Canada's State of Trade: Trade and Investment Update 2011

III. Canada’s Economic Performance

In many ways, 2010 was a year of consolidation, as the recovery, begun in 2009, moved to firmer footings: real economic activity expanded in all four quarters; domestic demand was buoyant; business investment rose; trade expanded; and jobs were created. These favourable conditions spurred consumer and business confidence. Output expanded in all provinces and territories in 2010 and, overall, the economy grew by 3.1 percent in real terms after having contracted the year before. Advances in employment brought levels almost back to where they were before the recession started—it would take until the first month of 2011 to actually surpass the pre-recession peak employment level. As a result of rising resource prices, the Canadian dollar appreciated against allmajor currencies and ended the year just slightly above parity with the U.S. dollar.

Gross Domestic Product

Canada emerged from the recession toward the end of the first half of 2009 and growth resumed starting in the third quarter of that year (Figure 3-1). Since then, the economy has registered six consecutive quarters of growth until the end of last year. For 2010 as a whole, real GDP expanded by 3.1 percent, offsetting the 2.5-percent contraction registered in 2009.

Figure: 3-1
Canadian Real GDP Growth, 2006-2010

Canadian Real GDP Growth, 2006-2010 Text Alternative

Source: Statistics Canada.

Turning to the expenditure-based categories of GDP (Figure 3-2), growth in real personal consumption expenditures on goods and services was a little higher than overall growth in GDP, as expenditures advanced by 3.4 percent in 2010 after having only risen by 0.4 percent in 2009.

Real expenditures on durables, semi-durables, and non-durables advanced 5.4 percent, 5.0 percent, and 1.7 percent respectively, while those for services were up by 3.4 percent. Expenditures were up broadly, with a few exceptions: expenditures on fuels, other than those related to motor fuels, were down in 2010, along with those related to reading and entertainment supplies, miscellaneous personal effects, and tobacco products. Spending was up themost for expenditures abroad (up 26.0 percent); women’s and girl’s clothing (up 10.8 percent); new and used motor vehicles (up 6.8 percent); footwear (up 6.7 percent); and furniture, carpets and other floor coverings (up 5.2 percent).With the upturn in spending, personal consumption contributed slightly over 2.0 percentage points to real GDP growth in 2010, up from 0.2 percentage point in 2009.

Real business investment was up 7.1 percent in 2010, after having declined by 16.0 percent the year before. Investment in machinery and equipment rebounded after two years of decline, up 11.2 percent in 2010. Computer and other office equipment, telecommunications equipment, industrial machinery, and trucks all experienced double-digit rates of increase to lead the way. Investment in plants was down by 0.5 percent, as a 1.3-percent gain in investment in engineering structures was not enough to offset a 4.8-percent reduction in investment in buildings.

Figure: 3-2
Contribution to Real GDP Growth, 2006-2010

Contribution to Real GDP Growth, 2006-2010 Text Alternative

Source: Statistics Canada.

Investment in residential construction, which includes new housing construction, resales, and renovation activity, rose by 10.4 percent in 2010 following two years of decline. New housing construction was up 15.5 percent in real terms, and renovation activity posted a gain of 10.9 percent, while resale activity was down 1.7 percent.

Businesses were actively re-stocking inventories in 2010 as there was a net $7.7-billion addition (in constant 2002 dollars) to the inventories for non-farm businesses. At the same time, farm inventories were reduced by a net $341 million in real terms last year.

Overall, business activities added another 2.0 percentage points to economic growth in 2010, after having removed 4.1 percentage points from growth in 2009. Business investment accounted for the larger share of the increase, at nearly 1.3 percentage points, while changes in inventories accounted for 0.8 percentage point of the increase.

The volume of exports and imports of goods and services rose by 6.4 percent and 13.4 percent, respectively. Overall, the increase in real exports added 1.8 percentage points to growth in 2010 while the advance in real imports removed 4.0 percentage points fromgrowth over the year. As a result, trade was a drag on growth in 2010, removing a net 2.2 percentage points fromgrowth for the year.

