Gross domestic product by income and by expenditure

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Second quarter 2007

The Canadian economy posted a second consecutive quarter of strong growth. Real gross domestic product (GDP) was up 0.8% in the second quarter of 2007, easing from the pace set in the first quarter (+1.0%). This strength was widespread as consumer and investment expenditures accelerated from the first quarter while businesses also continued to add to inventories. Despite a substantial appreciation of the Canadian dollar relative to its U.S. counterpart, exports also increased, outpacing first quarter gains.

Chart B.1 Final domestic demand strengthens to again outpace GDP

The economy grew at a 3.4% annualized rate in the second quarter, down slightly from the strong pace set in the first. This growth was similar to that of the U.S. economy (+4.0%) which gained substantial momentum in the second quarter.

Final domestic demand picked up steam in the second quarter of 2007 (+1.1%), outpacing GDP. Consumer spending, led by purchases of durable goods, was the largest contributor to growth. Residential construction continued to build on first quarter gains by expanding 1.3% in the second quarter. Business investment in machinery and equipment rebounded following a sharp drop in the first quarter.

Chart B.2 Contributions to percent change in GDP, second quarter 2007

Consumer spending picks up

Personal expenditure rose 1.2% in the second quarter, fuelled by gains in income. Consumers opened their pocket books to finance a surge in purchases of goods, notably motor vehicles, household appliances and recreational, sporting and camping equipment. Retail sales were particularly strong in May.

Chart B.3 Consumer durables lead personal spending higher

Energy products such as electricity and natural gas also registered increases due to cooler than normal temperatures in most regions of the country. Strength in spending on financial and legal services was led by strong increases in stock and bonds commissions and in mutual funds. One of the few expenditure items that did see a decline was restaurants and accommodation services.

Residential investment remains strong for a second consecutive quarter

Despite increases in mortgage rates, Canadians continued to invest in housing in the second quarter. Investment increased 1.3% following a strong 2.0% increase in the first quarter. The main source of strength continued to be the resale market as ownership transfer costs accounted for more than half of the increase. The resale market remained strong in Ontario and British Columbia. The value of new housing construction registered its second consecutive quarter of modest growth after sharp quarterly declines in the second half of 2006.

Chart B.4 Housing investment posts another strong quarter

Machinery and equipment spending rebounds while business non-residential spending slows

After faltering in the first quarter, business investment in machinery and equipment rebounded 1.5% in the second quarter. A sharp gain in the Canadian dollar relative to the US currency reduced the cost of imports from the U.S. Aggregate prices for machinery and equipment have dropped over 17% since 2002, largely as a result of the appreciation of the Canadian dollar.

Chart B.5 Investment in machinery and equipment rebounds

Business investment in non-residential structures was up 0.5% in the second quarter. After registering strong advances in 2006, engineering construction was flat in the second quarter with weak drilling activity recorded in the mining sector. Building investment, on the other hand, advanced 2.2%.

Overall business capital formation represented 19% of GDP (in nominal terms) in the second quarter. This ratio has been steadily increasing over the past few years and stood at 17% as recently as 2003.

Non-farm inventories continue to accumulate

Another $4.8 billion was added to inventories in the second quarter, following a $3.2 billion addition in the first. Inventory changes varied across products. Non-durable manufactured goods swelled in the second quarter, after two quarters of decline. Conversely, motor vehicle stocks in the retail sector were down sharply, reflecting the increased sales of these products. The non-farm stock-to-sales ratio edged down in the quarter.

Exports re-energize

After pausing in the first quarter, exports of goods and services advanced 0.7% in the second quarter. Energy products surged 3.3%. Manufactured goods registered mixed results as automotive products fell 2.7% while industrial goods and materials advanced 1.2%, recouping the losses of the first quarter.

Chart B.6 Export growth fuelled by energy

After peaking at 47% of GDP (in nominal terms) in the fourth quarter of 2000, exports have steadily declined as a share of GDP. In the second quarter of 2007, this share has fallen to 36% of GDP, its lowest level since 1994.

