2 TRANSPORTATION AND THE ECONOMY

CANADIAN ECONOMIC PERFORMANCE

The Canadian economy continued to perform well in 2005 as real gross domestic product at market prices grew 2.9 per cent, the same rate as in the previous year. Growth was strongest in the second and third quarters. During the year, energy prices, interest rates and the value of Canadian dollar all rose. Consumer expenditures, business investment and government spending all provided strength, while net exports were a drag on the economy as imports grew twice as fast as exports. High commodity prices resulted in strong growth in the resource rich western provinces while the high value of the Canadian dollar hurt the manufacturing sector in the central provinces.

Consumer expenditures increased 4.0 per cent, the largest increase since 2000, and contributed the most to economic growth. Retail sales were 6.3 per cent higher in 2005 than in 2004 when they increased 4.7 per cent. New motor vehicle sales increased 3.5 per cent in 2005, the first increase since 2002, as purchasers responded to "employee pricing" offers and other incentives. New housing starts numbered 233,900, down 4.1 per cent from 2004 but still the second highest since 1988. Investment in residential construction rose 3.3 per cent, less than half the 8.3 per cent increase in 2004, while investment in non-residential structures increased 6.8 per cent, up sharply from the 0.8 per cent last year. Investment in machinery and equipment was strong for the third year in a row as it rose 10.7 per cent in 2005. Overall business investment increased 6.9 per cent the same as the previous year. Government spending on goods and services rose 2.8 per cent while investment by government rose 4.2 per cent. The international sector once again was a weakness as exports of goods and services increased 2.3 per cent in real terms while imports increased 7.0 per cent compared with increases of 5.0 per cent and 8.1 in 2004.

Table 2-1 shows economic indicators in Canada for 2005.

TABLE 2-1: GENERAL ECONOMIC INDICATORS, 2004/05

	2005	Percentage change 2004 - 2005	Annual percentage change 1999 - 2004
GDP at Basic Prices (millions of constant 1997 dollars)
Total Economy	1,079,342	3.2	3.1
Goods	341,245	3.0	2.6
Agriculture	14,296	5.8	(2.3)
Forestry	7,180	(0.3)	4.2
Mining	41,193	1.9	3.3
Manufacturing	185,217	2.4	2.3
Construction	58,292	4.6	5.5
Services	738,097	3.3	3.4
Retail trade	63,092	4.6	4.9
Transportation	45,195	4.3	2.5
Merchandise Trade (millions of dollars)
Exports	453,404	5.7	3.1
Imports	386,749	6.5	2.1
Income (dollars)
Personal Disposable Income per capita	24,099	3.1	3.6
Canadian Dollar (U.S. cents per unit)	82.5	7.4	2.7
Employment (thousands)	16,170	1.4	2.1
Population (thousands)	32,271	0.9	1.0
Prices
Total Economy (1997 = 100)	118.3	3.1	2.5
Consumer Price Index (1992=100)
All Items	127.3	2.2	2.4
Transportation	150.7	4.1	3.1

Source: Statistics Canada Cat. No. 11-010, 13-001, 15-001,62-010; Bank of Canada

GDP at basic prices by industry grew 3.2 per cent in real terms in 2005, similar to the previous year. Output in the goods sector of the economy grew at 3.0 per cent while the services sector grew by 3.3 per cent. The lower growth rate in the goods sector reflects the relatively low growth (2.4 per cent) in manufacturing output. Motor vehicle production declined in the first half of the year but recovered in the second half. In the primary sector, agriculture grew 5.8 per cent; however, forestry declined 0.3 per cent. The mining sector grew 1.9 per cent as oil and gas exploration advanced 14 per cent but oil and gas extraction fell 1.5 per cent due to production difficulties. Construction output grew by 4.6 per cent with both non-residential activity and residential activity. Retail and wholesale trade advanced 4.6 per cent and 7.8 per cent, respectively. Transportation services grew 4.3 per cent and benefited from the movement of resource commodities and consumer goods.

Figure 2-1 shows the changes in real GDP since 2000.