Overall, the volume of exports of goods and services was up by $26.7 billion in chained 2002 dollars. The overwhelming majority (97.5 percent) of the increase in the volume of exports in 2010 occurred on the goods side, with nearly 80 percent of the increase originating from automotive products (up $20.7 billion). The transportation services sector was largely responsible for the gains in services exports in 2010 as a gain in travel was more or less offset by declines in commercial and government services exports.

Likewise, at 86.4 percent, the bulk of the increase in the volume of imports came on the goods side, led by machinery and equipment (up $22.8 billion), automotive products (up $19.2 billion), and industrial goods and materials (up $11.8 billion). In total, the volume of goods imports was up $57.8 billion in chained 2002 dollars over 2009 levels. Services imports advanced $9.2 billion in chained 2002 dollars, led by travel, up $6.0 billion, and transportation, up $3.0 billion.

With respect to GDP by industrial activity, the advances in the economywere driven by goods production. Industrial activity expanded by 3.3 percent in 2010, led by 5.0-percent growth for goods and 2.6-percent growth for services.

All goods-producing sectors advanced, with the exception of utilities (down 0.3 percent), which was held back by a decline in electricity production. Construction led the gains, up 6.6 percent, followed by manufacturing (up 5.6 percent) and mining and oil and gas extraction (up 5.1 percent). Output in the agriculture, forestry, fishing, and hunting sector expanded 1.4 percent in 2010.

Manufacturing, the largest of the goods-producing sectors, rebounded strongly. Increasing foreign demand, rising domestic consumer expenditures on goods, alongwith inventory re-stocking, created favourable conditions for the expansion of output. Gains were widespread, led by non-metallic minerals, primary metals, wood, and clothing—all with double-digit gains. Additionally, transportation equipment,machinery, and plastics and rubber all posted growth rates in the 8 to 9 percent range. Overall, 20 of the 21 major manufacturing industries experienced increased output in 2010, with the exception of printing (down 4.6 percent).

The above-mentioned increase in real investment in residential construction and the decline in plant investment were at the heart of themovements in construction output as residential building construction output advanced (up 13.1 percent) while non-residential building construction output retracted (down 0.3 percent). Overall, construction activity was 6.6 percent higher in 2010 than in 2009.

Forestry and fishing, and mining, oil and gas were also affected by strong foreign demand as well as by price effects. Output in forestry and logging was up 14.5 percent, aided by an increase in lumber exports after several years of decline. Mining output posted an 11.0-percent increase, with output up 22.7 percent for non-metallic minerals and output up 20.7 percent for coal. However, notwithstanding significant price increases in the sector, real output in oil and gas held steady, up only 0.7 percent in 2010.

Finally, agriculture output fell 1.7 percent as crop production was down by 3.4 percent last year.

Output in services is not as volatile as goods production and did not decline during the recession. Hence, with both exports and domestic consumption expenditures of services remaining weak, there was less opportunity for it to grow last year. Accordingly, services output increased by some 2.6 percent in 2010—roughly half the pace of goods output. Gains were small for the most part, but widespread.Wholesale trade, transportation and warehousing, and retail trade led the advances, up 5.2 percent, 4.3 percent and 3.7 percent, respectively.

Gross Domestic Product by Province

The turnaround in real output at the national level was mirrored on a regional basis, as output was up in each province and territory. However, regional disparities were present: Prince Edward Island, Nova Scotia, Quebec, Manitoba, and the Yukon posted growth below the national average. In contrast, Newfoundland and Labrador, the Northwest Territories, and Nunavut all registered much higher rates of growth than for the country overall (Figure 3-3).