Spurred by the jump in the Canadian dollar and strong domestic demand, imports rose 1.6%, following a small decline in the first quarter. Business demand for machinery and equipment bounced back in the second quarter, as these assets accounted for over one third of the overall increase in imports. The first quarter of 2007 was the only quarter in the past sixteen in which machinery and equipment imports had not grown. Imports of consumer goods, which have grown every quarter since the second quarter of 2005, also rose substantially, reflecting the increases in personal expenditure. Automobile product imports dropped 1.4%, moderating these increases.

Prices remain relatively firm

The first two quarters of 2007 recorded a significant increase in prices. Economy-wide prices in Canada, as measured by the chain-price index for gross domestic product, rose 1.4% in the second quarter following an energy-related 1.6% increase in the first. However, energy had a moderating effect on prices in the second quarter as economy-wide prices excluding energy were up 1.7%, following a 1.0% increase in the first.

In the second quarter, residential and non-residential construction prices remained strong. Raw materials prices accelerated, while prices on consumer goods and services eased.

Export prices fell, led by declines in forestry and automotive products, despite continued growth in prices of industrial goods and materials. Prices of mining products, particularly uranium, grew dramatically this quarter. The jump in the Canadian dollar diminished some of these gains for Canadian exporters as many of these commodities are traded on a US dollar basis.

The chain price index for government expenditure rose sharply in the first (+1.6%) and second (+1.3%) quarters of 2007, reflecting in part both pay equity payments in Quebec and special pension contributions in Newfoundland and Labrador. Without these payments, gains would have been much lower for the first (+0.6%) and second quarters (+0.8%).

Labour income continues strong

After a robust first quarter (+2.2%), labour income (in nominal terms) remained strong in the second quarter, rising 1.8%. High employment rates provided a solid foundation for these gains. Pay equity payments in Quebec and special pension contributions in Newfoundland and Labrador contributed to the growth in both the first and second quarters. Removing the effect of these special payments from both quarters, labour income would have risen by 1.7% in the second quarter and 1.8% in the first.

Profits ease, unincorporated income remains firm

Corporate profits (in nominal terms) grew by 1.2% in the second quarter following a 2.2% increase in the first quarter. Wholesale and retail trade saw large gains boosted by personal spending. With mineral prices on the rise, profits were also strong in the mining sector. On the other hand, earnings of manufacturers, specifically motor vehicles and parts manufacturers and wood and paper producers, slipped. Chartered banks and property and casualty insurers also saw their profits decline in the second quarter.

Profits have reached 14% of GDP and have been trending upward since 2002, when they represented 12% of GDP. This trend in profits is consistent with the growth of business investment.

Income of non-farm unincorporated business remained firm (+1.6%). After two years of low earnings, farm operators have registered significant income increases in 2007. An upward movement in prices for many crops has been instrumental in these gains.

Government sector saving advances sharply

Government sector saving expanded sharply in the second quarter, largely as a result of increased income. Personal income taxes registered a 5.9% gain fuelled by sustained growth in labour income and a large increase in taxes paid on interest and capital gains. Taxes on products also advanced on the strength of retail sales. Despite the special payments in Quebec and Newfoundland and Labrador, government outlays moderated in the second quarter, advancing 0.9%, following a 1.6% increase in the first.

Data tables

• Table B.1 Gross domestic product, income-based, current prices and quarterly percentage change
• Table B.2 Gross domestic product, expenditure-based, current prices and quarterly percentage change
• Table B.3 Real gross domestic product, expenditure-based, quarterly percentage change
• Table B.4 Real gross domestic product, expenditure-based, annualized percentage change
• Table B.5 Contributions to percentage change in real gross domestic product, expenditure-based
• Table B.6 Gross domestic product, implicit chain price indexes

Information on methods and data quality available in the Integrated Meta Data Base: 1901 and 2602.