Monthly economic indicators[737]

December 2004 The "Monthly Economic Indicators" (MEI) provides a variety of economic analysis and data in a convenient format. The MEI does not interpret or evaluate government policies, and every attempt is made to present factual information in an informed and balanced manner consistent with generally accepted economic principles. It is available to all employees of Industry Canada in either hard or electronic copy, or can be accessed via the Internet at http://strategis.ic.gc.ca/epic/internet/ineas-aes.nsf/en/h_ra01898e.html MONTHLY ECONOMIC INDICATORS December 2004 HIGHLIGHTS Real Gross Domestic Product (GDP) rose at a robust pace (3.2%) in the third quarter, despite no growth in September. Growth was fuelled by domestic demand as exports declined. Employment was flat in November, while the unemployment rate rose by 0.2 percentage point to 7.3%. Manufacturing employment fell further, bringing total job losses to 52,000 in that sector since July. Merchandise exports declined further in October while imports rose, resulting in a further narrowing of the trade surplus. Overall, available indicators point to slower growth in the fourth quarter. In the United States (U.S.), real GDP growth for the third quarter was revised up to 3.9% and recent indicators point to continued solid growth in the fourth quarter. The Bank of Canada kept its overnight rate at 2.5% on December 7. The U.S. Federal Reserve, however, raised its fed funds rate by a further 25 basis points to 2.25% on December 14. The Canadian dollar has retreated in recent days, falling to just about US¢81 cents on December 15 from a 12-year high of about US¢85 cents in late November. Key Monthly Economic Indicators % Change since last last month year Real GDP ($97 B) Goods Services Composite Index Employment (000's) Full-time Part-time Unemployment* (%) Youth* Adult* 1,052.6 331.0 722.6 200.2 16,115 13,134 2,981 7.3 13.2 6.1 0.0 -0.1 0.0 0.2 0.0 -0.2 1.0 7.1 13.4 5.9 1.8 0.2 5.9 5,043 -1.1 0.9 -0.3 3.4 3.8 3.1 7.8 1.5 2.0 -0.6 7.5 13.3 6.4 Sep. Sep. Sep. Oct. Nov. Nov. Nov. Nov. Nov. Nov. CPI inflation* 2.3 Retail Sales ($M) 29,137 Housing Starts (000's)** 238.2 Trade Balance* ($M) Exports Imports M&E 4,351 35,625 31,274 8,770 1.6 Oct. 4.7 Sep. 9.9 Nov. 4,854 10.1 13.7 13.0 Oct. Oct. Oct. Oct. November December 15 *** 2004 3-mth Corp. paper (%)* Long bond yield (%)* Canadian dollar (US¢)* 2.55 4.22 81.65 2.74 4.44 84.32 2003 2.73 4.79 76.98 *Data in levels only – % change not reported **Canada Mortgage and Housing Corporation ***Bank of Canada's Weekly Financial Statistics All other data from Statistics Canada The "Monthly Economic Indicators" (MEI) provides a variety of economic analysis and data in a convenient format. The MEI does not interpret or evaluate government policies, and every attempt is made to present factual information in an informed and balanced manner consistent with generally accepted economic principles. It is available to all employees of Industry Canada in either hard or electronic copy, or can be accessed via the Internet at http://strategis.ic.gc.ca/epic/internet/ineas-aes.nsf/en/h_ra01898e.html Industry Canada Industrie Canada Canada MONTHLY ECONOMIC INDICATORS December 2004 CONTENTS The Economy National Economic and Financial Accounts .......................................................... 3 Capacity Utilization Rate ..................................................................................... 4 International Accounts ....................................................................................... 5 Productivity & Competitiveness ............................................................................. 6 Real GDP by Industry ............................................................................................ 7 Consumer Spending and Attitudes ....................................................................... 8 Business Investment in Plant and Equipment ....................................................... 9 Housing ................................................................................................................. 10 Trade and Competitiveness ................................................................................... 11 Labour Market Trends Employment and Unemployment ......................................................................... 12 Industry Overview ................................................................................................. 13 Provincial Overview .............................................................................................. 14 Prices and Financial Markets Consumer and Commodity Prices ......................................................................... 15 Short-term and Long-term Interest Rates ............................................................. 16 Exchange Rates and Stock Prices ....................................................................... 17 Page The United States Economy U.S. Economic Trends ........................................................................................... 18 Coming Up... Key Future Data Releases/Planned Events .............................................................. 19 This issue uses data available as of December 15, 2004. It has been prepared by Éric Chalifoux, Stéphane Crépeau, Kevin Koch, Joseph Macaluso, Sue Moore, François Poitras and François Rimbaud of the Micro-Economic Analysis Directorate, under the direction of Hossein Rostami. Translation has been provided by Lucie Larocque and Sue Hopf is responsible for production support. Sources of information primarily include Statistics Canada, as well as the Bank of Canada, Canada Mortgage and Housing Corporation, Canadian Real Estate Association, Conference Board of Canada, U.S. Bureau of Economic Analysis, and U.S. Bureau of Labor Statistics. Unless cited otherwise, data contained in graphs and tables are derived from Statistics Canada. Please address comments to Hossein Rostami at (613) 995-8452 or through the Internet at rostami.hossein@ic.gc.ca. ISSN 1206-2588 THE ECONOMY National Economic and Financial Accounts A decline in exports led to a moderation in growth in the third quarter... Real gross domestic product (GDP) increased 3.2% (all rates annualized) in the third quarter, after increasing 3.9% in the previous quarter. Consumer spending and business investment in machinery and equipment both picked up in the third quarter, advancing 3.0% and 8.2%, respectively. Business inventory accumulation surged from $2.3 billion (chained 1997 dollars) in the second quarter to $16.9 billion in the third quarter. The build-up was widespread across manufacturers, wholesalers and retailers, especially related to motor vehicles. Net exports shaved about 5.0 percentage points from GDP growth, as exports fell 2.0% and imports rose 13.0%. In the second quarter, exports grew 18.0%. Statistics Canada revised down real GDP growth in the first two quarters of 2004. This, together with recent signs of an economic slowdown, led Consensus Forecasts (December issue) to revise down the growth outlook for 2004 and 2005 by 0.3 percentage point to 2.7% and 3.0%, respectively. 