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Economy stumbles after outsized gain
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Real GDP... |
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Economy stumbles after outsized gain |
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Labour markets... |
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Rise in employment narowly based in the public sector; private sector jobs drop |
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Retail sales... |
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Retail sales decline |
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Housing starts... |
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Housing starts pull back a bit |
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Merchandise trade... |
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Net exports remain a significant drag on economic growth |
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Consumer price index... |
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IInflation sharply lower as energy prices tumble |
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Overview... |
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Economy at a glance table |
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Real GDP...
Economy stumbles after outsized gain
Latest month available: August
- Canada's economy contracted in August with real GDP falling by 0.3% following July's much stronger-than-expected 0.7% surge.
- Both goods and services sector output contracted with the goods sector slumping by 0.6% on the back of lower output from the mining and oil and gas industries as well as softer manufacturing and construction activity.
- The decline in output in the energy sector followed an outsized 2.7% increase in July. In the services sector, wholesale trade recorded a 3.1% drop (following a 1.9% surge in July), with transportation and warehousing and health care also posting notable declines. Retail activity was flat in the month and finance, insurance and real estate recorded marginal 0.1% growth.
- The decline in GDP in August dented July's strong gain and makes it likely that the economy expanded at a 1.5% annual rate in the third quarter, somewhat slower than our earlier forecast for a 2.5% increase. Even at this slower pace, we still think it is likely that the third quarter will mark the high-water mark for growth this year with financial market stress through the autumn keeping the cost of capital high and the U.S. economy likely having slipped into recession.
Labour markets...
Rise in employment narowly based in the public sector; private sector jobs drop
Latest month available: October
- Employment in Canada rose 9,500 in October after the 107,000 surge in September. However, the modest increase in employment did not prevent the unemployment rate from inching up to 6.2% from 6.1% in September. The key wage measure in the report, average hourly wages for permanent workers, moderated only slightly, with the year-over-year rate dropping to 4.2% from 4.3% in September.
- October’s strength was narrowly based in the public sector. A 40,000 rise in the public administration component as a result of hiring for the October 14 federal election offset broad-based weakness within the private sector (private sector jobs fell by 20,000).
- Goods-producing jobs fell 27,000, led by construction and manufacturing, which each lost 9,000 jobs. Within the service-producing component, the weakness was led by a 27,000 drop in employment in accommodation and food services.
- Weakness in private sector employment is more consistent with the pressures confronting the Canadian economy, including the high costs of capital that has already likely sent the U.S. economy into recession. These factors are expected to start having a more dominant impact on Canada’s labour market data going forward.
Retail sales...
Retail sales decline
Latest month available: August
- Retail sales fell 0.3% in August in both nominal and real terms following gains of 0.6% and 0.1% in June and July, respectively. Sales excluding the volatile auto sales component for both new and used vehicles were also down 0.3%.
- The greater-than-expected weakness in ex auto retail sales was likely the result of a pronounced 3.7% drop in receipts at gasoline stations that offset strong increases in a number of other components. Sales rose at general merchandise stores (0.8%), miscellaneous retailers (0.6%, led by sales at sporting goods stores rising 1%) and building and outdoor home supply stores (0.5%).
- The drop in August retail sales follows even more sizeable declines in the volume of wholesale trade and manufacturing for August, suggesting a likely 0.5% drop in GDP in the month following an outsized 0.7% jump in July.
- The jump in output in July assures that overall third-quarter GDP growth will remain positive, although an increase closer to 1.5% seems more likely compared to our earlier projection of 2.5%. This would represent a modest strengthening trend compared to a 0.8% decline in the first quarter and a minimal 0.3% increase in the second.
- However, with the U.S. economy slipping into a recession that is expected to persist until early next year, the third quarter may represent a near-term peak in economic growth in Canada. Our forecast assumes that even though commodity prices will move lower in the face of declining U.S. growth they will still remain at historically high levels assuming that demand from emerging economies, although weakening, does not collapse.
Housing starts...
Housing starts pull back a bit
Latest month available: October
- Housing starts resumed a downward trend in October, dropping 3.1% in the month to an annualized 211,800. So far this year, housing starts have averaged 220,700, which is down a modest 4.7% from the same period last year. This is in stark contrast to the United States where starts are down 29.8% in the first nine months of this year compared to year-ago levels.
- The decline in overall starts in October largely reflected a 6% drop in the urban multiples component to an annualized 115,300. Starts of urban single-detached units fell as well, but by a more modest 1.1% to 69,300. Some offset was provided by starts in rural areas, which rose 5% to 27,200 units.
- Declines were generally recorded in Ontario and the West with some offset coming from Quebec (up 4.6%) and the Atlantic region (up 1%). Starts in Ontario fell 2.5% and by 7.2% and 17.5% in the Prairie region and British Columbia, respectively. Earlier price increases out West are starting to have a dampening impact on activity. The October level of starts in British Columbia of 27,900 represents the lowest level since May 2006.
