Thanks largely to the money earned from resources, Canada defied the conventional wisdom and was able to overcome several obstacles to steady economic growth, according to a study released today in the Canadian Economic Observer.
Thursday, April 10, 2008
Study: Canada's economy in 2007
Thanks largely to the money earned from resources, Canada defied the conventional wisdom and was able to overcome several obstacles to steady economic growth, according to a study released today in the Canadian Economic Observer. These hurdles included the slowing US economy and the credit squeeze in global financial markets.
Events in the real economy played out against the backdrop of continued rapid shifts in prices in some markets. The Canadian dollar continued its five-year ascent to reach parity with the US greenback by the end of 2007.
The loonie began to take off late in 2002, just as commodity prices started their historic climb. This price boom began initially in energy, before soon spreading to metals. The largest increases in 2007 were for agricultural products.
Meanwhile, prices in global financial markets were exceptionally volatile throughout the year. Last year's global financial turmoil joined a long list of crises from the past decade. The economy has shown its ability to absorb and adapt to most of these shocks in financial markets.
While many prices in commodity and financial markets were gyrating more than ever, growth in the real economy of output and employment has never been more steady. In the last four years, real gross domestic product (GDP) expanded by 3.1%, 3.1%, 2.8% and 2.7%: easily the most stable growth for any four-year period on record back to 1961.
Canada surpasses US growth
Real GDP growth of 2.7% in Canada was barely affected by the slowdown in the United States, where GDP growth eased from 2.9% in 2006 to 2.2% last year. This was the first year growth in Canada surpassed the United States since early this decade.
It is worth recalling how large the gap between growth in Canada and the United States can be when the latter falters: in 2001, Canada's GDP growth of 1.8% was almost triple the 0.7% in the recession-plagued United States, while the 2.9% increase in 2002 was nearly double the 1.6% gain in the United States. The widely-held myth that "Canada catches cold when the United States sneezes" was debunked years ago: so far in 2007 and 2008, we have barely sniffled while contagion spread in US housing and financial markets.
Canada's steady growth last year, despite the slowdown in the United States, sheds some light on the recent debate about how much Canada can "decouple" from the US economy. To date, the slowdown in the United States has been largely confined to housing and autos, both of which contracted for a second straight year, and of course the financial sector.
Commodity output slow to respond to high prices
Profits, investment, exports and sales of resources all soared in recent years, but output and employment in the primary sector grew at only about the same rate as the overall economy. This gap reflects how the commodity boom was largely a price phenomenon.
Since 2002, the volume of output in the resource sector rose just 11%, less than the 14% growth for the overall economy. Meanwhile, employment in resources rose 13.6%, implying a drop in output per employee.
The gap between employment and output growth was driven by mining, where jobs jumped 25% between 2002 and 2007 but production rose only 9%.
Manufacturing sales by industry in 2007 showed almost exactly the same pattern of increase or decrease as seen on balance since 2002. Clothing, forestry products and autos all continued to post large declines, while small drops were seen for printing, beverages and tobacco, rubber and plastic, and computers and electronics.
These losses were offset by rapid growth for petroleum, primary metals, aerospace, machinery, metal fabricating, non-metallic minerals and chemicals. Food, furniture and miscellaneous manufacturers contributed modest gains.
Household spending accelerates
The growing wealth of Canadians was reflected in a 4.7% gain in the volume of consumer spending in 2007, its largest annual increase since 1985.
Flat-screen TVs continued to fly off the shelves of retailers. Auto sales set a new record of 1.686 million units. Despite high gasoline prices, sales of trucks rose while passenger cars fell slightly, lifting the share of trucks in all vehicle sales to a record 49.2%. This helped boost gasoline consumption a further 3.6% last year, despite record high prices at the pump.
Another measure of the growing purchasing power of Canadians was a sharp increase in travel abroad, especially to overseas vacation destinations rather than short shopping trips to the United States: travel overseas rose 9.8%, while trips to the United States were up 6.1%, including a 3.3% increase in same-day auto trips.
Regional differences continues to narrow
It has become commonplace in recent years to characterize Canada as divided between a booming resource economy in the West and a slumping manufacturing sector in the East. In 2007, this was more a falsification than a simplification.
Regional differences in job growth were less pronounced than in recent years. For the first time since 2004, every province posted higher employment. While Alberta continued to lead with a 4.7% gain, growth accelerated in every other province.