98 99 00 01 02 03 Real GDP Growth % Change, SAAR 5.5 5.2 4.1 3.4 1.8 2.0 1.4 3.3 2.7 3.9 3.2 -0.7 2 3 03 4 1 2 04 3 Growth in Personal Income % Change, SAAR 7.3 5.4 4.6 4.6 4.1 2.7 3.0 1.4 3.2 2.7 4.9 3.5 ...while profits continued to rise at a healthy pace Pre-tax corporate profits rose 8.5% following a 33.0% increase in the second quarter. At 13.9% of GDP, corporate profits are well above the historical average of about 10%. Personal disposable income rose 2.0% in the third quarter, down from 5.0% in the second, reflecting an increase in taxes (Ontario health premiums). The savings rate fell to nearly zero, the lowest on record, from a downwardly revised 0.5% in the third quarter. 98 99 00 01 02 03 2 3 03 4 1 2 04 3 Personal Debt and Savings Rate 110 105 100 95 90 % % Ratio of household debt to income (Left) 14 12 10 8 6 4 Contributions to Quarterly Real GDP Growth* (Annualized) 10 85 80 75 1991 1993 Personal saving rate (Right) 1995 1997 1999 2001 2003 2 0 % Change (annualized) 5 0 Corporate Profits 150 % Corporate Profits before Taxes (Left) Ratio of Corporate Profits to GDP (Right) % 16 14 -5 100 -10 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 2000 2001 2002 2003 2004 50 0 -50 1991 1993 1995 1997 1999 2001 2003 12 10 8 6 4 2 0 Consumption Net Exports Investment GDP Growth Inventory * For the purpose of simplification and given their relative stability over time, contributions from government expenditures are not shown. MEI December 2004 3 THE ECONOMY Capacity Utilization Rate Strong manufacturing output pushed its capacity utilization to a record high in the third quarter... The capacity utilization rate for non-farm goods-producing industries recorded its fifth consecutive quarterly increase in the third quarter. Industries operated at 85.7% of their production capacity, 1.5 points below the peak reached in the first quarter of 1988. The increase was mainly driven by the manufacturing sector, which posted an annualized increase of 8.4% in output. Capacity utilization in the manufacturing sector stood at 88.5% in the third quarter of 2004, up 6.9 percentage points from a year ago and a record high since the availability of data in 1987. Over the past year, capacity utilization rates have increased in 16 out of 21 industries, with double-digit increases in chemical, fabricated metal products, machinery, and computer and electronic products. Moreover, 10 industries were operating at more than 90% of their capacity and well above their 10-year average. Benefiting from strong housing demand in Canada and the U.S., the forestry and logging industry was using 98.5% of its capacity in the third quarter, an increase of 7.9 points from the second quarter and a record level. Furthermore, the forestry and logging sector was operating 15.2 points above its 10-year average. ...but there are signs of weakening in the fourth quarter The appreciation of the Canadian dollar vis-à-vis the greenback, high energy prices and slowing foreign demand are depressing manufacturing activity in the fourth quarter. Manufacturing shipments declined for the second month in a row in October (1.3%) while fewer new orders were received and finished product inventories continued to increase. In addition, the manufacturing sector lost 18,000 jobs in November, bringing total job losses to 52,000 since July. Industrial Capacity Utilization Rate 100 % Wood products Forestry Capacity Utilization: Non-farm Goods-producing Industries Level (%) Change (% points) 10-year 2004Q3 Average Q/Q Y/Y 90 80 Total Industrial Forestry & logging Mining & oil & gas extraction Electric power * Construction Total Manufacturing Food Beverage & tobacco products Textile mills Textile product mills Clothing Leather & allied products Wood products Paper Printing & related support activities Petroleum and coal products Chemical Plastic & rubber products Non-metallic mineral products Primary metal Fabricated metal products Machinery Computer & electronic products Electrical equipment Transportation equipment Furniture & related products Miscellaneous manufacturing 85.7 98.5 74.8 85.2 84.5 88.5 84.7 76.6 79.7 75.3 69.2 60.5 99.2 91.9 72.7 91.9 93.9 91.9 92.4 98.2 90.7 90.5 85.1 79.0 90.9 76.3 79.3 1.0 7.9 -0.7 1.1 -1.3 2.1 1.7 0.2 3.6 0.4 -2.2 -2.0 1.8 1.6 1.1 -1.3 4.2 0.7 -2.6 1.0 4.6 4.9 3.6 1.8 1.7 1.0 0.8 3.5 15.6 -1.2 0.9 -3.6 6.9 5.4 2.5 7.4 -0.9 -6.2 -8.4 8.9 1.7 2.1 -2.4 13.0 4.9 0.0 5.2 10.5 12.5 14.1 7.5 8.1 0.3 2.7 83.1 83.3 76.6 84.6 84.9 84.1 80.8 80.4 80.5** 79.2** 82.0 74.0 87.3 90.3 77.5 93.7 83.0 85.2 82.0 91.1 81.6 81.5 80.5 82.5 87.0 81.3 81.6 70 60 1987 1989 1991 1993 1995 1997 1999 2001 2003 Industrial Capacity Utilization Rate 90 % Manufacturing Total 85 80 75 70 1987 1989 1991 1993 1995 1997 1999 2001 2003 * Electric power generation, transmission & distribution ** Represents available data between 1997Q1-2004Q3 MEI December 2004 4 THE ECONOMY International Accounts The current account surplus moderated in the third quarter... The current account surplus decreased $1.8 billion to $9.4 billion ($37.6 billion annualized) in the third quarter, primarily due to a lower surplus on trade in goods and a higher deficit on investment income. The surplus on trade in goods stood at $17.3 billion ($69.3 billion annualized) as imports rose (2.5%) more than exports (0.4%). The increase in imports was led by automotive products, industrial goods and crude petroleum. The deficit in services declined $0.3 billion to $2.6 billion. Moreover, the deficit on investment income increased $0.3 billion to $5.4 billion, resulting from lower profits earned by Canadian direct investors. ...while Canadian direct investment abroad continued to increase Canadian direct investment abroad rose by $11.1 billion, after a record increase in the second quarter. Foreign direct investment in Canada rose to $5.8 billion, up from an outflow in the previous quarter. On an industry basis, the investment was led by machinery and transportation. Foreign portfolio investment in Canada increased