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Statistics Canada has just released the economic accounts for the second quarter of 2010.
Real gross domestic product (GDP) grew by 0.5% in the second quarter, after increasing by 1.4% in the first quarter. Final domestic demand advanced 0.9%, led by business investment in machinery and equipment. Real GDP increased by 0.2% in June.
Consumer expenditures on goods and services, as well as business investment on residential structures, grew at a slower rate than in the first quarter.
Export and import volumes both rose, with growth in imports outpacing growth in exports for a second consecutive quarter.
Expressed at an annualized rate, real GDP grew 2.0% in the second quarter, after expanding by 5.8% in the first quarter. This compared with a 1.6% second quarter rate of increase in the US economy.
The output of the goods-producing industries rose 1.9%, while that of the services industries edged up 0.1%. This marks the third consecutive quarter in which the output of the goods-producing industries has significantly outpaced that of the services industries.
Consumer spending on goods and services advanced 0.7% in the second quarter, slowing from the 1.0% gain recorded in the first quarter. Spending on both durable and semi-durable goods declined.
Expenditures on new and used motor vehicles fell 2.9%. Households spent less on electricity and natural gas for a second consecutive quarter.
Spending on furniture, furnishings, and household equipment and maintenance edged up 0.1%. Consumers had increased their expenditures on this category of goods and services by at least 1.0% in each of the three previous quarters.
Spending on services rose 1.2%, after advancing 0.7% in the first quarter. Growth in spending by Canadians travelling abroad, together with purchased transportation, contributed significantly to the increase in consumer spending on services.
Meanwhile, housing investment grew 0.3% in the second quarter, the slowest quarterly rate of increase since the first quarter of 2009. Renovation activity was down 0.8%, following four consecutive quarters of growth. Expenditure on ownership transfer costs related to housing resale activity declined for a second consecutive quarter, after recording large gains through most of 2009.
Investment in new housing construction (+6.9%) continued to advance, the third consecutive quarterly gain of over 6.0%.
Business investment in plant and equipment expanded 3.5%, the largest quarterly gain since 2005. The advance was due mainly to a 6.7% increase in spending on machinery and equipment. Investment in computers and other office equipment (+19.3%) and in industrial machinery (+12.6%) led the second-quarter gain.
Exports of goods and services grew 1.5%, the fourth consecutive quarterly gain. Increases in exports of automotive products (+12.8%) and exports of machinery and equipment (+6.2%) were the main contributors to growth in goods exports. Exports of services, notably commercial services, also continued to advance.
Imports of goods and services were up 3.9%, also the fourth consecutive quarterly increase. Machinery and equipment (+8.7%) and industrial goods and materials (+4.9%) contributed the most to the increase in imported goods, while travel services (+6.8%) led the growth in imported services.
Businesses accumulated $13 billion in inventories in the second quarter, following an accumulation of $6 billion in the first quarter. This was in contrast to the reduction of inventories recorded in each quarter of 2009.
Manufacturers’ inventories increased for the first time since the fourth quarter of 2008. Inventories in both retail and wholesale trade also rose.
Agricultural inventories fell for a second consecutive quarter as exports of grains and cattle remained strong.
The economy-wide ratio of stock to sales remained unchanged from the previous quarter. Businesses held inventories equivalent to 65 days of sales.
The price of goods and services produced in Canada rose 0.2% in the second quarter. Price increases for coal and iron ore were largely offset by price declines for crude petroleum and motor fuels and lubricants.
Overall, the price of final domestic demand was up 0.1%. The price of government current expenditure on goods and services increased in the second quarter, as did the price of both residential and non-residential structures.
The price of consumer goods and services declined 0.1%. This was the first decline in the price of consumer goods and services since the fourth quarter of 2008. A decrease in the price of motor fuels and lubricants was a major contributor to the second quarter decline.
Canada’s real gross domestic income, a measure of purchasing power, grew 0.5% in the second quarter, the fourth consecutive quarter of growth. This gain mirrors the change in GDP, as Canada’s terms of trade (a measure of export prices relative to import prices) were very similar to those of the previous quarter.
Total funds raised by domestic non-financial sectors reached $273 billion in the second quarter, up from $222 billion in the first quarter.
