Canadian GDP increased 0.4 percent in fourth quarter

RP news wires, Noria Corporation

The Canadian economy gained momentum throughout the fourth quarter of 2006, closing the year with 0.4 percent growth in December, Statistics Canada reported on March 2. For the quarter as a whole, the pace of economic activity eased slightly as the economy advanced 2.7 percent over the year. Real gross domestic product (GDP) was up 0.4 percent in the fourth quarter, following an increase of 0.5 percent in the second and third quarters. Growth was largely driven by higher personal expenditure and the strengthening of exports. However, these gains were dampened by the draw-down of non-farm inventories.

The economy grew 0.4 percent in December compared to gains of 0.3 percent in November and 0.1 percent in October. Both the service (+0.5 percent) and the goods-producing industries (+0.1 percent) increased in December. Manufacturing, wholesale and retail trade posted the strongest results. Construction, financial services and tourism-related industries also advanced. These gains in December were partly offset by losses in the energy sector, and in the agriculture and forestry industries.

A more detailed analysis is available in Canadian Economic Accounts Quarterly Review.

Growth in final domestic demand continued to outpace that of GDP in the fourth quarter. Final domestic demand was supported by personal expenditure, especially on services and on durable goods, along with business investment in non-residential structures. The acceleration in exports added significantly to GDP growth in the quarter.

Note to readers

Percentage changes for expenditure-based and industry-based statistics (such as consumer expenditures, investment, exports, imports, production and output) are calculated using volume measures, that is, adjusted for inflation. Percentage changes for income-based statistics (such as labour income, corporate profits and farm income) are calculated using nominal values, that is, not adjusted for inflation.

Please see the Canadian Economic Accounts re-referencing note for information on the GDP re-referencing exercise that will be published on May 31st, 2007.

Please see Softwood Lumber Agreement between Canada and the United States: National Accounts treatment to understand how the softwood lumber rebates are being treated in the Canadian System of National Accounts.

The strength in personal expenditure was underpinned by spending on financial services, on restaurants and accommodation and on purchased transportation, especially air travel. Automotive products contributed to consumer spending and exports. The surge in exports was also driven by other consumer goods, as well as by machinery and equipment.

Despite these gains, GDP growth was moderated by a drop in inventory investment. Inventories of motor vehicles were down sharply due to growing demand in domestic and international markets.

The rise in the production of services (+0.7 percent) in the quarter contrasted with the decline (-0.4 percent) observed in goods-producing industries. Overall, growth came mainly from the construction and financial sectors and from the tourism-related industries. Manufacturing, wholesale trade and the energy sector were the main brakes on economic growth.

Industrial production (the output of utilities, mines and factories) retreated by 1.0 percent as a result of the declines recorded in all three sectors. Industrial production fared better in the United States, which fell only 0.2 percent.

The Canadian economy grew at an annualized rate of 1.4 percent in the fourth quarter. Growth in the US economy edged up to 2.2 percent in the same period, led by firmer exports and personal and government expenditure.

Real gross domestic product, chained (1997) dollars¹

Change

Annualized change

Year-over-year change

First quarter 2006

0.9

3.8

3.2

Second quarter 2006

0.5

2.0

2.9

Third quarter 2006

0.5

2.0

2.6

Fourth quarter 2006

0.4

1.4

2.3

2006

2.7

...

2.7

...	not applicable
1.	The change is the growth rate from one period to the next. The annualized change is the growth rate compounded annually. The year-over-year change is the growth rate of a given quarter compared with the same quarter in a previous year.

Economy-wide prices, as measured by the chain price index for GDP were up 0.3 percent, or 0.5 percent excluding energy. Energy prices have now moderated economy-wide price index growth for four consecutive quarters.

The automotive sector drives exports

With a slight decline in the Canadian dollar over the fourth quarter, export growth was up 1.2 percent, following a 0.9 percent increase in the third quarter. This was mainly due to growth in exports of goods (+1.2 percent). Exports of services, up 0.7 percent, also contributed to growth, though to a lesser extent.

Automotive products (+7.7 percent) primarily accounted for the increase in exports of goods. This sector has picked up after the third quarter slowdown, related to protracted plant closures. Other consumer goods and machinery and equipment, up 9.5 percent and 1.3 percent, respectively, also contributed to export gains in the quarter. The growth in transportation (+3.2 percent) and travel (+1.2 percent) services were partly offset by a decline in foreign sales of commercial services (-0.9 percent).