by $10.8 billion, as investors bought Canadian bonds and equities, but sold short-term instruments. The rise in equities was led by the largest share offering in Canadian history (Petro-Canada) and a corporate restructuring. Despite a net outflow of $6.3 billion in the third quarter, Canada's external debt increased to $192.9 billion (14.7% of GDP) from $176.6 billion (13.7% of GDP). However, the external debt as a percentage of GDP had been steadily declining from a peak of 44.3% in 1994. Current Account & Trade Balances 80 60 40 20 0 -20 -40 -60 Non-Merchandise Trade Balance 87 89 91 93 95 97 99 01 03 Current Account Balance $ Billion, SAAR Merchandise Trade Balance Main Components of the Current Account $ Billion, SAAR Q2/2004 37.6 23.8 Q3/2004 76.5 69.3 44.8 37.6 -11.7 -20.5 Current Account Balance Balance on Services -10.4 -21.7 Merchandise Trade Balance Net Investment Income 2 3 4 1 2 3 03 04 The merchandise trade balance represents net exports of goods. The non-merchandise trade balance represents net exports of services plus net receipts of investment income and transfers. Financial Account (Net Flows) 120 80 40 0 -40 -80 Financial Account Components, Q3/2004 Total Financial Account (net flows) 43.4 6.4 -7.4 -24.7 -68.1 -13.8 0 -10 -20 20 10 $ Billions 7.1 4.0 3.5 -0.8 6.2 10.8 -10.2 -0.4 $ Billion Canadian Liabilities (in flows) Canadian Assets (out flows) -120 -160 88 90 92 94 96 98 00 Canadian Assets* Other Investment Canadian Liabilities Portfolio Investment Direct Investment 02 2 3 4 1 2 3 03 04 Acquisitions * Reverse of BOP sign MEI December 2004 5 THE ECONOMY Productivity & Competitiveness Productivity declined in Canada and rose in the U.S. in the third quarter... Labour productivity in Canada's business sector declined 1.1% (annual rate) in the third quarter, as the number of hours worked grew at a faster pace than output. Productivity continued its lacklustre performance of the previous five quarters. At the same time, meanwhile, U.S. productivity rose 2.4% as output grew at a faster pace than the number of hours worked. This is the sixth straight quarter in which Canadian businesses have posted lower productivity performance than those of the U.S. Productivity Growth % Change, SAAR Canada U.S. 8.5 3.22.9 3.9 2.9 4.3 2.5 2.5 1.4 4.5 2.4 0.2 0.4 -1.1 3.9 2.9 0.4 0.7 2.4 -1.1 1 2 04 3 99 00 01 02 03 3 03 4 Source: Industry Canada calculations Growth in Unit Labour Costs* % Change, SAAR ...while unit labour costs grew faster in the U.S. Canada's unit labour costs in the business sector rose 1.1% in the third quarter, as productivity edged down and wages remained unchanged. In the U.S., unit labour costs rose 1.5% as hourly compensation increased at a faster pace than productivity. It was the first time since the second quarter of 2002 that Canadian business had a lower unit labour cost growth than their U.S. counterpart. Higher productivity growth in the U.S. has been translated into higher growth in hourly compensation, i.e. a year-over-year rise of 4.0% in the U.S. versus no growth in Canada in the third quarter. Canada U.S. X... x 1.8 4.0 2.1 2.4 1.6 1.2 1.5 1.6 0.4 1.9 2.3 1.5 1.1 0.0 x x -0.5 x -0.4 -1.1 -0.4 -1.1 -2.6 ...x x x 99 00 01 02 03 3 03 4 1 2 04 3 A higher Canadian dollar eroded Canada's competitiveness A decline in Canada's productivity relative to t h a t o f t h e U . S . , c o m b i n e d wi t h t h e appreciation of the loonie vis-à-vis the U.S. c u r r e n c y, l e d t o a d e t e r i o r a t i o n i n competitiveness in the Canadian business sector. The Canadian dollar has appreciated further in the fourth quarter, averaging about US¢82 (mid-December) and an increase of about 7.0% over the third quarter. This should r e s u lt in f ur ther er os ion of Ca nad a' s competitiveness, pushing it near the level reached in 1993. * For the business sector x Source: Statistics Canada, U.S. Bureau of Labour Statistics and Industry Canada calculations. Unit Labour Cost Comparison ($US) 110 Ratio: Canada/U.S.; 1992=100 $US per $CAN A falling line represents an increase in Canadian competitiveness Business Sector (Left) Exchange Rate (Right) 0.9 90 70 0.8 50 93 94 95 96 97 98 99 00 01 02 03 3 03 4 1 2 3 04 0.6 Source: Statistics Canada & U.S. Bureau of Labor Statistics MEI December 2004 6 THE ECONOMY Real GDP by Industry Economic activity paused in September Real GDP at basic prices posted no growth in September after robust growth in the previous three months. However, in September, real GDP was 3.4% higher than a year earlier and business output was 3.6% higher. Real GDP increased 3.9% (annualized) in the third quarter, up from 3.8% in the second. Weakness was concentrated in mining and manufacturing in the goods sector... Goods production was down 0.1% in September, after rising 0.7% in August. Industrial production was down 0.3% after six months of expansion. Lower output in mining and manufacturing accounted for the decline as utilities' output (0.4%) was up. The mining sector was affected by the lower output of diamond mines and lingering strikes in the iron mines. Drilling and rigging activities were hampered by unseasonably bad weather in the Prairies. Manufacturing was weakened by the slow-down in export demand. However, September's manufacturing output was 5.4% higher than a year earlier. In the third quarter, output in the goods sector rose 5.6% (annualized), led by agriculture (10.3%), manufacturing (8.4%) and utilities (8.1%). ...and arts & entertainment, wholesale and transportation in the service sector Service output was flat in September after an increase of 0.3% in August. Increases in eight industries, namely accommodations and other services, were offset by declines in five others, led by entertainment, wholesale and transportation. The National Hockey League lock-out affected entertainment. Lower exports hampered wholesaling and transportation; however, their outputs were substantially higher than a year ago. The outputs of finance and education were also substantially higher than a year earlier. In the third quarter, output in the service sector rose 3.1% (annualized), led by wholesale (7.8%), health (6.8%) and retail (6.0%). Real GDP at Basic Prices 1.5 % change Composite Leading Indicator Real GDP at Basic Prices (1997 chained dollars) September 2004 $ millions Total Economy Business Sector 1,052,568 894,049 331,048 monthly % Change since last month year change -439 -529 -414 350 -306 94 -57 -343 -7 -274 139 -142 4 188 -93 32 87 67 -241 152 134 -82 0.0 -0.1 -0.1 1.5 -0.8 0.4 -0.1 -0.2 0.0 -0.4 0.2 -0.3 0.0 0.1 -0.2 0.1 0.2 0.1 -2.5 0.7 0.5 -0.1 3.4 3.6 3.8 