- The resumption of declining housing starts is not surprising given deteriorating housing affordability that commenced last year, although the pace of decline still remains surprisingly muted. However, the current tight credit conditions are expected to put further downward pressure on new construction through next year, with starts expected to average close to 180,000 in 2009.
- The risks to this area of domestic spending are largely on the downside in the face of financial market turmoil and a from a knock-on effect of more pronounced weakening in the U.S. economy.
Merchandise trade...
Net exports remain a significant drag on economic growth
Latest month available: September
- The merchandise trade surplus came in at C$4.5 billion in September and August's surplus was revised down to $5.6 billion from an initially estimated $5.8 billion. The narrowing in the September surplus reflected a modest 1% drop in exports while imports rose 1.9%.
- The rise in imports was led by a 10.3% surge in the energy component, a partial reversal of the severe drop registered in August. This reflected a pick-up in the volume of crude petroleum imports as prices declined in the month. A significant increase was also reported in the imports of passenger autos. Offsetting some of the strength in the energy and transportation components was a decline in imports of industrial goods and materials.
- The decline in exports reflected a decline in prices — volumes were flat on the month. The weakness was concentrated in exports of energy products, automotive products and industrial goods. Exports of industrial goods fell 1.9%, with export prices for these products posting the first decline this year. The decline in auto-related exports conversely reflected lower volumes as prices continued to creep higher.
- On a constant dollar basis, imports edged up 0.6% in September while exports were flat. As a result, the net export deficit on a volumes basis widened marginally to $5.8 billion from $5.6 billion in August after the huge $7.6 billion deficit reported in July.
- Net exports remained a significant drag on economic growth in the third quarter. The strong Canadian dollar and soft U.S. growth saw constant-dollar exports contract at a 4.4% annual rate while imports increased at a 1.1% annual rate. Data on the domestic economy has also taken a weaker tone in recent weeks. On balance, even though we are forecasting a pop in real GDP (with a 1.5% annual rate increase expected) in the third quarter, the data are lining up for a mild contraction in the fourth quarter.
Consumer price index...
Inflation sharply lower as energy prices tumble
Latest month available: October
- Consumer prices fell sharply by 1% in October with the year-over-year rate slipping to 2.6% from 3.4% in September, the largest monthly decline since June 1959. The Bank of Canada’s core measure, which eliminates the impact of eight volatile series plus indirect taxes, dipped 0.2% in October. The year-over-year core rate was 1.7%, unchanged from September.
- The sharp drop in the CPI index reflected lower prices for gasoline, which plunged 13.4% from September, traveller accommodation (-7%) and natural gas (-6.1%). Changes in property taxes, which are reflected in the CPI once a year, rose 3.2%.
- Gas prices were up 13.3% from a year ago, a sharp slowing from September's 26.5% pace. Food prices were 6.1% higher than in October 2007, a pick-up from September's 5.6%. Mortgage interest costs were 7.2% higher. However, there were several components showing prices declines during the past 12 months, with passenger vehicle prices off 9%, women's clothing prices falling 5.8%, and computer (-12%) and video equipment (-11.5%) also down.
- Going forward, weak growth caused by continued tight credit conditions and restrained demand from the United States will see the amount of slack in Canada grow, which will put additional downward pressure on prices. With price pressures ebbing, the Bank of Canada, like other central banks, will continue to focus on the downside risks to economic growth.
Economy at a glance
| % change from |
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Lastest month |
Previous month |
Year ago |
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3-month trend |
| Real GDP |
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Aug. |
-0.3 |
0.6 |
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Down |
| Industrial production |
Aug. |
-0.8 |
-3.3 |
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Up |
| Employment |
Oct. |
0.6 |
1.3 |
|
Down |
| Unemployment rate (%)* |
Oct. |
6.2 |
6.2 |
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Flat |
| Manufacturing |
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| Production |
Aug. |
-1.2 |
-4.0 |
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Up |
| Employment |
Oct. |
-0.4 |
-2.3 |
|
Up |
| Shipments |
Sept. |
0.2 |
4.9 |
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Up |
| New orders |
Sept. |
-3.6 |
6.1 |
|
Up |
| Inventories |
Sept. |
-0.3 |
3.1 |
|
Up |
| Retail sales |
Aug. |
-0.3 |
4.1 |
|
Up |
| Car sales |
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Sept. |
2.5 |
0.7 |
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Down |
| Housing starts (000s)* |
Oct. |
211.8 |
226.0 |
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Down |
| Exports |
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Sept. |
-1.0 |
13.4 |
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Up |
| Imports |
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Sept. |
1.9 |
9.3 |
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Up |
| Trade balance ($billlions)* |
Sept. |
4.5 |
2.7 |
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Down |
| Consumer prices |
Oct. |
-1.0 |
2.6 |
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Down |
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| * Levels are shown for the latest period and the same period a year earlier. |
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