Personal expenditure remains robust

Personal expenditure on consumer goods and services advanced 0.8 percent, but at a slower pace than over the first three quarters of 2006. The increased spending was mainly due to higher outlays on services (+1.2 percent) and on durable goods (+1.0 percent), though it was tempered by reduced spending on non-durable goods (-0.2 percent).

Growth in expenditure on durable goods was mostly attributable to strong demand for new and used motor vehicles (+1.6 percent). This resulted from increased purchases of new trucks and vans.

Non-farm inventory draw-down widespread

Non-farm inventories were down $748 million in the fourth quarter, marking the first drop in 10 consecutive quarters. Manufacturers and retailers substantially reduced inventories of non-durable goods. Inventory run-down, especially significant in automotive products, occurred against a backdrop of increased exports and consumer demand for these types of products.

The economy-wide inventory-to-sales ratio in real terms fell to 0.666 in the fourth quarter, from 0.674 in the third.

Business investment growth moderates

Business investment in plant and equipment slowed in the fourth quarter (+1.5 percent), largely sustained by strength in investment in non-residential structures (+2.5 percent) as a result of strong investment in engineering structures (+3.4 percent). Growth in Canadian business investment has been ongoing for the last 16 quarters.

The pace of business investment in machinery and equipment slowed considerably (+0.6 percent), the weakest growth recorded in six quarters.

Residential construction edges up

Investment in residential structures edged up (+0.1 percent) following a third-quarter drop of 1.8 percent. This turnaround was largely driven by a pick up in renovations activity (+2.2 percent), as reflected in the strong demand for renovation permits. Renewed activity in the resale market was reflected in a 1.9 percent rise in ownership transfer costs, which were down 3.4 percent in the third quarter.

The decline in value of new housing construction (-2.0 percent) slowed slightly in the fourth quarter compared to the third quarter (-3.3 percent). Growth in the number of housing starts in the fourth quarter provides a signal of renewed investment in residential construction.

Labour income gaining momentum

Labour income strengthened in the fourth quarter of 2006, growing by 1.5 percent compared to 1.1 percent in the previous quarter. Strength in earnings was supported by a 1.7 percent increase in wages and salaries in the service industries. Significant gains were made in the financial, insurance and real estate sectors, as well as in the professional and personal services industries.

Personal disposable income grew by 1.1 percent and the saving rate rose in the fourth quarter. The personal sector deficit (net borrowing position) narrowed.

Growth in corporate profits slows

Corporate profits advanced 0.6 percent in the fourth quarter, considerably slower than the exceptional growth (+3.0 percent) in the third quarter. The motor vehicle and parts as well as the paper and wood products manufacturing industries were major contributors to growth in the fourth quarter. Strong profits in construction, telecommunications and transportation also contributed to gains.

The corporate sector's position as net lender to the rest of the economy strengthened in the fourth quarter. With undistributed earnings up in the quarter, partly reflecting the repayment of softwood lumber duties to Canadian producers, corporate net saving advanced for the second straight quarter.

Government revenue rebounds

Corporate income tax liabilities reached a peak of $57 billion during the quarter, increasing $4.6 billion (+8.8 percent), in part reflecting tax owing on refunds of softwood lumber duties levied by the United States since 2002. Resumption of strong growth in personal income taxes marked the end of the higher federal refunds related to fiscal amendments implemented late in 2005. The rise in government total revenues of $11 billion (+1.9 percent) was offset somewhat by a drop in its investment income (-$2.9 billion), resulting from lower provincial government natural resource royalties. Government surplus (net lending position) expanded in the fourth quarter.

GDP by industry, December 2006

The economy grew 0.4 percent in December compared to gains of 0.3 percent in November and 0.1 percent in October. Both the service (+0.5 percent) and the goods-producing industries (+0.1 percent) increased in December. Manufacturing, wholesale and retail trade posted the strongest gains. Construction, financial services and tourism-related industries also advanced. These gains were partly offset by losses in the energy sector, and the agriculture and forestry industries.

Wholesale trade recorded strong growth (+1.2 percent), reflecting robust motor vehicle sales. Retail trade enjoyed an even greater increase (+2.1 percent). December was a pinnacle month for retail, with an increase in monthly output not seen since November 2001.

For the second month in a row, manufacturing strengthened, gaining 0.9 percent. The increase came from the manufacturing of durable goods, which was up 2.0 percent. Conversely, non-durable goods manufacturing fell back 0.8 percent. Of the 21 major manufacturing groups, 13 increased, accounting for 64 percent of total manufacturing value added. Motor vehicle production contributed the most to the increase. However, pharmaceutical and tobacco production hindered the growth.

