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In the last five years, ours has become a different economy. Starting in 2003, rising oil, metal and other commodity prices, among other events, started a transformation. By 2007, finance and insurance, retail and wholesale trade as well as construction were the main sectors contributing to growth. Western Canada had displaced Central Canada as the driver of national economic growth, the Canadian dollar had reached par with the U.S. greenback, the manufacturing sector was in flux, and consumer spending was strong.

Growth slowed gradually during 2007 because of flagging U.S. demand. However, the real gross domestic product (GDP), measured year to year, was 2.7% greater in 2007 than in 2006. Annual GDP rose from $1.0 trillion in 2003 to $1.2 trillion in 2007, an increase of 12.1%.

A measure of the value of all goods and services produced, GDP gauges an economy’s size and performance. Canada’s GDP, which is measured monthly and quarterly as well as annually, recorded 18 consecutive quarter-to-quarter increases after the second quarter of 2003, when the SARS crisis occurred.

The country’s GDP growth has been broad-based: since 2003 all but a few industries have seen output rise. The services-producing sector, which accounts for over two-thirds of Canada’s GDP, has been particularly strong. Services grew 14% from 2003 to 2007, driven mainly by wholesale trade, with 23% growth in GDP; retail trade, 20%; and finance, insurance and real estate, 16%.

The goods-producing sector grew more slowly, about 8%, from 2003 to 2007. After increasing 3% in 2004, growth in goods-producing industries slowed each year to 0.8% in 2007; some industries posted year- over-year declines. After spectacular growth in 2003 and 2004, the agriculture, forestry, fishing and hunting industry shrank in 2006 and 2007. Manufacturing, struggling with stiff competition and the higher loonie, has not seen output grow since 2005.

Construction has been the fastest-growing industry over the last five years. From 2003 to 2007, it expanded output 29%, from $59.9 billion to $76.9 billion. The hot construction sector has been buoyed by Western Canada’s growing economy. However, in 2007, both non-residential and residential construction were slowing.

Western Canada is leading

Rising commodity prices have stoked expansion in primary industries with a strong presence in Western Canada, such as agriculture, mining and oil and gas extraction. GDP growth was noticeably stronger among western provinces, except for a decline in Saskatchewan in 2006. Mining caused strong GDP growth in Newfoundland and Labrador (9.1%), the Northwest Territories (13.1%), and Nunavut (13.0%).

Alberta’s economy grew by 3.3% in 2007, half the 2006 rate, but still outpaced all the provinces and territories from 2004 to 2006. Although oil and gas exploration was curtailed in 2006 and 2007, their extraction increased. Canadians kept flocking to Alberta in 2007, drawn by its low unemployment rate, and this spurred residential and non-residential investment.

Although growth slowed to 3.1% in British Columbia, 2007 was the sixth year in a row that the province’s growth rate exceeded the national average. A rising population, construction for the 2010 Olympic Games and gains in financial services, wholesale trade and retail trade have been the major drivers of growth.

Ontario, at 2.1%, and Quebec, at 2.4%, grew slower than the national average, as they have each year since 2003. The rising loonie and a slowdown in the U.S. economy hampered both provinces’ export-oriented manufacturing industries in 2007.

Although Newfoundland and Labrador led the provinces in GDP growth in 2007, the rest of Atlantic Canada posted growth that lagged behind the national average.

More income, more spending, more borrowing

Wallets and bank accounts have expanded with the economy. Income Canadians earn—from wages, investments, government benefits and their unincorporated businesses—increased 39% from 2000 to 2007. Individual Canadians earned a total $1.17 trillion in 2007.

Canadians have been quicker to spend than to save: while expenditures, including taxes, climbed 43% from 2000 to 2007, savings dropped 20%. In 2007, real consumer spending rose 4.5%, its largest gain since 1997.

Companies are benefitting from a strong economy. Since 2002, consistently rising operating profits have enabled businesses to put money back into their operations. Businesses raised nearly $75 billion in 2007 by borrowing from banks and selling bonds and shares to invest in plants, machinery and equipment, and engineering projects.

But businesses could not keep up with individual Canadians. Collectively, Canadians have been borrowing more each year since 2003—just under $120 billion in 2007. About two-thirds of these funds were for mortgages; most of the other third was borrowed via consumer credit programs such as credit cards.

Investing in Canada, investing in the world

The expanding economy, particularly the resource sector, ensured that Canada continued to be attractive for foreign direct investors. Foreign corporate inflows to Canada gained 14.4% in 2007, one of the largest rises in the past 22 years. It was led mainly by acquisitions of Canadian firms.

For a second straight year, the growing foreign corporate investment in Canada was led by investors from countries besides the United States, traditionally the biggest foreign direct investor in Canadian firms. In 2007, the biggest growth came from the United Kingdom, the Netherlands, France, Switzerland and Germany.

Foreign direct investment in Canada reached the half-trillion-dollar mark at the end of 2007. The United States still accounted for nearly 58% of foreign direct investment in Canada, with holdings of $288.6 billion in 2007. Foreign direct investment was concentrated in the manufacturing and oil and gas industries.

Canadian direct investors are similarly active overseas, although the amount they held overseas in 2007 fell by $15.4 billion from 2006. This was only the second annual decline since 1986. Both times, the rise in the value of the Canadian dollar played a significant role.

Financial, insurance and management industries accounted for nearly half of the money Canadian direct investors held overseas in 2007: manufacturing, mining, and oil and gas firms absorbed most of the rest. About 44% of Canada’s $514.5 billion in direct investment abroad was in American firms.