In Newfoundland and Labrador, economic output advanced 6.0 percent in 2010, following a 10.4-percent decline the year before. This was the fastest pace of growth among the provinces. The gain was led by mining and oil and gas extraction, in particular by a 34.3-percent rise in metal ore mining along with increased output in oil and gas extraction. Output in construction was up 19.7 percent as residential construction increased by 14.2 percent and work began on a new mineral ore processing plant. Increased goods in circulation led to increased activity in wholesale trade and transportation services. Manufacturing output in 2010 was little changed over 2009 (up 2.8 percent) as gains in seafood product preparations (up 17.2 percent) were partially offset by declines in electronic productmanufacturing (down 39.1 percent).

Figure: 3-3
Real GDP Growth by Province, 2010

Real GDP Growth by Province, 2010 Text Alternative

Source: Statistics Canada.

In Prince Edward Island, output expanded by 2.0 percent in 2010, following a 0.2-percent contraction a year earlier. Residential construction and crop and animal production increased, while additional capacity resulted in higher output by utilities. Finance and insurance, retail trade, public administration, and health care also contributed to the overall gains. However, output in manufacturing fell by 8.6 percent last year, as food, transportation equipment, and chemical products posted declines.

In Nova Scotia, real GDP was up by 2.1 percent last year after falling by 0.3 percent in 2009. Gains in manufacturing, residential construction, wholesale trade, retail trade and transportation services outweighed declines in mining and oil and gas extraction and inmiscellaneous engineering construction. Inmanufacturing, transportation equipment manufacturers increased output with work on Coast Guard vessels and naval frigates. Output formanufacturers of rubber also increased, as did that for seafood product preparations and textiles.

The economy of New Brunswick posted a 3.3-percent rate of growth in 2010, after having declined by 0.5 percent in 2009. Manufacturing output led the way with an 9.6-percent gain, as wood products, seafood product preparations, and miscellaneous manufacturing posted the bulk of the gains. Forestry andmining output increased, while wholesale trade, retail trade, public administration, and transportation services also expanded. Construction output fell in 2010: residential construction and non-residential construction both increased, but the gains were offset by declines in engineering construction, as several engineering projects neared completion.

After a 0.5-percent contraction in 2009, the Quebec economy expanded by 2.7 percent last year. All major sectors of the provincial economy expanded in 2010, with the sole exception of arts, entertainment, and recreation (which posted a marginal, 0.1-percent decline). On the goods side, manufacturing and construction accounted for most of the gains. Residential construction was up 16.3 percent to lead the advance in construction. Manufacturing output rose by 1.8 percent last year: strong gains were registered for rubber products (up 36.1 percent), pharmaceuticals (up 17.5 percent), meat (up 16.9 percent), wood (up 9.4 percent), and primary and fabricated metal products (up 3.7 percent), while notable losses were posted for electronic products (down 16.0 percent) and aerospace products (down 11.7 percent). On the services side, retail trade, health care, wholesale trade, transportation services, and public administration were the leading sectors in 2010.

The Ontario economy expanded by 3.4 percent in 2010—just slightly above the national rate. This came on the heels of a severe 3.5-percent contraction in 2009. Similar to Quebec, all major sectors of the provincial economy expanded, with one exception. In the case of Ontario, output by utilities fell last year, as electricity production was down by 3.1 percent. A third of the gains came from manufacturing, which expanded by 8.0 percent. Within manufacturing, gains were widespread, with 18 of 21 major manufacturing industries registering increased output in 2010. The advance was led by motor vehicles and primary and fabricated metal products, which jointly accounted for nearly three quarters of the overall manufacturing gains. Plastics (up 12.0 percent) and machinery (up 8.2 percent) also registered notable gains in output, while losses were posted for aerospace products (down 7.6 percent) and printing (down 6.1 percent). Construction output also rose in 2010, supported by an 11.4-percent expansion in residential construction. Services activities also increased in tandem with goods production, led by wholesale and retail trade, truck and rail transportation, and financial services.

