Canada's GDP Drops Sharply

Real gross domestic product (GDP) declined 0.8% in the fourth quarter, weakening progressively each month. This was the sharpest quarterly decline since 1991. Declines in exports, capital investment and personal expenditures all contributed to the economic contraction. Final domestic demand fell 1.2%. Government current and capital expenditure rose. Real GDP declined 1.0% in December.

GDP growth for the year was positive at 0.5%, a sharp deceleration from 2.7% in 2007.

The volume of imports fell faster than exports. Both registered their largest quarterly decline since 1982. Prices of imports climbed, notably because the Canadian dollar depreciated 14% in the quarter relative to its US counterpart. This was the largest quarterly depreciation relative to the US dollar since Canada returned to a floating exchange rate in 1970.

Declines in the production of goods (-2.4%) were widespread as domestic and foreign demand weakened. Except for agriculture, all other goods-producing sectors receded. Manufacturing (-4.3%) led the downturn, experiencing a sixth consecutive quarterly decline. Service-producing industries, down 0.4%, fell for the first time since the third quarter of 1991. The decline in service-producing industries was primarily driven by decreases in wholesale and retail trade, and in transportation services, which more than offset increases in the public sector, and in finance and insurance.

The Canadian economy contracted at an annualized rate of 3.4% in the fourth quarter, compared with a 6.2% decline in the US economy. The European Union registered a decline of 5.9% in the quarter, while Japan's economy was down 12.7%.

Exports continue to fall

Exports of goods and services were down 4.7% in the fourth quarter. This was the sixth consecutive quarterly decline; a first in Canada since quarterly estimates began over 60 years ago.

Automotive products were down 19%, accounting for nearly half of the quarterly decline in total exports. Industrial goods and materials also decreased significantly in the fourth quarter.

Imports decline sharply

Imports dropped sharply in the fourth quarter (-6.4%). Declines were registered for both goods and services imports, as domestic demand faltered and prices for imported goods and services rose.

Imports of automotive products declined 16% while other consumer goods were down 9.0%, reflecting a downturn in consumer spending.

Personal spending declines

After decelerating since the start of the year, personal spending fell for the first time since the fourth quarter of 1995. Both goods and services contributed to the 0.8% decline.

Expenditures on new and used motor vehicles dropped 5.5% in the fourth quarter, following declines in the second and third quarter.

After 15 quarterly advances, spending on furniture, furnishings and household equipment and maintenance fell 2.3% in the fourth quarter.

Spending on services was down 0.4%. Financial services declined as stock and bond commissions and fees related to mutual funds dropped significantly.

Investment in residential structures retreats

Investment in residential structures (-6.1%) fell again in the fourth quarter, posting its largest quarterly decline of 2008. Resale activity, as reflected in ownership transfer costs, dropped 24% in the quarter. Renovation activity fell 4.2%, after small declines in the previous two quarters. The volume of new housing construction also slipped, after remaining flat in the third quarter.

Business investment in plant and equipment down

Business investment in machinery and equipment contracted 7.5% in the fourth quarter. All categories recorded declines, notably automobiles, trucks, and industrial machinery. Investment in non-residential structures was unchanged in the fourth quarter, following three quarterly increases.

Inventories build up again

Inventories accumulated again in the fourth quarter for both farm and non-farm businesses.

For non-farm businesses, the increase in stocks was at a slower rate than in the previous seven quarters. Retail inventories, particularly of motor vehicles, increased as consumer spending softened. Wholesalers drew down their durable goods inventories in the fourth quarter, while manufacturers of non-durable goods increased their stocks.

Corporate profits down sharply

Corporate profits declined 20% in the fourth quarter, after trending upward for nearly seven years. A sharp downturn in energy and metal prices was a major factor in the fourth quarter decline.

Personal income increases

Personal disposable income continued to advance (+0.4%), as increases in labour income and government transfers to persons more than offset declines in investment income. Labour income advanced 0.7%, growing at a similar rate as the third quarter. Employment was virtually unchanged in the fourth quarter, while average weekly earnings were up and hours worked were down slightly.

The downturn in spending (in nominal terms) combined with increased disposable income led to $45 billion of personal saving in the fourth quarter; $15 billion higher than in the third quarter. This level of personal saving was the highest since the fourth quarter of 1995, and led to a saving rate of 4.7%, the highest rate recorded since the first quarter of 2002.

Export prices drop as import prices climb

The price of goods and services produced in Canada dropped 2.7% in the fourth quarter, largely due to declines in energy and metal prices. Export prices were particularly hard hit, falling 4.1%. Declining prices were a major contributing factor to the 3.5% fall in nominal GDP.

Import prices increased significantly throughout 2008. The 5.5% increase in the fourth quarter reflected the depreciation of the Canadian dollar.

GDP by industry, December 2008

Real GDP dropped 1.0% in December, as almost all major sectors reduced production. This follows a 0.7% decline in November. The output of manufacturing, retail trade, construction and wholesale trade were the main sources behind the December drop. Reduced activity was also recorded in transportation, mining excluding oil and gas extraction, accommodation and food services, and forestry. The public sector (health, education and public administration combined) advanced while the finance and insurance sector was unchanged.

Activity in the manufacturing sector (-3.0%) fell again in December, with 16 of the 21 major groups losing ground, mirroring recent declines in exports. Motor vehicle and associated parts production, and the manufacturing of primary metal, chemical and wood products, continued to retreat.

Value added in retail trade dropped 3.5% in December, the largest monthly decrease in over a decade. The decline was widespread, with all major trade groups decreasing. The reduction in the volume of activities posted by new and used car dealers, home centres and hardware stores, and beer, wine and liquor stores, led the retreat. The volume of wholesaling activity (-2.4%) decreased in December for a third month in a row.

Construction activity was down 2.3% in December. For the second month in a row, all three components (residential buildings, non-residential buildings, and engineering and repairs work) retreated. The home resale market declined further in December. As a result, the output of real estate agents and brokers dropped 4.2% after much stronger declines in the previous two months.

The output of the energy sector decreased 0.6% in December. A significant drop in support activities for mining and oil and gas extraction led the retreat, although oil and gas extraction was up slightly. Electricity generation also contracted. The output of the mining sector excluding oil and gas extraction dropped 7.4% in December.

Source: Statistics Canada, March 2, 2009

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