5.6 -0.2 3.1 2.8 5.4 3.1 6.5 3.9 5.0 2.1 3.4 2.0 2.9 3.5 1.8 0.0 2.1 1.6 1.4 1.0 0.5 Goods-producing 0.0 24,146 Agri., Forest, Fish, Hunt* Mining & Oil & Gas Extraction 37,679 Utilities Construction Manufacturing 1998 1999 2000 2001 2002 2003 2004 -0.5 26,095 58,268 184,687 -1.0 1997 Real GDP by Major Sector 135 131 127 123 119 115 111 107 103 99 1997 1998 1999 2000 2001 2002 2003 2004 January 1997 = 100 Goods Manufacturing Services Services-producing 722,635 Wholesale Trade 66,755 Retail Trade 60,038 Transportation & Warehousing 50,049 Information & Cultural 43,205 FIRE** Professional*** Admin. & Waste Mgmt Education Health & Social Arts, Entertain. & Recreation Accommodation & Food Other Public Administration 211,321 46,327 22,243 46,002 63,164 9,519 23,352 24,577 57,581 *Agriculture, Forestry, Fishing & Hunting **Finance, Insurance & Real Estate ***Professional, Scientific & Technical services MEI December 2004 7 THE ECONOMY Consumer Spending and Attitudes Real consumption grew faster in the third quarter... Real consumption grew 3.0% in the third quarter, following an upwardly revised increase of 2.1% in the second. While growth in services (2.1%) was similar to that in the second quarter, spending on goods rose at a faster pace. Notably, spending on furniture, furnishing and household equipment and maintenance rose 9.5% as a result of the strong housing market. Total Retail and Motor Vehicle Sales 30.0 28.0 26.0 24.0 22.0 20.0 18.0 16.0 1996 1997 1998 1999 2000 2001 2002 2003 2004 Motor Vehicle Sales (Right) Total Sales (Left) $ Billions $ Billions 7.5 7.0 6.5 6.0 5.5 5.0 4.5 4.0 3.5 3.0 ...despite slower growth in disposable income Disposable income grew 2.0% in the third quarter, down from 5.0% in the second. Meanwhile, the savings rate declined 0.5 percentage point to 0.0%, the lowest rate since 1961. The consumer confidence index stood at 120.4 in November, similar to October's level. While respondents were less upbeat about their current situation, they were more optimistic about the future. Sales of new motor vehicles rose 7.7% in October and preliminary figures point to a 3.7% decline in November. Assuming no growth in December, sales of new motor vehicles will rise 8.0% in the fourth quarter. These developments point to sustained growth in consumption in the fourth quarter. Real Consumer Spending and Household Finances $ Millions, SAAR (unless otherwise noted) 2002 2003 Real Consumption (97$) % change Durable Goods % change Semi-Durable Goods % change Non-Durable Goods % change Services % change Disposable Income % change Saving Rate (%) Debt-to-Income Ratio (%) 601,594 3.4 93,099 8.3 54,472 3.8 137,196 2.3 317,627 2.6 692,691 3.8 3.2 98.1 620,444 3.1 94,923 2.0 56,142 3.1 140,078 2.1 330,098 3.9 713,548 3.0 1.4 101.6 2004 Q2 638,154 2.1 96,213 3.5 58,800 3.5 142,562 0.2 341,421 2.3 738,176 5.0 0.5 104.0 2004 Q3 642,868 3.0 97,345 4.8 60,071 8.9 143,271 2.0 343,202 2.1 741,904 2.0 0.0 105.1 Retail Sales and Consumer Credit September 2004 % Change since last last $ millions month year 0.2 0.6 0.5 1.4 1.8 -1.0 0.2 0.9 0.6 0.8 4.7 5.8 6.5 3.8 7.4 3.2 5.0 5.0 6.1 10.6 Total Retail Sales (S.A.) 29,137 Food Drug Stores Clothing Furniture Automotive General Merch. Stores All other Stores Total ex. motor vehicles Consumer Credit 5,703 1,927 1,697 1,913 9,631 3,533 4,734 22,246 264 Real Consumer Spending and Attitudes 190 Index (1995 Q1=100) Total Spending (Left) 170 Durable Goods (Left) Consumer Attitudes* (Right) 140 1991=100 160 150 120 130 100 110 80 90 123412341234123412341234123412341234123 95 96 97 98 99 00 01 02 03 04 60 *Conference Board of Canada MEI December 2004 8 THE ECONOMY Business Investment Investment in machinery and equipment continued to rise at a robust pace... Led by machinery and equipment (M&E), business fixed investment rose 4.5% in the third quarter, following a similar increase (4.6%) in the second. M&E investment rose 8.2% in the third quarter. This followed a 5.5% increase in the second quarter and represented the seventh straight increase. Investment in non-residential structures rose 0.6% in the third quarter, following an increase of 0.9% in the second. Investment in Plant and Equipment 235 215 195 175 155 135 115 95 75 60 1992 1994 1996 1998 2000 2002 2004 1993 1995 1997 1999 2001 2003 70 80 Index (1992Q1=100) Machinery & Equipment (Left) Non-Residential Construction (Left) Capacity Utilization (Right) 90 % 100 ...while corporate profits remained record high Operating profits were essentially unchanged in the third quarter, as the increase in financial industries offset small losses in the non-financial sector. This followed four straight quarters of double-digit increases. The largest declines were witnessed in information and cultural industries (80.1%) and manufacturing (7.0%). Despite this recent decline, operating profits in the manufacturing sector are 39.1% higher than at the end of 2003. Record high profits and high capacity utilization rates, as well as the substantial appreciation of the Canadian dollar over the past two years, bolds well for sustained growth in investment. Business Investment and Corporate Finances $ Millions, SAAR (unless otherwise noted) 2002 BUSINESS INVESTMENT Machinery & Equipment (1997$) % change Non-residential Construction (1997$) % change Capacity Utilization (%, Non-farm goods) Capacity Utilization (Mfg. sector) CORPORATE FINANCES & ATTITUDES Corporate Operating Profits % change Profits - Non-financial industries % change Profits - Financial industries % change Business Credit % change 149,969 4.8 115,798 8.8 34,169 -6.8 890,035 3.8 172,118 14.8 128,203 10.7 43,915 28.5 904,784 1.7 82,715 -1.2 44,493 -8.3 83.0 83.3 86,441 4.5 44,928 1.0 82.9 82.9 2003 Corporate Profits & Business Confidence 225 200 175 150 125 100 Index, 1991=100 % of GDP 16 Corporate Profits as % of GDP (Right) Business Confidence* (Left) 14 12 10 8 6 75 4 1992 1994 1996 1998 2000 2002 2004 1993 1995 1997 1999 2001 2003 *Conference Board of Canada 2003 Q4 88,920 3.2 45,501 3.5 83.8 84.2 2004 Q1 90,688 8.2 45,100 -3.5 83.9 84.6 2004 Q2 91,906 5.5 45,197 0.9 84.7 86.4 2004 Q3 93,735 8.2 45,262 0.6 85.7 88.5 178,676 17.7 131,604 19.5 47,072 13.0 911,063 2.5 194,124 39.3 142,680 38.2 51,444 42.7 921,495 4.7 205,244 25.0 155,400 40.7 49,840 -11.9 936,013 6.5 205,320 0.1 154,448 -2.4 50,876 8.6 951,642 6.8 MEI December 2004 9 THE ECONOMY Housing Housing moderated in the third quarter... Residential construction grew 3.3% in the third quarter, half the growth posted in the second quarter. The slow-down was noticeable in the resale of existing homes where ownership and