The energy sector fell 1.8 percent in December to its lowest level of output for 2006. This setback was due to the decline in natural gas extraction. Oil and gas exploration also lost significant ground (-4.7 percent), a fifth consecutive monthly drop.

Industrial production (the output of mines, utilities and factories) was essentially unchanged in December. The declines in mining and utilities offset the increase in manufacturing. In comparison, industrial production in the United States increased 0.5 percent in December, due to gains in manufacturing and mining, but partly offset by a decline in the output of utilities.

Monthly gross domestic product by industry at basic prices in chained (1997) dollars

July 2006^r

Aug. 2006^r

Sept. 2006^r

Oct. 2006^r

Nov. 2006^r

Dec. 2006^p

Seasonally adjusted

month-to month % change

All industries

0.3

-0.4

0.1

0.3

0.4

Goods-producing industries

0.3

0.2

-1.2

0.2

0.1

Service-producing industries

0.3

0.4

0.0

0.1

0.4

0.5

Industrial production

0.6

-0.0

-1.7

0.2

-0.0

Manufacturing

0.0

-0.4

-1.8

-0.5

1.3

0.9

Retail trade

0.5

0.7

0.1

-0.4

-0.3

2.1

Energy sector

1.3

0.5

-1.6

0.8

-2.5

-1.8

^r	revised
^p	preliminary

Year-end review

Real GDP grew by 2.7 percent in 2006, a slight deceleration from 2005, while final domestic demand was up 4.5 percent. Consumer spending and non-residential investment accounted for most of the growth in 2006.

Construction, retail and wholesale trade as well as finance and insurance were the main sectors contributing to growth in 2006. Manufacturing and forestry and logging were hard hit. The energy sector continued to expand but at a much slower pace than in the last four years.

Consumer spending was the leading contributor to real GDP growth in 2006 advancing 4.1 percent, its best performance since 1997. A solid first quarter helped establish strong annual growth in expenditures on both durable (+6.8 percent) and semi-durable goods (+7.2 percent). Declining prices in both of these groups encouraged purchases. Significant gains were also registered in purchases of services (+4.2 percent).

Non-residential investment was the main contributor to investment's strong positive impact on GDP in 2006. Business investment in non-residential structures was buoyed by a 14 percent increase in engineering investment. This was principally concentrated in non-conventional oil and gas extraction, where investment nearly doubled in 2006, as considerable infrastructure was added to the Alberta oil sands.

Business investment in machinery and equipment was 8.0 percent higher in 2006, largely as a result of strong growth in computers and other office equipment, software, telecommunications equipment, trucks and in industrial machinery.

Non-farm business inventories accumulated for the year, albeit at about three-quarters the pace of 2005, due to a draw-down in the last quarter of 2006. Business investment in farm inventories slowed in 2006.

Imports experienced strong growth for the fourth straight year (+5.2 percent) in 2006, while exports increased only 1.3 percent. Export growth was hindered in 2006 by lower demand for forestry and automotive products as demand from Canada's largest trading partner, the United States, slumped.

Corporation profits (on a nominal basis) cooled in 2006, after double-digit growth in 2004 and 2005, but still exhibited a healthy increase of 5.7 percent.

Labor income (on a nominal basis) rose by 6.1 percent in 2006, while the personal saving rate edged up to 1.8 percent.

Overall, national saving increased as the Canadian economy continued to lend to non-residents.

Canadian economic accounts key indicators¹

Third quarter 2005

Fourth quarter 2005

First quarter 2006

Second quarter 2006

Third quarter 2006

Fourth quarter 2006

2005

2006

Seasonally adjusted at annual rates

$ millions at current prices

GDP by income and by expenditure

Wages, salaries and supplementary labour income

694,340

703,668

721,284

723,800

732,000

743,216

688,150

730,075

1.8

1.3

2.5

0.3

1.1

1.5

5.6

6.1

Corporation profits before taxes

192,368

202,812

196,276

197,376

203,220

204,480

189,455

200,338

4.7

5.4

-3.2

0.6

3.0

0.6

10.6

5.7

Interest and miscellaneous investment income

60,392

67,724

64,712

63,488

63,616

61,856

60,403

63,418

5.9

12.1

-4.4

-1.9

0.2

-2.8

11.7

5.0

Net income of unincorporated business

86,556

86,988

86,736

87,352

87,980

88,884

86,206

87,738

0.9

0.5

-0.3

0.7

1.0

2.5

1.8

Taxes less subsidies

156,352

157,024

160,560

162,716

159,236

159,808

155,297

160,580

0.4

2.3

1.3

-2.1

0.4

4.5

3.4

Personal disposable income

793,836

802,164

830,520

826,824

838,648

847,720

787,524

835,928

1.6

1.0

3.5

-0.4

1.4

1.1

4.2

6.1

Personal saving rate²

1.3

3.0

1.2

1.3

1.5

1.2

1.8

...