The increase in financing was concentrated in the government sector. Borrowing by all levels of government increased in the second quarter. This was led by bond issuances by federal and provincial governments.
Funds raised by non-financial private corporations advanced to $64 billion. Borrowing through loans increased by $21 billion, the first increase in loans since the fourth quarter of 2008, while bond issuances declined.
Household borrowing eased from $102 billion in the first quarter to $91 billion in the second quarter, in contrast to the upward trend in borrowing seen in previous quarters. Lower consumer credit and mortgage borrowing accounted for most of the decline in the second quarter.
The non-resident sector continued to be a net lender to the domestic economy in the second quarter. This lending reflects Canada’s quarterly current account deficit, which has continued since the fourth quarter of 2008. Most of these funds were provided to the Canadian economy in the form of purchases of government securities and acquisitions of corporate shares.
Additional data tables are available in the Canadian Economic Accounts Quarterly Review.
Consumer prices rise in June
Statistics Canada has just released its Consumer Price Index for June that shows that prices rose 1.0% in the 12 months to June, following a 1.4% increase in May.
Energy prices rose 1.3% between June 2009 and June 2010, after increasing 6.2% over the 12 months ending in May. Excluding energy, the Consumer Price Index (CPI) advanced 0.9% in June, following a 1.0% increase in May.
The price of gasoline decreased 2.9% in June compared with the same month a year earlier, after rising 6.9% in May. This was the first year-over-year drop in prices at the pump since October 2009.
Natural gas prices increased 3.0% in June, after rising 4.7% in May. This was the third consecutive advance following several months of decline.
Electricity prices rose 5.8% in June following a 4.0% advance in May.
Prices for the purchase of passenger vehicles rose 2.8% in June, following a 5.1% increase in May.
On a seasonally adjusted monthly basis, consumer prices fell 0.2% in June, the same rate of decrease as in May. Both the transportation and the clothing and footwear indexes fell 0.7% while food prices decreased 0.1%.
Prices increased in seven of the eight major components of the CPI in the 12 months to June; the only exception was clothing and footwear.
Shelter costs rose 1.6% in the 12 months to June, after increasing 1.3% in May. Homeowner’s replacement costs rose 5.2% following a 4.4% increase in May. In addition to paying higher prices for natural gas and electricity, consumers also paid more for rent.
On the other hand, the mortgage interest cost index, which measures the change in the interest portion of payments on outstanding mortgage debt, declined 5.0% in June, following a 5.4% decrease in May.
Despite the year-over-year decline in gasoline prices, transportation costs rose 1.0% in the 12 months to June after increasing 4.1% in May. In addition to paying higher prices for the purchase of passenger vehicles, consumers also paid 5.3% more for passenger vehicle insurance premiums.
Consumers paid 1.2% more for household operations, furnishings and equipment. This increase followed a 0.9% rise in the 12 months to May. Higher prices were recorded for telephone services and child care. Costs for financial services fell 2.8%.
Food prices went up 0.7% in June following a 0.8% increase in May. The increase in June was the smallest since March 2008. Prices for food purchased from restaurants rose 1.8% while prices for food purchased from stores increased 0.1%. Prices increased for sugar and confectionery, tomatoes and lettuce, while prices for oranges and potatoes fell.
Prices in the health and personal care component were up 1.7%. Prices for oral-hygiene products and dental care increased.
In the recreation, education and reading component, prices rose 0.4% after falling 0.2% in the 12 months to May. Consumers paid more for cablevision and satellite services. However, prices for video equipment and computer equipment and supplies fell.
Prices for clothing and footwear declined 1.8%. In this component, lower prices were recorded for women’s and children’s clothing.
Apart from Manitoba, consumer prices rose in all provinces in the 12 months to June, but at a slower pace than in May. Prices at the pump fell in most provinces.
The fastest rate of change occurred in Ontario where consumer prices rose 1.6%. Prices for the purchase of passenger vehicles were up as were passenger vehicle insurance premiums. Ontario consumers also paid more for electricity and telephone services.
In Manitoba, consumer prices decreased 0.2% in the 12 months to June, following a 0.5% increase in May. Lower prices for gasoline, natural gas and home and mortgage insurance were recorded in this province.
In British Columbia, prices advanced 0.5% in June, following a 0.6% increase in May. Electricity prices rose 21.7% while prices for home and mortgage insurance declined.