transfer costs dropped 15.6% after an increase of 25.6% the previous quarter. Renovations accelerated posting growth of 12.3% af ter a 2.1% rise in the second quarter. New housing grew by 4.7% following a 3.9% increase in the second quarter. Housing Activity 25 23 20 18 16 14 11 Residential Construction (Left) 9 1996 1997 1998 1999 2000 2001 2002 2003 2004 *Canada Mortgage and Housing Corporation Housing Starts* (Right) $ Billions Units (000s) 275 250 225 200 175 150 125 100 Monthly Housing Indicators Levels Residential Construction (1)* ($97M, basic prices) ...and slowed further in the fourth quarter The value of residential building permits issued rose 3.0% in October, after three consecutive monthly declines. Housing starts rose 5.9% in November. However, the average monthly housing starts in the first two months of the fourth quarter were 6.6% lower than the third quarter level. Housing starts for the first 11 months of 2004 averaged 231,800 and on track to a 17-year high. In November, half of the provinces posted increases in housing starts, led by British Columbia (20.9%), Saskatchewan (14.3%) and Quebec (10.5%). In Ontario, housing starts fell 2.8%. Moreover, the price of new housing has been rising at a more moderate pace in recent months. In October, it was 5.6% higher than a year earlier, lower than the 6.2% increase posted in June. Building Permits, $M (2)* Sales of Existing Homes (3)** (# of units) Change since Last Last month year 0.2% 3.0% 345 13,200 -500 0 -300 -100 5,900 -2,300 300 600 1,500 8,100 8.4% 9.1% 72 21,400 -800 300 -1,300 -700 5,100 2,600 300 2,200 4,800 8,900 21,493 3,073 25,558 238,200 2,200 900 4,300 3,300 62,100 81,000 4,700 4,800 39,600 35,300 Housing Starts, (3)*** (# of units, SAAR) Newfoundland & Labrador Prince Edward Island Nova Scotia New Brunswick Quebec Ontario Manitoba Saskatchewan Alberta British Columbia 1 - September data; 2 - October data; 3 - November data Sources: *Statistics Canada; **Canadian Real Estate Association; ***Canada Mortgage and Housing Corporation Growth in Real Residential Construction Real Investment in Residential Structures $97 Millions, SAAR (unless otherwise noted) 2002 2003 Residential Construction 58,133 62,452 % change 14.4 7.4 New Housing % change Alterations & Improvements % change Ownership & Transfer Costs % change 28,900 23.2 20,600 4.7 8,639 11.5 30,678 6.2 22,619 9.8 9,204 6.5 2004 Q2 67,247 6.6 32,995 3.9 24,100 2.1 10,148 25.1 2004 Q3 67,792 3.3 33,377 4.7 24,808 12.3 9,728 -15.6 -3.6 98 99 00 01 02 03 2 3 03 4 1 2 04 3 -0.3 3.6 5.2 % change, SAAR 19.6 14.4 10.5 7.4 8.2 8.9 6.6 3.3 MEI December 2004 10 THE ECONOMY Trade and Competitiveness Exports declined further in October… Merchandise exports declined 1.1% in October, the fourth consecutive decline and the lowest level since March. The decline was mostly concentrated in the U.S. where the appreciation of the Canadian dollar vis-à-vis the greenback is making Canada's exports less competitive. However, half of the decline was due to lower exports of forestry products to the U.S., reflecting in part lower prices. Exports to non-U.S. destinations rose 1.2%. Overall, export volumes increased 0.1% while prices declined 1.2%. Merchandise Trade Flows and Balance 40.0 35.0 7.5 30.0 25.0 20.0 15.0 Trade Balance (Right) 10.0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 0.0 Imports (Left) 2.5 5.0 $ Billions Exports (Left) $ Billions 10.0 ...while imports continued to rise... Imports increased 0.9% in October following an increase of 0.4% in September. Imports from all major trading areas except the U.S. rose. Most of the increase came from higher imports of energy products (16.5%), reflecting a record high in crude petroleum imports. Import volumes rose 2.2% and prices fell 1.3%. Unit Labour Cost Comparison ($US) 110 Ratio: Canada/U.S.; 1992=100 A falling line represents an increase in Canadian competitiveness 90 Business Sector (Left) Exchange Rate (Right) 0.8 $US per $CAN 0.9 …pushing the trade surplus lower Canada's trade surplus declined by $0.7 billion to $4.4 billion, the lowest level in a year. The trade surplus with the U.S. fell to $7.6 billion and the trade deficit with other countries widened to $3.3 billion, the highest level since May. Merchandise Trade October 2004 Levels ($ millions) September 2004 Exports to United States 36,024 29,276 30,981 21,337 5,043 7,939 2,420 5,814 3,362 6,598 7,615 7,410 1,408 1,807 2,155 273 6,435 8,796 6,623 3,989 70 50 3 4 1 2 3 03 04 Source: Statistics Canada & U.S. Bureau of Labor Statistics 93 94 95 96 97 98 99 00 01 02 03 0.6 Year-to-date ($ millions) Jan.-Oct. 2003 334,826 277,035 285,869 200,697 48,957 76,338 24,283 51,512 28,562 54,944 74,603 73,046 14,328 18,033 16,340 2,538 54,469 82,157 64,011 38,600 Change ($M) Sep. to Oct. 2004 -399 -480 293 -152 -692 -328 37 -40 -241 -137 50 111 -11 28 355 -13 19 -26 -289 69 % Change Sep. to Oct. 2004 -1.1 -1.6 0.9 -0.7 October 2004 35,625 28,796 31,274 21,185 4,351 7,611 2,457 5,774 3,121 6,461 7,665 7,521 1,397 1,835 2,510 260 6,454 8,770 6,334 4,058 Jan.-Oct. 2004 357,604 291,488 301,326 208,081 56,278 83,407 26,081 55,996 33,014 64,265 77,122 75,466 14,469 17,807 20,084 2,625 60,513 86,753 64,411 39,413 Jan.-Oct. 2003 to Jan.-Oct. 2004 6.8 5.2 5.4 3.7 Imports from United States Trade Balance with United States Exports by Commodity Agriculture/Fishing Products Energy Products Forestry Products Industrial Goods & Materials Machinery & Equipment Automotive Products Other Consumer Goods 1.5 -0.7 -7.2 -2.1 0.7 1.5 -0.8 1.5 16.5 -4.8 0.3 -0.3 -4.4 1.7 7.4 8.7 15.6 17.0 3.4 3.3 1.0 -1.3 22.9 3.4 11.1 5.6 0.6 2.1 Imports by Commodity Agriculture/Fishing Products Energy Products Forestry Products Industrial Goods & Materials Machinery & Equipment Automotive Products Other Consumer Goods MEI December 2004 11 LABOUR MARKET TRENDS Employment and Unemployment Employment edged up in November... Employment rose 5,000 in November, following robust growth in the previous two months (78,000). All gains were in part-time employment (30,000). However, since the beginning of the year, full-time employment has risen 217,000 (1.7%), offsetting a decline of 22,000 (0.7%) in part-time. Youth employment declined 4,000, all in part-time. So far this year, youth employment has risen 23,000 (0.9%). Job gains were among self-employed (19,000) and the public sector (9,000), while private sector employment decreased 23,000. So far this year, job creation has been almost equally divided among the three categories. However, job growth in the private sector has been more moderate (0.6%) than that for self-employed (2.7%) and