6%.

Domestic spending was slowed by the first drop in business investment since 2009. However, much of this decline reflected the unusually high level of spending on machinery in the second quarter when a large offshore drilling platform was imported. Outlays for machinery and equipment in the third quarter were still nearly 4% ahead of their first-quarter level. Inventory accumulation slowed in the third quarter, despite a replenishing of the supply chain for both autos and grains. Household demand rose steadily, led by housing.

Labour markets

Employment declined 0.1% in November after a 0.3% drop in October. Nevertheless, hours worked rose, partly reflecting a rebound in full-time jobs. With the labour force unchanged, the unemployment rate edged up to 7.4%.

Most of the drop in jobs occurred in the trade industry, particularly retail which is consistent with the loss of part-time jobs. Manufacturing, which accounted for most of the decline in October employment, shed another 7,000 jobs. However, construction more than recovered its losses from the month before, while natural resources continued to lead all industries in job growth.

Quebec posted the largest decrease in employment, as the bulk of the drop in trade occurred in this province. Despite more losses in manufacturing, jobs in Ontario increased due to a rebound in construction, and Ontario's unemployment rate fell below Quebec's. Alberta's growth continued to be driven by its booming natural resource sector, and its 5.0% unemployment rate was the lowest in the country. Despite gains in goods-producing industries, employment in BC fell for a second straight month due to declines in business services.

Leading indicators

The composite leading index rose 0.2% in October, after a gain of 0.1% in September. Five of the ten components increased in October, the same as the month before, while four declined, one fewer than in September. Household spending remained the strongest sector of the economy, while manufacturing remained the weakest.

The housing index advanced 1.6%, as the continued advance in housing starts since the spring was reinforced by a rebound in existing home sales in the last two months. Durable goods sales were mixed, with a dip in furniture and appliance sales offset by an increase in demand for other durable goods. Almost all of the growth in services employment was in the personal sector, as jobs in the business sector continued to post only modest gains.

New orders drove the weakness in manufacturing, with a 5.5% decline led by lower demand for aircraft. The ratio of shipments to inventories edged down for the fifth straight month, as a rebound in sales over the last two months was outweighed by higher inventories of finished products. This partly reflects Japanese-owned auto plants replenishing their inventories after supplies were disrupted by a parts shortage in the spring and summer. The average workweek at manufacturing plants was unchanged, after four consecutive declines.

Output

Real GDP expanded 0.2% in September, its fourth straight increase after a brief dip in May. Goods-producing industries continued to lead growth, as services posted only 0.1% gains in each of the last two months.

Energy output continued to expand rapidly, having more than made up for its supply disruptions in the spring. Petroleum refining led September's advance, as a refinery resumed production after closing for both maintenance and a 20% increase in its capacity. Crude oil and natural gas production also rose for the fourth straight month, after five consecutive declines to start the year.

Outside of energy, manufacturing was buoyed by increases in most capital goods industries. This more than offset the first drop in auto assemblies since the spring. Construction rose 0.2%, as residential building posted its fifth increase in row. Steady gains in engineering work offset a further drop in non-residential building.

The small gain in services was largely confined to the goods-handling industries, notably rail transport. Consumer services and real estate also advanced. Finance posted the largest drop, as trading in markets subsided after the sell-off in August. Information services were pulled down by a fourth straight loss for publishing. Most other services, which mostly serve businesses and government, were little changed.

Household demand

Household spending continued to make a substantial contribution to growth in the third quarter, with personal expenditure and housing each accounting for 0.2 percentage points of growth in total GDP. Most of this growth was financed by increased borrowing, as disposable incomes were flat after the boost in the second quarter from government checks to compensate for the HST expired in Ontario.

The volume of retail sales increased 0.6% in September, leaving sales up 0.4% for the second straight quarter. Growth remained concentrated in non-automotive durable goods and non-durable goods. Auto purchases remained lacklustre for the third straight month, but picked up in October.

Furniture and appliances led the gain in other durable goods, a reflection of the recent strengthening in the housing market. Demand for computers and office machinery also grew strongly for a second straight quarter, after a rare decline in the first. Consumption of non-durable goods such as food and energy was lifted by a sharp deceleration in price increases, from 1.3% in the second quarter to 0.4% in the third.