In Manitoba, GDP increased by 2.0 percent in 2010 after amarginal decline in 2009. Gains in construction, transportation services, and wholesale and retail trade were partially offset by losses in agriculture, forestry, fishing, and hunting and in manufacturing. Crop productionwas down sharply (13.8 percent) as a result of bad weather. Manufacturing output edged up 0.1 percent after two years of decline; an 11.6-percent gain in primary and fabricatedmetals combined with a 7.3 percent gain in wood products outweighed a 16.8-percent decline in miscellaneousmanufacturing, a 12.9-percent decline in printing, and an 8.3-percent decline in machinerymanufacturing. Construction output advanced as work continued on major engineering projects, in particular, electric power engineering construction, supported by 19.7-percent jump in residential construction. Education, health care, and public administration also registered gains.

Following a 4.2-percent decline in 2009, Saskatchewan’sGDP increased by 4.4 percent last year. Crop production fell sharply (down 18.6 percent) as a result of bad weather and, in turn, manufacturers of agricultural equipment reduced production. Mining and oil and gas output jumped 18.7 percent as potash production picked up as a result of strong provincial exports; however, oil and gas extraction fell for the seventh consecutive year, down 0.9 percent.Manufacturing activity edged down 0.8 percent, as gains in miscellaneous foodmanufacturing, primary and fabricated metal products, and wood products were offset by declines inmeat products andmachinery (notably agriculturalmachinery). All major services categories posted increases, led by finance and insurance, and wholesale and retail trade. Within transportation and warehousing, truck and rail transportation services posted strong gains, while pipeline transportation and warehousing services posted notable declines.

Alberta’s GDP expanded by 3.8 percent in 2010, after contracting by 4.8 percent a year earlier. Advances were widespread, with all goods-producing sectors and all services sectors recording increased output. Mining and oil and gas exploration, and manufacturing led on the goods side, up 4.4 percent and 8.7 percent, respectively. Strengthening energy prices led to increases in support activities for mining and oil and gas exploration. Increased output in meat products (up 22.8 percent),machinerymanufacturing (up 21.2 percent), and wood products (up 14.2 percent) led the gains inmanufacturing. Crop production rose sharply (14.9 percent) as the province experiencedmore favourable weather than its Prairie neighbours to boost agricultural output, while residential construction jumped 21.4 percent to anchor the gains in construction activity. As was the case elsewhere in Canada, the expansion of activity on the goods side was accompanied by an expansion of services activity, most notably for wholesale trade, transportation and warehousing, and retail trade.

British Columbia’s economy grew by 4.0-percent in 2010, after having contracted by 1.8 percent the previous year. Gains were widespread, with only one major sector— utilities—recording a decrease in output. Construction activity was up by 11.3 percent last year, as work continued on major engineering projects, in particular, electric power engineering construction, supported by a 6.3-percent increase in residential construction. Manufacturing output was up by 5.1-percent, with gains led by wood, machinery, and miscellaneous food manufacturing. In support of increased exports, production in forestry products jumped by 21.9 percent last year. Declining electric power generation was behind the decline in utilities output. Wholesale activity and transportation services picked up—truck and rail transportation services in particular—to lead the gains in provincial services output. The 2010 Olympic Winter Games also had a positive impact on output in industries such as performing arts and spectator sports, and accommodation and food services, which expanded by relatively more than in the other provinces and territories.

The Yukon economy expanded for the seventh consecutive year in 2010, advancing 2.1 percent compared to a 3.6-percent increase a year earlier. Construction output was up by 19.0 percent, led by non-residential construction, as work began on a number of community and health services buildings. Output in the services sector was up, with gains in retail trade, public administration, and accommodation and food services.

In the Northwest Territories, GDP rose by 5.8 percent last year, after falling by 10.9 percent in 2009. Construction, principally engineering construction, and mining activity, were the main contributors. Public administration and transportation services led the gains for services output.