the public sector (2.2%). The participation and employment rates remained near their historical peaks. Employment 100 80 60 40 20 0 -20 -40 1998 Monthly change in thousands 1999 2000 2001 2002 2003 2004 Unemployment Rate 13.0 12.0 11.0 10.0 66.0 9.0 8.0 7.0 Participation Rate (Right) 6.0 1992 1994 1996 1998 2000 2002 2004 64.0 % Unemployment Rate (Left) 67.0 % 68.0 ...but the unemployment rate rose to 7.3% The unemployment rate rose 0.2 percentage point to 7.3% in November as more people entered the labour force. The youth unemployment rate edged down to 13.2% as less youths sought jobs. In contrast, the unemployment rate for adults rose by 0.2 percentage point to 6.1% as more people looked for work. 65.0 Labour Force Trends Levels (in thousands) Employment Full-time Part-time Youth 15-24 Adult 25+ Self-employed Unemployment Unemployment Rate Youth 15-24 Adult 25+ Labour Force Participation Rate Employment Rate 2003 November 15,880.8 12,880.9 2,999.9 2,423.2 13,457.7 2,441.7 1,285.5 7.5 13.3 6.4 17,166.3 67.6 62.6 Change since 2004 November 16,115.3 13,134.4 2,981.0 2,441.7 13,673.7 2,504.0 1,261.7 7.3 13.2 6.1 17,377.0 67.5 62.6 % Change since year-todate 194.6 217.2 -22.4 22.9 171.9 66.6 -5.1 -0.1 -0.8 0.0 189.6 -0.2 -0.1 2004 October 16,110.7 13,159.7 2,951.0 2,445.3 13,665.4 2,485.3 1,230.6 7.1 13.4 5.9 17,341.2 67.4 62.7 last month 4.6 -25.3 30.0 -3.6 8.3 18.7 31.1 0.2 -0.2 0.2 35.8 0.1 -0.1 last year 234.5 253.5 -18.9 18.5 216.0 62.3 -23.8 -0.2 -0.1 -0.3 210.7 -0.1 0.0 last month 0.0 -0.2 1.0 -0.1 0.1 0.8 2.5 last year 1.5 2.0 -0.6 0.8 1.6 2.6 -1.9 0.2 1.2 MEI December 2004 12 LABOUR MARKET TRENDS Industry Overview Further manufacturing job losses pushed employment down in the Goods sector... Employment in the Goods sector decreased 17,000 in November, following an increase of 5,000 in October. Most losses were in manufacturing (18,000), while employment edged up in natural resources (4,000) and construction (1,000). So far this year, the Goods sector has gained 12,000 jobs (0.3%), as strong gains in construction (57,000) offset losses in manufacturing (28,000) and agriculture (19,000). Since July, employment in the manufacturing sector has declined 52,000. This reflected a number of factors, including rising oil prices and the appreciation of the Canadian dollar. More than 100,000 jobs have been lost in the manufacturing sector since its peak in November 2002. Employment by Major Sector 118 116 114 112 110 108 106 104 102 100 98 1998 1999 2000 2001 2002 2003 2004 January 1998 = 100 Total Goods Services ...but employment continued to grow in the Services sector Employment rose 21,000 in the Services sector, following gains both in September (64,000) and October (30,000). The largest gain was in FIRE* (21,000), offsetting the decline recorded in October. The largest loss was in the accommodation & food services sector (13,000). Employment in the service sector rose 183,000 (1.5%) in the first eleven months of 2004. Most gains were concentrated in trade (79,000), FIRE* (56,000), professional, scientific and technical services (44,000) and health care & social assistance (28,000). So far this year, losses were only in accommodation & food (25,000), business, building & other support and public administration services (3,000). Employment Growth by Worker Category November 2004 (thousands) Total 4.6 234.5 Private employees Selfemployed Public sector -22.8 91.3 18.7 62.3 8.7 80.9 month-over-month year-over-year Industrial Employment Trends 2003 November 4,003.5 Goods-producing Agriculture 339.9 Natural Resources* 293.4 133.8 Utilities Construction 949.5 Manufacturing 2,286.9 Services-producing 11,877.3 Trade 2,491.9 Transportation* 771.2 951.9 FIRE* 996.0 Professional/Scientific 616.5 Business/Building 1,054.8 Educational Services Health Care/Social Assistance 1,708.1 Information/Culture/Recreation 721.8 1,031.7 Accommodation & Food 698.7 Other Services 834.6 Public Administration (in thousands) Levels 2004 2004 October November 4,044.0 4,027.2 330.0 327.9 296.3 300.7 130.3 127.7 1,012.9 1,014.1 2,274.6 2,256.8 12,066.7 12,088.1 2,545.1 2,556.1 779.2 785.6 991.6 1,012.8 1,032.3 1,028.8 641.4 629.5 1,052.1 1,067.1 1,755.1 1,760.3 723.5 718.5 1,016.9 1,004.1 700.8 701.2 828.6 824.2 last month -16.8 -2.1 4.4 -2.6 1.2 -17.8 21.4 11.0 6.4 21.2 -3.5 -11.9 15.0 5.2 -5.0 -12.8 0.4 -4.4 Change since last year-toyear date 23.7 11.9 -12.0 -18.6 7.3 4.7 -6.1 -3.0 64.6 57.0 -30.1 -28.2 210.8 182.7 64.2 78.7 14.4 3.4 60.9 56.1 32.8 44.3 13.0 -8.1 12.3 6.0 52.2 28.1 -3.3 1.5 -27.6 -25.4 2.5 1.6 -10.4 -3.4 % Change since last last month year -0.4 0.6 -0.6 -3.5 1.5 2.5 -2.0 -4.6 0.1 6.8 -0.8 -1.3 0.2 1.8 0.4 2.6 0.8 1.9 2.1 6.4 -0.3 3.3 -1.9 2.1 1.4 1.2 0.3 3.1 -0.7 -0.5 -1.3 -2.7 0.1 0.4 -0.5 -1.2 *Natural Resources: Forestry, Fishing, Mining, Oil & Gas; Transportation includes warehousing; FIRE: Finance, Insurance, Real Estate & Leasing. MEI December 2004 13 LABOUR MARKET TRENDS Provincial Overview Most provinces experienced little employment change in November... All western provinces registered small employment gains in November. In British Columbia (B.C.), a strong increase in part-time employment (24,000) was accompanied by full-time job losses (23,000). B.C.'s employment has risen 22,000 (1.0%) so far this year. Ontario lost 2,000 jobs in November, but employment has risen 86,000 (1.4%) so far this year. Quebec's employment edged up 1,000, following a decline of 12,000 in October. All Atlantic provinces, except Newfoundland & Labrador, recorded employment gains in November. So far this year, Prince Edward Island (2.3%), New Brunswick (2.3%) and Nova Scotia (2.0%) have posted the strongest employment growth among all provinces. Regional employment patterns 116 113 110 107 104 101 98 1998 119 116 113 110 107 104 101 98 1998 1999 2000 2001 2002 2003 2004 1999 2000 2001 2002 2003 2004 January 1998 = 100 Atlantic Prairies British Columbia January 1998 = 100 Quebec Ontario ...while the unemployment rate increased in five provinces In line with a large decrease in the labour force, B.C.'s unemployment rate fell to 6.4%, its lowest monthly level since August 1981. At 4.6%, Alberta's unemployment rate still remained the lowest among the provinces. Lower employment and a higher labour force pushed up Ontario's unemployment rate 0.5 percentage point to 7.0%. Despite small employment gains, Quebec's unemployment rate rose to 8.9% as more people sought jobs. The unemployment rate decreased by 1.3 percentage points to 10.5% in Prince Edward Island, but it rose 0.7 percentage point to 16.5% in Newfoundland & Labrador. Provincial Employment and Unemployment Trends Employment (thousands) Levels 2004 November Canada 16,115.3 Unemployment Rates -- November 2004 % 16.5 10.5 9.0 9.9 8.9 7.0 5.1 5.4 4.6 6.4 7.3 Unemployment Rate (%) Change since last year (000's) % 234.5 3.0 2.2 11.7 5.9 13.1 115.6 11.9 8.3 21.5 41.4 1.5 1.4 3.2 2.7 1.7 0.4 1.8 2.1 1.7 1.2 2.0 Change since last month (000's) 4.6 -3.0 2.0 1.3 0.5 1.8 -2.2 0.9 1.4 0.8 1.2 % 0.0 -1.4 2.9 0.3 0.1 0.0 -0.0 0.2 0.3 0.0 0.1 Levels 2004 November 7.3 16.5 10.5 9.0 9.9 8.9 7.0 5.1 5.4 4.6 6.4 Change since last last month year 0.2 0.7 -1.3 0.2 -0.2 0.3 0.5 0.0 0.2 -0.1 -0.5 -0.2 -1.0 -0.5 -1.0 -0.3 -0.2 0.2 -0.2 -0.2 -0.3 -1.1 Newfoundland & Labrador 216.6 71.8 Prince Edward Island Nova Scotia New Brunswick Quebec Ontario Manitoba Saskatchewan Alberta British Columbia 448.0 354.2 3,722.5 6,371.7 579.9 494.6 1,763.2 2,092.9 MEI December 2004 C B C an ad a Q ue L. PE I O nt an Sa sk N .