Existing home sales increased 1.2% in October, reinforcing their 2.7% gain in September. Housing starts were essentially unchanged in October, holding on to almost all of their 9% increase in September. At 208,000 units at annual rates, starts exceeded the 200,000 unit mark for only the third time this year. However, all of the recent gains in starts have been for multiple units, as ground-breaking on single-family dwellings slowed to its slowest pace in over a year.

International Trade

The current account deficit narrowed to $12.1 billion in the third quarter. Almost all of the reduction reflected higher exports, notably for industrial goods and machinery and equipment. Exports of energy and automotive goods remained weak, after supply disruptions lowered exports in the second quarter. All of the return to a surplus in trade in goods originated in trade with countries outside of the US, notably emerging nations.

Exports increased 4.2% in September, a third straight advance that lifted exports to their highest level of the recovery. Growth was driven by further gains in demand from emerging nations and a rebound in shipments to the US. These outweighed a drop in exports to the EU, which account for 9.6% of Canada's exports.

Energy exports rose $1.0 billion in September, after four months of decline or no change. Some of the increase reflects a major refinery coming back on-line. Industrial goods posted a fifth straight increase, with strong demand for both metals and fertilizer. Agriculture products advanced 9% after no net change between April and August, as the arrival of the grain harvest helped replenish the supply chain. Machinery and equipment was the only sector where exports fell, due to a decline in its volatile aircraft component.

Imports dipped 0.3% in September after a 1.9% gain in August. Imports of manufactured goods retreated, while resource products advanced. Machinery and equipment gave back all of their gains in August, led by a drop in aircraft. Auto imports fell due to vehicles, as parts imports rose to a 6-month high. The re-opening of a refinery in Eastern Canada led to higher imports of crude oil, while precious metals led the increase in imports of industrial goods.

Prices

The implicit price index for GDP rose 0.3% in the third quarter, its smallest advance in a year. After three consecutive rapid increases, export prices levelled off in response to lower commodity prices. The drop in commodity prices did slow inflation for consumers, especially for energy products.

The consumer price index rose 0.3% in October, after a 0.4% increase in September. This left prices 2.9% above their level of a year-ago. Core prices matched the monthly gain in the total CPI, and were 2.3% above their level in October 2010.

Energy prices led the increase in prices in October, notably gasoline nation-wide as well as electricity prices in Alberta. Energy prices had fallen in the third quarter, giving motorists a temporary respite. Prices of durable goods also rose notably, led by increases for autos for the second straight month. A 0.1% drop in services prices was led by the lower cost of shelter.

Commodity prices resumed their downward trend in November, after a brief upturn in October. Metals accounted for most of the drop. The drop in metals was led by nickel, while aluminum fell to a 15-month low. Energy prices were buoyed by an increase for crude oil.

Financial markets

A late rally left the Toronto stock market flat in November, after a 5% gain in October. Energy and metals stocks held on to most of their gain in October, while financials retreated. After returning to parity with the US dollar in October, the exchange rate slipped to 98 cents (US) by the end of November.

Business fund-raising stalled in October, after steady growth since December 2009. Short-term credit fell and new equity issues slumped after the summer sell-off in stocks, but these were offset by higher bond issues. Household credit expanded steadily in September.

Regional economies

The prairies led the nation in the growth of housing starts, retail sales and manufacturing shipments. Housing starts jumped 28% in October to an annual rate of 41,400, their highest level of the recovery. Retail sales increased 1.5% in September, capping a third straight quarterly gain. Manufacturing sales grew 4.9% in September, led by higher petroleum receipts in Alberta.

Ontario also posted gains across the board. Housing starts rose 12%, continuing their gradual upward trend so far this year. Retail sales expanded 1% in September, helping to lift quarterly sales 0.7% after a weak first half of the year. Manufacturing sales also advanced 1%, their third straight monthly gain as this sector rebounded 6% in the third quarter from a 3% drop in the second. Autos led the recovery.

Manufacturing continued to lead Quebec's growth, with sales up for a third straight month in September. Third-quarter sales rose 1.9% after a 1.1% drop in the second, with a wide range of capital goods leading the way. Retail sales also rebounded in the third quarter from a two consecutive quarterly declines, capped by a 0.7% increase in September. Housing starts fell 29% in October, equalling the low for the year set in August.