Millions of chained (1997) dollars

Personal expenditure on consumer goods and services

665,602

671,517

680,330

686,613

695,136

700,517

663,583

690,649

0.6

0.9

1.3

0.9

1.2

0.8

3.9

4.1

Government current expenditure on goods and services

218,239

220,622

222,569

224,957

226,059

227,067

217,689

225,163

0.7

1.1

0.9

1.1

0.5

0.4

2.7

3.4

Gross fixed capital formation

264,002

269,080

275,957

277,856

279,975

282,547

261,572

279,084

2.3

1.9

2.6

0.7

0.8

0.9

7.1

6.7

Investment in inventories

14,992

14,937

11,130

17,985

13,819

921

15,514

10,964

...

Exports of goods and services

474,439

481,889

476,003

474,500

478,583

484,220

472,037

478,327

2.1

1.6

-1.2

-0.3

0.9

1.2

2.1

1.3

Imports of goods and services

475,574

490,041

487,694

498,307

504,490

503,735

474,040

498,557

2.7

3.0

-0.5

2.2

1.2

-0.1

7.1

5.2

Gross domestic product at market prices

1,162,822

1,170,239

1,181,076

1,186,983

1,192,904

1,197,176

1,157,705

1,189,535

0.8

0.6

0.9

0.5

0.4

2.9

2.7

GDP by industry at basic prices

Goods producing industries

333,441

336,007

336,629

334,262

333,866

332,602

331,595

334,340

1.1

0.8

0.2

-0.7

-0.1

-0.4

2.0

0.8

Industrial production

244,563

246,320

244,974

242,413

242,085

239,770

243,485

242,311

0.9

0.7

-0.5

-1.0

-0.1

-1.0

1.0

-0.5

Energy sector

64,427

65,102

64,479

64,260

64,755

63,277

63,767

64,193

2.0

1.0

-1.0

-0.3

0.8

-2.3

1.5

0.7

Manufacturing

175,190

176,357

175,817

173,185

171,792

170,704

174,987

172,875

0.4

0.7

-0.3

-1.5

-0.8

-0.6

0.7

-1.2

Non-durable manufacturing

71,455

71,169

70,307

69,422

68,822

68,235

71,317

69,196

0.2

-0.4

-1.2

-1.3

-0.9

-1.2

-3.0

Durable manufacturing

103,581

105,050

105,389

103,640

102,848

102,350

103,516

103,557

0.6

1.4

0.3

-1.7

-0.8

-0.5

2.1

0.0

Construction

64,014

65,518

67,493

67,978

68,548

69,422

63,689

68,360

1.6

2.4

3.0

0.7

0.8

1.3

5.7

7.3

Services producing industries

735,726

741,062

749,519

756,511

761,727

766,848

732,506

758,651

0.8

0.7

1.1

0.9

0.7

3.2

3.6

Wholesale trade

66,506

67,920

69,713

70,585

71,282

70,404

65,997

70,496

1.4

2.1

2.6

1.3

1.0

-1.2

6.9

6.8

Retail trade

62,355

62,752

64,164

65,427

65,996

66,268

62,219

65,464

0.2

0.6

2.3

2.0

0.9

0.4

4.7

5.2

Transportation and warehousing

51,671

52,073

52,469

52,806

52,916

52,988

51,241

52,795

1.8

0.8

0.6

0.2

0.1

3.5

3.0

Finance, insurance, real estate and renting

214,923

216,331

218,619

220,821

223,336

225,826

213,985

222,151

0.8

0.7

1.1

1.0

1.1

3.7

3.8

Information and communication technologies

62,834

63,271

64,054

64,730

65,408

66,107

62,359

65,075

1.0

0.7

1.2

1.1

1.0

1.1

5.2

4.4

...	not applicable
1.	The first line is the series itself expressed in millions of dollars, seasonally adjusted at annual rates. The second line is the quarter to quarter percentage change at quarterly rates.
2.	Actual rate.