The Nunavut economy experienced the fastest growth of all Canadian regions, rising 14.8 percent in 2010 following a 6.2-percent decline in 2009. Increased output in mining and oil and gas exploration accounted for much of the growth last year as the opening of a newmine causedmining output to increase. At the same time, engineering construction activity declined. Heightened exploration activity also led to higher output of support activities for mining and oil and gas extraction. Non-residential construction, mainly of institutional buildings, also contributed to the overall economic advances in the territory.

Employment

Job growth in Canada resumed in 2010 after a setback in job creation in 2009. For the year as a whole, employment rose by 1.4 percent, or 227,900 jobs. Roughly 70 percent of the job gains, or 157,800 jobs, were in full-time positions. With jobs being created, the national unemployment rate fell from 8.3 percent in January 2010 to 7.6 percent in December 2010. For the year as a whole, the unemployment rate averaged 8.0 percent, down 0.3 percentage point from 2009 (Figure 3-4).

Job gains were widespread across Canada, with only Alberta (down 8,000) and New Brunswick (down 4,000) posting losses in 2010.

Figure: 3-4
Unemployment Rate in Canada, 2006-2010

Unemployment Rate in Canada, 2006-2010 Text Alternative

Source: Statistics Canada.

Three provinces accounted for the bulk of the job gains. Ontario was responsible for some 47.4 percent of the national total, followed by Quebec at 29.4 percent, and British Columbia at 16.7 percent.

The number of jobs in the goods-producing industries was up in 2010 compared to 2009. However, not all sub-sectors posted gains. Manufacturing jobs fell 2.1 percent compared to their 2009 level, as this sector cut some 37,500 positions. Similarly, there were 15,400 (or 4.9 percent) fewer jobs in agriculture. This is a continuation of a longerterm trend, as both manufacturing and agriculture have been shedding jobs duringmuch of the decade. However, construction added 56,400 jobs to the payroll,while both utilities and forestry, fishing, mining, quarrying, and oil and gas made smaller additions to their employment levels in 2010. Overall, goods-producing industries added 15,700 positions to the payroll last year.

The services sector, which added 212,200 jobs to the payroll, was responsible for the bulk of the new jobs in 2010. Gains in health care and social assistance services (up 81,500) and in professional scientific and technical services (up 74,800) accounted for about three quarters of the overall gains to services jobs. Small declines were registered for miscellaneous services (down 33,500), transportation and warehousing (down 10,500), and information, culture and recreational services (down 3,600).

Over the course of 2010, Canada closed the gap with the October 2008 peak level of employment, but ended the year with employment just slightly below that prerecession level. By January 2011, Canadian employment levels had fully recovered all the jobs lost during the recession and the economy continued to add jobs over the first few months of 2011.

Inflation

Consumers paid 1.8 percent more on average for the goods and services in the Consumer Price Index (CPI) basket in 2010 compared to 2009. This was up considerably from the recession-driven 0.3-percent increase registered in 2009, but slightly lower than the average of 2.2 percent recorded over 2006-2008.

For the year as a whole, prices were up in seven of the eight major components of the CPI. Price advances in transportation and shelter rebounded in 2010 after having declined in 2009, driven by price increases for energy and passenger vehicles. Transportation and shelter combined account for just over 45 percent of the total weight of the CPI basket of goods and services.

Transportation costs were 4.3 percent higher in 2010, after falling 5.4 percent the year before. The increase was primarily the result of higher gasoline and passenger vehicle prices.

The single most important factor in 2010 was the increase in the price of gasoline. Energy prices rose 6.7 percent in 2010, following a 13.5-percent decline in 2009. Prices for gasoline increased 9.1 percent, after falling 17.5 percent the year before. Electricity prices increased 4.8 percent following a 1.8-percent rise in 2009. Natural gas prices declined 1.8 percent, a much slower rate than the 20.1-percent decline in 2009.