There was little change in the main economic indicators for BC. Retail sales edged up 0.2% in September and were flat overall in the third quarter. Manufacturing sales also were little changed in September, but following solid gains over the summer, this left third-quarter sales up 2%. Housing starts rose 2% in October, their first month without a double-digit percent change since February.

International economies

In the United States, the housing market posted signs of recovery. Existing home sales rose 1.4% in October, and have hovered around 5.0 million (at annual rates) over the last three months versus 4.8 million over the summer. Housing starts remained above 600,000 units (at annual rates) in two straight months for the first time in over a year. Residential building permits were up 11% due to growth in both single and multiple units, pointing to further gains.

The pick-up in housing also was reflected in retail sales, where a third straight increase in building materials helped lift total sales by 0.5% in October. Auto sales edged up to their highest pace since February, helped by price cuts in September and October. Along with a 2% drop in energy prices, this helped lower the level of the CPI by 0.1% in October.

Industrial production rebounded 0.7% in October from a dip in September. Manufacturers drove the advance, up 0.5%. Auto assemblies rose to an annual rate of 9.3 million, marking a complete recovery to their February level before the disruption of the supply of parts from Japan. Business equipment also expanded, although new orders for core capital goods fell nearly 2%.

The labour market made modest gains. Initial claims for unemployment fell steadily in November. The number of job openings in September hit its highest level since 2008, and private sector hiring also was at its highest since before the recession.

The euro-zone expanded in the third quarter of the year, with real GDP growth matching its second quarter pace of 0.2%, boosted by Germany and France. However, industrial production fell in September as every major sector declined, led by capital and durable consumer goods. New orders retreated for the third time in four months, falling 6.4% as demand for capital goods slumped, while construction contracted further. The volume of retail trade fell after three monthly gains, while inflation was stable at 3% in October.

Real GDP in Germany grew 0.5% in the third quarter, following a 0.3% rise in the second, buoyed by domestic demand. Personal expenditure rebounded, while business investment gained 2.9%. Industrial production fell 2.9% in September, its steepest fall in two and a half years. New orders contracted for the third straight month due to declining demand for capital goods. Construction fell for the fifth time in the past six months, after strong gains to start the year. Exports rose slightly, on the heels of a large increase in August.

France recovered in the third quarter, with real GDP growing 0.4% after a 0.1% decline in the second. Industrial production fell 1.9% in September, giving back most of the gains in the previous two months, as manufacturing output declined. New orders were down 6.2%, continuing their recent see-saw pattern. After some tepid gains, construction also retreated. Consumers reined in spending as summer ended.

Real GDP in the UK grew 0.5% in the third quarter, following gains of 0.4% and 0.1% in the first and second quarters (the latter slowdown was mainly due to the extra holiday for the Royal Wedding). Industrial production was flat in September, while new orders fell for the second consecutive month, dampened by weak export demand. Construction contracted again, following a brief respite in August. Consumer spending picked up, boosted by retailer discounts. The unemployment rate hit a 15-year high of 8.3% in September.

Japan's real GDP grew 1.5% in the third quarter, as the economy returned to its level before the March tsunami. Personal expenditure and exports led growth, while public investment fell 2.8%. State spending on reconstruction is expected to accelerate as the government approved a third supplementary budget of $160 billion in November, following two earlier packages worth $80 billion. Exports fell for the first time in three months in October, eroded by a strong yen and flooding in Thailand that led to supply shortages for manufacturers.

China's economy grew 9.1% in the third quarter, down slightly from 9.5% in the previous quarter. Exports fell in October to their slowest pace since March 2009. Government curbs on bank lending helped slow the rise in housing costs but dampened the real estate and construction industries. The annual rate of inflation eased in October to 5.5% from 6.1% in September.

Real GDP in Russia rose 4.8% in the third quarter from a year earlier, its fastest pace in a year, led by investment and consumer spending. Unemployment fell to a three-year low in September.

Brazil's economy grew 0.3% in the third quarter, its slowest pace in the past 10 quarters, as the government curbed bank lending and raised interest rates.

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