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The Canadian Month at a Glance: August 6, 2010

Canada’s Economy Takes a Break

by Eric Thomson

From April to June, Canada added a massive 225,000 jobs, over half of all of the year-over-year gains since July 2009, which has nearly brought Canada’s employment to pre-recession levels. Now that growth is beginning to normalize, employment and gross domestic product growth paused in July. Canada’s economy shed 9,000 jobs, pushing the employment rate up slightly to 8.0 per cent. The 139,000 full-time jobs lost were largely offset by the 130,000 gained in part-time employment. As global and domestic demand for goods and natural resources heated up, all of the goods-producing industries increased their payroll, adding 42,000 jobs overall. Manufacturing was particularly strong, growing by 28,500 jobs. The services sector was the drag on the economy in July. In this sector, employment tumbled 51,000 jobs, mainly due to loses in the education sector, which shed 65,300 jobs. The falling number of home sales and a general cooling off of construction output also led to declining employment in the wholesale trade, business and support services, finance and insurance, and leasing and renting industries. All other service sector industries had gains including transportation and warehousing; public administration; professional, scientific, and technical services; accommodation and food services; health care; and information culture and recreation.

Although GDP growth in May was positive and stronger than in April, it came in at a relatively modest 0.1 per cent, or 1.4 per cent at an annualized rate. The April and May results indicate that GDP growth in the second quarter has been sluggish compared with Canada’s fiery growth of 6.1 per cent at an annualized rate in the first quarter of 2010. The slowdown in growth was expected and is in line with analysts’ expectations of more tepid growth through 2010 due to the downside risks associated with the European debt crisis and a still soft labour market in the United States.

The goods-producing industries, growing at 0.6 per cent, drove Canada’s real GDP growth in May. The rise came about due to increases in the agriculture and mining sectors. The mining, oil, and gas extraction industry was the top performer in May, posting growth of 3.4 per cent. The rise was driven by increasing global demand for resources and energy. However, real output in the construction industry slid by 1.6 per cent in May, due to a drop in housing starts. Manufacturing grew at a tepid 0.1 per cent; although on a positive note, output increased in many manufacturing subsectors, particularly motor vehicle manufacturing. It was a decline in machinery manufacturing output that limited growth for the entire industry.

Although many industries showed strong gains, declines in wholesale trade and construction output limited total real GDP growth to 0.1 per cent in May.

A struggling wholesale trade sector, caused by cooling construction activity, led to a 0.1 per cent decline in real GDP growth in the services sector. Despite the overall decline in the services sector, the 0.3 per cent gain in retail trade has to be viewed as positive economic news. Consumer spending, in part lifted by the recent rebound in employment, grew particularly strongly for clothing, accessories, and food and beverages. The gain would have been stronger had it not been for declining construction activity, which weakened demand for construction-related products. Real output in the finance, real estate, and business services sector eked out a 0.1 per cent gain in May. Although recovering demand for loans and an increase in stock trading volume boosted the sector’s performance, the lower level of activity in real estate, rental, and leasing offset virtually all of the gain. In particular, the fall in the number of real estate transactions drove down output by real estate agents and brokers by 11.3 per cent—the fifth decline in as many months. While wholesale trade and real estate activity drove down services sector output, many other service-producing industries in the Canadian economy posted output gains in May. Specifically, arts and recreation, transportation and warehousing, and accommodation and food industries posted decent gains. Output growth was flat in public administration, health-care, and other service industries.

The Bank of Canada raised its prime rate by 25 basis points on July 20, but is likely to keep rates near their current historic lows for the time being.

Concerned by potential risks attached to still relatively weak U.S. demand and by the European financial market turbulences, the Bank of Canada revised its Canadian economic outlook downward. Nonetheless, the Bank raised its prime rate from 0.5 to 0.75 per cent on July 20. According to the Bank of Canada, the uncertainty caused by the European debt crisis and the U.S. economy is being balanced by increasing consumer and business confidence worldwide and quickly rising employment in Canada. As a result of these balancing factors and the low risk of inflation, the consumer price index grew by only 1.0 per cent in June on a year-over-year basis, the Bank stated in its July Monetary Policy Report that, “any further reduction of monetary stimulus would have to be weighed carefully against domestic and global economic developments.”


Canadian Data Released to August 6, 2010

Key Indicators Feb. 10 Mar. 10 Apr. 10 May 10 Jun. 10 Jul. 10
Household Sector
Employment (000s) 16,945 16,963 17,072 17,097 17,190 17,181
Employment change (000s) 21 18 109 25 93 –9
Unemployment rate (per cent) 8.2 8.2 8.1 8.1 7.9 8.0
Wage settlements (total, %) 4.3 0.7 1.8 2.3    
Wage settlements (public, %) 4.8 0.2 1.8 1.6    
Wage settlements (private, %) 1.1 1.9 2.2 2.4    
Average weekly earnings (Y/Y, %) 2.55 2.55 3.31 3.70    
Labour income (Y/Y, %) 2.52 2.79        
Retail sales (%) 0.51 2.34 –2.16 –0.21    
Consumer Price Index (Y/Y, %) 1.58 1.40 1.84 1.39 0.96  
Motor vehicle sales (units, millions) 1.659 1.579 1.514 1.518    
Housing starts (units, 000s) 202.2 198.9 206.3 198.9 192.8  
Personal savings rate 2.8          
Consumer attitudes (2002 = 100) 88.3 92.5 84.8 89.3 83.6 80.0
Business Sector
Real GDP at basic prices (%) 0.23 0.63 –0.02 0.12    
Manufacturing shipments (%) –0.01 1.42 0.41 0.45    
Wholesale sales (%) –1.55 1.15 –0.21 –0.12    
Real merch. exports (%) 0.56 1.25 0.04 3.93    
Real merch. imports (%) 1.22 2.43 0.50 4.13    
Merch. trade balance (current $ millions) 7,838 –4,268 –3,956 –6,037    
Industrial product price index (Y/Y, %) –0.43 –1.10 –0.26 1.47 0.17  
Raw materials price index (Y/Y, %) 27.85 14.88 17.32 6.38 –0.13  
West Texas Int. crude (US$/barrel) 76.42 81.24 84.48 73.84 75.35 76.24
Business confidence (2002 = 100)   97.8     95.1  
Financial Sector
Chtd. bnk. personal loans ($ billions) 343.3 344.1 347.6 348.2 348.3  
Chtd. bnk. business loans ($ billions) 278.8 279.3 284.0 292.5 282.0  
Prime business rate 2.25 2.25 2.25 2.25 2.50 2.75
3-month T-bill rate 0.17 0.29 0.40 0.43 0.58 0.64
5-year mortgage rate 5.39 5.85 6.25 5.99 5.89 5.79
Exchange rate (US$/C$) 0.9462 0.9775 0.9950 0.9616 0.9635 0.9591
U.S.-Cda. 90-day T-bill rate spread 0.06 0.14 0.24 0.27 0.46 0.48
All data are seasonally adjusted to annual rates, excluding interest rates and prices.
Percentage changes (%) are month-to-month with the exception of those designated year-over-year (Y/Y).
Wage settlements represent average annual percentage increase in base rates over first year of contract.
Total settlements exclude COLA.
Sources: The Conference Board of Canada; Statistics Canada; CMHC Housing Time Series Database.

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Forecasts and research often involve numerous assumptions and data sources, and are subject to inherent risks and uncertainties. This information is not intended as specific investment, accounting, legal, or tax advice.
Sources: The Conference Board of Canada; Statistics Canada; CMHC Housing Time Series Database.

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Eric Thomson Eric Thomson
Economist
Forecasting and Analysis

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