Prices for passenger vehicles rose 3.5 percent in 2010, after falling 5.9 percent in 2009 and 6.9 percent in 2008.

Shelter costs rose 1.4 percent, following a 0.3-percent decrease in 2009. Property taxes increased 4.1 percent. In addition to higher electricity prices, accommodation replacement costs increased 3.7 percent, after decreasing 2.6 percent in 2009. However, mortgage interest costs declined 4.4 percent in 2010, after increasing 0.3 percent the previous year.

Price pressures eased for five of the six remaining CPImajor components compared with 2009. These components were: food; household operations, furnishings and equipment; clothing and footwear; health and personal care; and alcoholic beverages and tobacco products.

Food prices in particular rose more slowly last year than in 2009 (1.4 percent versus 4.9 percent). Prices for food purchased from stores rose 1.0 percent, significantly slower than the 5.5-percent increase in 2009. The smaller increase in food prices can be largely explained by falling prices for fresh fruits and vegetables, which declined 2.7 percent after rising 8.1 percent in 2009, and by softer price increases formeat as well as for bakery and cereal products.

Prices for clothing and footwear fell 1.9 percent in 2010, following a 0.4-percent decline in 2009. It was the ninth consecutive year in which the price index for this component has decreased.

Finally, prices for recreation, education, and reading advanced 0.9 percent in 2010, the same pace as in 2009. Rapid technological advancements, improvement in product features and quality andmarket competition by low-cost producing countries continued to push prices for home entertainment equipment down in 2010, while education, reading, and other cultural costs were up over the year.

Provincially, price increases were strongest in Ontario (2.5 percent), and the Atlantic provinces of Newfoundland and Labrador (2.4 percent), Nova Scotia (2.2 percent) and New Brunswick (2.1 percent). Price increases were lowest in Manitoba and the Yukon (0.8 percent), while prices fell 0.7 percent in Nunavut.

The Bank of Canada core index1 also increased 1.7 percent for 2010 as a whole, following a 1.8-percent increase in 2009.

The Canadian Dollar

Figure: 3-5
Canada-U.S. Exchange Rate, 2010

Canada-U.S. Exchange Rate, 2010 Text Alternative

Source: Statistics Canada.

After depreciating against the U.S. dollar in 2009, the Canadian dollar rose against the U.S. dollar in 2010 (Figure 3-5). Averaging US97.09¢ in 2010, the Canadian dollar was worth US9.53¢ more than in 2009, an increase of 10.9 percent in its value against the U.S. dollar over the year. Relative to the othermajor currencies, and based on annual averages, the Canadian dollar also rose 3.8 percent against the yen, by 11.8 percent against the British pound sterling, and by 16.1 percent against the euro.

The Canadian dollar began the year at US96.4¢ on January 4, 2010. By the end of January, the dollar had sunk to US93.9¢, then began rising in the middle of April. On April 23, fears about European sovereign debt were realized when the Greek government requested a EU/IMF bailout package, and money markets began reacting by seeking safe haven in the U.S. dollar. As a result, the U.S. dollar appreciated against foreign currencies, including the Canadian dollar, which began to slide until it reached its low for the year, at US92.8¢ on May 25. The summer and early fallmonths were very turbulent and the dollar traded in a range between US93.8¢ and US98.1¢. By the end of October, it was again at the high end of this range and began a push that culminated with the Canadian dollar breaking through parity on December 31, the final trading day of the year


1 The core index is a special aggregate of the CPI and is used by the Bank of Canada as a policy instrument to conduct monetary policy with the aim of holding overall inflation within a 1 to 3 percent target range. The core index is computed by removing eight of the most volatile components of the CPI as defined by the Bank (fruits, fruit preparations and nuts; vegetables and vegetable preparations; mortgage interest costs; natural gas; heating oil and other fuels; gasoline; inter-city transportation; and tobacco products and smokers’ supplies) and the effect of changes in indirect taxes from the CPI.