& N N M A lta B S 14 PRICES and FINANCIAL MARKETS Consumer and Commodity Prices Higher gasoline prices pushed up inflation to 2.3% in October... On a year-over-year basis, the increase in the Consumer Price Index (CPI) rose to 2.3% in October from 1.8% in September. This was mainly due to gasoline prices, which rose 20.3% compared to 7.2% in September. Excluding energy, inflation in October (1.5%) was slightly higher than in September (1.4%). Inflation rose in all provinces, except Alberta where it remained at 1.5% in October. Newfoundland & Labrador, Manitoba, and Saskatchewan posted the largest rise in inflation, about 1.1 percentage points. On a month-to-month basis (seasonally adjusted), the CPI rose 0.4% following a 0.2% rise in September. The year-over-year increase in commodity prices was 25.8% in November, down from 32.1% in October, due to a moderation in energy price inflation. Energy prices rose 45.0% in November compared to 55.5% in October. On a monthly basis, commodity prices fell 3.5% following a 6.8% jump in October. Excluding energy prices, commodity prices were unchanged from September. Commodity Prices ($US basis) 220.0 200.0 180.0 160.0 140.0 120.0 100.0 Total 80.0 60.0 40.0 1996 1997 1998 1999 2000 2001 2002 2003 2004 Excluding energy Energy Index, 1982-90=100 Consumer Prices October 2004 Index (1992=100) All items CPI Food Shelter Household operations Clothing & Footwear Transportation Health & Personal Care Recreation, Educ. & Reading Alcohol & Tobacco Energy 125.2 125.3 121.8 115.0 105.4 144.6 119.1 128.4 144.5 154.9 % Change since last last month year 0.2 0.5 0.5 -0.3 0.5 0.6 -0.1 -0.8 -0.1 0.0 2.1 2.3 3.5 3.0 -0.1 0.4 3.5 1.2 0.1 5.5 1.4 13.1 ...but the "core" rate fell to 1.4% The "core" rate of inflation, which excludes the eight most volatile components and indirect taxes, moderated to 1.4% in October from 1.5% in September, below the midpoint of the 1%-3% official target range. Excl. 8 Most Volatile/Indirect Taxes 124.7 Commodity Prices (November 2004) Index, 1982-90=100 152.5 122.7 202.5 -3.5 0.0 -6.9 25.8 11.4 45.0 Excluding Energy Energy Consumer Price Index 5.0 % change, year-over-year All items Excluding 8 most volatile components and indirect taxes 4.0 Provincial CPI Inflation -- October 2004 % 3.2 3.0 Official Target Range: 1%-3% 2.9 3.0 2.4 2.9 2.1 2.9 3.1 2.4 2.3 2.0 1.5 1.0 0.0 B C an ad a C Q ue O nt an Sa sk L. PE I lta A B N S N .& -1.0 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 MEI December 2004 N M 15 PRICES and FINANCIAL MARKETS Short-term and Long-term Interest Rates The Bank of Canada paused in December... The Bank of Canada left its target for the overnight rate unchanged at 2.5% on December 7. The rapid appreciation of the dollar, moderating global growth, as well as signs of economic slowdown in Canada were important factors behind the decision. In the United States, the Federal Reserve raised its fed funds rate by 25 basis points (bps) to 2.25% on December 14, the fifth consecutive rate increase, encouraged by good growth prospects, improving labour market conditions, and low and stable inflation. The rate on three-month corporate paper in Canada was 2.55% on December 14 compared to 2.76% on November 18. In the U.S., short-term rates rose from 2.1% in early November to 2.39% on December 13. With Canadian rates trending down while U.S. rates edged higher, the rate differential narrowed to 16 bps. ...and long-term yields edged down in Canada Increased uncertainties about economic prospects in the U.S. and Canada have led to volatility in bond markets and a narrowing of the spread between Canadian and U.S. bond yields. In the U.S., 10-year yields were 4.13% on December 14, down from 4.40% in early December, but similar to yields in mid-November. In Canada, yields fell from 4.50% in mid-November to 4.25% on December 14, resulting in a narrowing of the rate spread to about 15 bps, down from about 40 bps in October. One-year mortgage rates were 4.90% on December 8, steady from one month ago. Five-year mortgage rates eased further to 6.15% on December 8, from 6.30% in November. Short-term Interest Rates 10 8 6 4 2 0 O ct ob er O ct ob 4 e N ov r 19 em N ov ber em 2 be D ec r 1 7 em D ec ber em 1 be r1 5 Key Market Rates 3.00 90-day Corporate Paper Canada (daily) (end of period) 2002 90-day spread Corporate against Paper U.S. Long Bond Yield spread against U.S. 2.83 2.66 2.10 2.12 2.22 2.50 2.60 2.74 2.55 1.50 1.62 0.70 0.55 0.55 0.65 0.59 0.49 0.14 4.88 4.66 4.83 4.82 4.68 4.58 4.52 4.44 4.22 0.93 0.39 0.21 0.21 0.42 0.48 0.41 0.24 0.13 United States 2.75 2003 June July August September October November Dec. 15 * 2.50 Canada 2.25 -2 Spread 2.00 -4 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 Long-term Bond Yields 10 8 6 United States 4 2 0 4.55 Canada 4.75 4.95 A positive spread indicates that Canadian rates are above their U.S. counterparts. * Bank of Canada's Weekly Financial Statistics Canada (daily) Key Lending Rates (end of period) 2002 2003 June July August September October November Dec. 15 * Prime Overnight Lending Mortgage Rate 1 year 5 year Rate Rate 2.75 2.75 2.00 2.00 2.00 2.25 2.50 2.50 2.50 4.50 4.50 3.75 3.75 3.75 4.00 4.25 4.25 4.25 4.90 4.75 4.70 4.60 4.40 4.80 4.90 5.00 4.80 6.70 6.45 6.70 6.55 6.30 6.30 6.40 6.30 6.05 4.35 -2 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 O ct ob er O ct ob 4 e N ov r 1 em 9 N ov ber em 2 be D r1 ec em 7 D ec ber em 1 be r1 5 Spread 4.15 * Bank of Canada's Weekly Financial Statistics MEI December 2004 16 PRICES and FINANCIAL MARKETS Exchange Rates and Stock Prices The Canadian dollar lost some ground in December Since closing above US¢85 on November 26, the dollar has retreated 