The Bank of Canada’s core index advanced 1.7% in the 12 months to June, following a 1.8% rise in May. Price increases were recorded for the purchase of passenger vehicles, passenger vehicle insurance premiums, homeowner’s replacement costs, electricity and telephone services.
The seasonally adjusted monthly core index increased 0.1% in June, after increasing by the same amount in May.
For more information, or to enquire about the concepts, methods or data quality of this release, contact the Dissemination Unit (toll-free 1-866-230-2248; 613-951-9606; fax: 613-951-2848; cpd-...@statcan.gc.ca), Consumer Prices Division
The federal budget from a global perspective
The federal budget introduced on March 4th will be forgotten within a week. In many ways this budget should be seen as a transitory budget, with no major initiatives. All the difficult decisions were postponed until the 2011 budget.
But what’s very clear at this point is that from a global perspective, the stimulus and bailouts of yesterday will turn into the fiscal tightening of tomorrow. The US might turn out to be the most difficult case. The issue is not only that the US current budget deficit is close to 10% of GDP, but also the composition of the deficit. Note that “pure” expenditure growth (that is program spending) by the government was not very large and this boost was offset by a de-facto spending cuts by state and local governments. So at the end of the day over the past year, we have seen only $40-$50 billion of pure spending—nothing to write home about. The vast majority of “spending” (close to $500 billion) was in the form of transfer to financial institutions, individuals and lower taxes. Note, for example, in US, all the growth in personal income currently is due to transfer payments and lower taxes. Wage income is actually falling. The point here is that when it comes to taxes and transfer payments, it is much more difficult (politically speaking) to cut when compared to pure fiscal spending.
Also remember that in both the US and Canada, the ability to cut the deficit in the 1990s was largely helped by falling interest rates, and in the case of Canada, a very weak dollar. Both factors are not at play in the current situation. Accordingly, look for any improvement in the fiscal situation to be limited.
The practical implication here is that huge budget deficits cannot co-exist with record low interest rates. Something will have to give. And this something must be interest rates. The new global fiscal reality suggests that long-term interest rates will probably rise faster than short-term rates in the coming 2-3 years—leading to a notable steepening in the yield curve.
In this context, Greece will try to sell enough bonds next week to finance the close to $30 billion of debt that is about to mature in April and May. Note that after these two months, the refinancing situation of Greece will improve for a while with much less debt expected to mature in the following months. So they have to go through the next two months before getting a break. At this point it is far from clear that the market will be willing to absorb this amount of Greek debt—so look for some volatility next week.
The US labour market is still unable to create jobs and start reversing the trend that cost no less than 8 million jobs during the recession. But if you look at overall manufacturing activity in the US, you will see a very different picture with an impressive rebound in production activity. In fact, the manufacturing sectors on both sides of the 49th parallel are showing signs of life. But the improvement in the US is not only stronger, but also much more capital-intensive. The practical implication of the more capital-intensive manufacturing rebound south of the border is that despite the strong Canadian dollar, manufacturing employment in Canada will probably rise faster than in the US in the near term. However, given the increased prevalence of better- capitalized and more efficient production facilities stateside, Canadian manufactures will find it even more difficult to compete when the dust settles.
Benjamin Tal
Senior Economist
More oxygen for the housing “buble”
A rush of home buyers trying to beat higher taxes and tighter mortgage regulations could pump up the housing market just as it’s showing signs of cooling.
The real estate market pulled back slightly in January after its record run, although both sales and prices were up sharply from the depressed levels of a year ago.
Economists believe, however, that home buyers will push to beat new regulations, unveiled this week by Finance Minister Jim Flaherty, which come into effect April 19.
They also think that there will be a rush to beat the new harmonized sales tax in Ontario and British Columbia later this year.
That could lead to a spike in sales in the spring, followed by a sharp pullback and lower prices in the second half the year, but nothing that would crater the market.
An increase in supply as owners were enticed to list their homes by high prices, and a slight ebbing of demand as consumers realized things were getting a little too pricey, led to a decrease in month-over-month sales in January for the first time since December, 2008.
The 2.8-per-cent decline was small, but comes as market watchers anxiously track the market in search of an asset bubble.
As reported earlier, the federal government moved this week to curtail speculation in what has been a red-hot market.