The Canadian dollar capped its five-year appreciation against the US dollar by achieving parity late in September. The increase accompanied higher commodity prices, notably record prices for oil and wheat, and a cut in US interest rates. The latter was motivated by the turmoil in financial markets that began in mid-August, and renewed weakness in the US housing market.

In Canada, however, there were few signs that the disruption in some financial markets was affecting the real economy. Figures from Statistics Canada show employment jumped 0.3 percent in September, helping to send the unemployment rate to a 31-year low of 5.9 percent. Higher commodity and stock market prices in September also pointed to the underlying strength of the economy. Short-term business credit growth was steady, as more bank loans made up for a drop in commercial paper.

The Consumer Price Index fell 0.1 percent between July and August, largely due to lower gasoline prices. As a result, the annual inflation rate slowed substantially to 1.7 percent from the 2.2 percent posted in each of the previous four months.

Much of the drop in gasoline prices reflects an easing in the cost of crude oil over the summer (before surging to new record highs in September). But part of the drop also reflects the stronger Canadian dollar: gasoline prices in Canada fell 7.7 percent, more than the 4.9 percent drop in the US. This continues a trend that began when the loonie began its appreciation in 2003: since then, gasoline prices have risen 42 percent in Canada, while US drivers have seen prices jump 90 percent. While Canada imports little gasoline directly from the US, the North American market is fully integrated, ensuring that any savings from the exchange rate are passed on to drivers in Canada. Most studies of the impact of the exchange rate on import prices ignore this effect, which has saved Canadians $10.2 billion, or $823 per household on average, over the last five years.

Quebec
Household demand in Quebec softened over the summer, after pay equity settlements had fuelled strong gains in the spring. Housing starts fell steadily over the summer, while retail sales in June and July gave back all of their 5 percent gain in May. The underlying determinants of growth remained strong. Employment grew 0.4 percent in the third quarter, and unemployment remained at its lowest level on record. Manufacturing sales dipped early in the summer due to temporary declines in oil and metals prices. Since these industries represent 25 percent of its sales of manufactured goods, Quebec remains well positioned to profit from the recent rebound in their prices.

British Columbia
British Columbia’s resource sector continued to hamper growth. In particular, its forestry products, which account for one-third of its shipments, were hit by a province-wide strike late in July. This was the latest blow to the lumber industry, which has seen shipments tumble 22 percent in a little over a year. Still, British Columbia’s overall employment growth of 2.9 percent in the past year remained the third highest among the provinces, led by construction. This helped buoy housing starts and retail sales over the summer.

Ontario
Ontario also continued to shift away from its traditional manufacturing base. It has shed 60,000 factory jobs in the past year. Nevertheless, employment growth has remained close to the national average due to services. Business services led the way with gains of nearly 10 percent. Education and accommodation and food have also seen employment grow at double-digit rates. Housing starts remained steady into August, but Ontario retail sales in July were the weakest in Canada.

23 Oct 2007