4.8% to close just below US¢81 on December 14. This reflected growing evidence of slowing economic conditions in Canada, particularly in the export-dependent manufacturing sector, declining commodity prices, and a partial recovery in the U.S. dollar against major currencies. However, the loonie is still up about 10% above its value in May (US¢73.4). While the U.S. dollar has recovered somewhat in recent weeks, some analysts expect the greenback to trend down further as the U.S. twin deficits are expected to remain large. The Canadian dollar also lost some ground against the euro and Japanese yen, wiping out gains since late summer. From recent highs on November 10, the dollar depreciated 4.8% against the euro and 8.2% against the yen. Stock markets rose towards the end of the year The stronger dollar helped push the S&P/TSX index above 9,000 in recent weeks, with the index closing at 9,086 on December 14. All sub-indices, except for financial stocks, recorded gains in November, especially metals & mining (11.0%) and energy (4.7%). Oil prices eased about 12% from mid-November, supporting U.S. stock markets in the last month. The Dow Jones closed at 10,676 on December 14 and has been around 10,500 since mid-November. This is 9.5% above its recent low of 9,750 on October 25. The Canadian Dollar 1992=100 versus US dollar (Left) 0.80 0.75 86 0.70 82 0.65 0.60 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 78 74 versus C6 index (Right) 94 90 98 0.86 0.85 0.84 0.83 0.82 0.81 0.80 0.79 0.78 0.77 0.76 Canadian Dollar 0.85 $US/$CAN Canada (daily) (close) $US vs. $CAN index vs. C-6 (92=100) $CAN vs. EURO yen vs. $CAN 2002 2003 June July August September October November Dec. 15 0.6339 0.7713 0.7497 0.7522 0.7616 0.7926 0.8210 0.8432 0.8165 78.80 91.65 88.68 91.00 91.80 93.52 96.36 99.92 97.39* n/a 1.628 1.627 1.599 1.599 1.569 1.559 1.577 1.642 n/a 82.86 81.59 83.64 83.19 87.21 86.88 86.76 85.13 O ct o O ber ct ob 4 e N ov r 1 em 9 N ov be em r 2 be D ec r 1 em 7 D ec be em r 1 be r1 5 * Bank of Canada's Weekly Financial Statistics Stock Market Indices 12,500 Dow Jones Industrial Average 9,500 9,000 8,500 7,500 S&P/TSX 5,000 7,500 2,500 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 O ct o O ber ct ob 5 e N ov r 2 em 0 N ov be em r 3 D ber ec em 17 D ec be em r 1 be r1 5 Key Stock Market Indexes S&P/TSX (daily) November Close 9,030 S&P/TSX 201 Energy 262 Metals & Mining Utilities 158 168 Materials 71 Industrial 147 Financial 222 Gold Telecommunication 69 Information Technology 32 Consumer Discretionary 89 Consumer Staples 188 S&P 500 Dow Jones 1,173.8 10,428 % change from last last month year 1.8 4.7 11.0 4.4 7.1 1.1 -2.7 2.2 6.5 0.8 2.1 5.7 3.9 4.0 14.9 43.9 32.6 4.5 13.3 -2.3 13.7 -6.2 12.7 25.9 6.6 12.6 10.9 6.6 10,000 8,000 MEI December 2004 17 THE UNITED STATES ECONOMY U.S. Economic Trends U.S. economic growth accelerated in the third quarter… According to preliminary estimates, real gross domestic product (GDP) increased at an annual rate of 3.9% in the third quarter, up from 3.3% in the second quarter and higher than the advanced estimate of 3.7%. Preliminary estimates confirmed that higher consumption growth (5.1% vs. 1.6%) and a lesser drag from net exports were the main factors behind higher growth. On the income side, lower profits in the financial sector led to a 2.3% drop in corporate profits, the first drop since the first quarter of 2003. Moreover, personal outlays grew faster than personal disposable income, resulting in a lower personal saving rate (0.5%). ...and growth should stay robust in the fourth quarter Industrial production increased 0.7% in October following a 0.1% rise in September. Moreover, the Institute of Supply Management (ISM) manufacturing and non-manufacturing indices rose to 57.8 and 61.5 in November, respectively, suggesting the economy is expanding further. Also, consumers kept buying as real expenditures increased 0.3% in October, following a 0.5% rise in September. Non-farm payrolls rose by only 112,000 in November, less than expected and below the monthly average (185,000) so far in 2004. The trade deficit increased in October on track to set a record high in 2004 The trade deficit increased to US$55.0 billion in October from US$50.9 billion in September, primarily due to an increase in goods deficit (to US$59.7 from US$55.0 billion). Despite further depreciation of the U.S. dollar against major currencies in 2004, the merchandise trade deficit has risen to US$540 billion (or 6.1% of GDP) in the first nine months of this year from US$454 billion (5.0% of GDP) for the same period of 2003. At the same time, the trade deficit with China has risen to US$113 billion from US$89 billion in 2003. There are growing calls on China to contribute to the correction of that imbalance by revaluing its currency. While the U.S. dollar depreciation is viewed as an important factor in reducing trade imbalances, the U.S. also needs to raise its national savings by slowing its domestic demand and lowering its large fiscal deficit. U.S. Real GDP Growth % change, SAAR 7.4 600 400 4.4 3.7 1.9 0.8 98 99 00 01 02 03 3 4 2003 1 2 2004 3 1998 1999 2000 2001 2002 2003 2004 3.0 4.5 3.3 200 3.9 0 -200 -400 U.S. Non-Farm Payrolls Monthly change in thousands 4.2 4.2 U.S. Consumer Price Inflation 4.0 % change, year-over-year U.S. Unemployment & Participation Rates 8.0 % % Unemployment Rate (Left) Participation Rate (Right) 69 3.0 6.0 68 2.0 4.0 67 1.0 2.0 66 Excluding Food & Energy Total 0.0 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 Source: U.S. Bureau of Economic Analysis & U.S. Bureau of Labor Statistics 0.0 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 65 MEI December 2004 18 COMING UP Key Future Data Releases and Planned Events CANADA Consumer Price Index - November Real GDP by Industry - October Labour Force Survey - December Canadian International Merchandise Trade - November Key Policy Interest Rate Announcement Monthly Survey of Manufacturing - November Financial Statistics for Enterprises - 4th Quarter 2004 Balance of International Payments - 4th Quarter 2004 National Economic and Financial Accounts - 4th Quarter 2004 December 17 December 23 January 7 January 12 January 20 January 20 February 25 February 25 February 28 UNITED STATES Consumer Price Index - November GDP - 3rd Quarter 2004 (final) The Employment Situation - December International Trade in Goods and Services - November Federal Open Market Committee Meeting December 17 December 22 January 7 January 12 February 1/2 Note: The December 2004 MEI uses data available as of December 15, 2004 MEI December 2004 19