FIGURE 2-1: REAL GDP BY MAJOR SECTOR, 2000 - 2005

Source: Statistics Canada Cat. No. 15-001

The world economy grew 3.5 per cent in 2005, which, while down from the 3.9 per cent growth in 2004, was very respectable. It survived high oil prices and was supported by a strong U.S. economy and by growth in China and Japan. In the United States strong consumer spending, equipment and software purchases, exports and residential construction contributed to 3.5 per cent growth, down from 4.2 per cent growth the previous year. While the fall in the value of the U.S. dollar helped exports, high energy prices increased imports and the trade deficit widened by $100 billion. Consumer spending was buoyed by employment and high real estate prices. The Mexican economy grew by 3.1 per cent in 2005, benefiting from strong domestic demand and exports to the United States. Latin America grew by 3.8 per cent in 2005 down from 4.2 per cent in 2004. Brazil's growth rate fell from 4.9 per cent to 2.3 per cent reflecting tight monetary policy and the effects of a political crisis on consumer and business confidence. Western Europe's growth rate was only 1.6 per cent in 2005, down from 2.1 per cent the previous year and reflects the impact of high energy prices as well as structural difficulties particularly in Germany, France and Italy. Growth in the United Kingdom economy fell from 3.2 per cent in 2004 to 1.8 per cent in 2005. Growth in the Asia-Pacific region was 5.0 per cent in 2005, basically unchanged. For the second year in a row Japan had respectable economic growth at 2.7 per cent. China continued with very strong growth, 9.9 per cent in 2005, fueled by exports and investment. China is now the third largest exporter in the world.

Figure 2-2 compares Canada's economy with that of other regions from 2001 to 2005.

FIGURE 2-2: REAL GDP: CANADA AND OTHER REGIONS, 2001 – 2005

Source: Global Insight, Statistics Canada Cat. 13-010, U.S. Bureau of Economic Analysis

In 2005, merchandise exports on a balance of payments basis increased by 5.7 per cent while imports increased by 6.5 per cent, resulting in a goods surplus of $66.7 billion up less than one per cent from 2004. In terms of value, energy exports increased due to a rise in energy prices while the value of forestry and automotive product exports declined. Exports to the U.S. rose 5.2 per cent, 7.4 per cent to the European Union and 5.3 per cent to Japan while imports increased 3.4 per cent from the U.S., 5.0 per cent from the European Union and 11.6 per cent from Japan.

The value of Canadian dollar against the U.S. dollar fell in the first part of 2005 from the 2004 close of US$0.824 to its low for the year of US$0.794 in May. It then rose to close the year at a 13-year high of US$0.863. The average value of the Canadian dollar against the U.S. dollar increased 7.4 per cent in 2005 and has risen 28 per cent from January 2002 to December 2005. The rise of the Canadian dollar reflects the fall in the value of the U.S. dollar as well as an increase in commodity prices.

General prices in the total economy as measured by the GDP deflator rose 3.1 per cent in 2005, up very slightly from the 3.0 per cent increase in 2004. Consumers paid 2.2 per cent more on average for goods and services in 2005 than they did in 2004; this was up from the 1.9 per cent increase in 2004. The main factor behind the increase in inflation was the increase in energy prices, which rose 9.7 per cent compared with the 6.7 per cent increase in 2004. Another contributing factor was a 5.2 per cent increase in home ownership replacement costs. Transportation prices rose 4.1 per cent compared with a 2.4 per cent increase in 2004 as gasoline prices rose 12.8 per cent.

Disposable income per capita rose 3.1 per cent in 2005 in nominal terms compared with a 2.9 per cent increase in 2004. In real terms, disposable income per capita rose 1.5 per cent, the same rate as it did in 2004.

The average number of persons employed in Canada rose 1.4 per cent to 16,170 thousand in 2005, and follows a 1.8 per cent increase in 2004. The labour force grew only 0.9 per cent in 2005 and this along with the employment growth pushed the unemployment rate down to 6.8 per cent, the lowest rate since 1974. By mid-year the population of Canada rose to 32.3 million, up 0.9 per cent from 2004.

PROVINCIAL ECONOMIC PERFORMANCE

In 2005, western Canada continued to have stronger growth than central and eastern Canada. The West's economy was driven by the demand for resource commodities. This drove up the value of the Canadian dollar and caused problems for the manufacturing industries of Ontario and Quebec. Newfoundland and Labrador improved its economic performance in 2005 but had the lowest growth rate of the provinces as a result of declines in oil production, which were due to accidental spills and system problems.

While the primary sector struggled in Prince Edward Island, the manufacturing and construction sectors did well. In Nova Scotia, the service sector, particularly retail and wholesale trade, was strong but the fishing industry was hurt due to quotas and the weather. In addition, natural gas production fell. Investment activity and consumer demand helped the New Brunswick economy while manufacturers were affected by the high dollar and by high energy prices. Consumer demand for cars and other large purchases helped the Quebec and Ontario economies as the manufacturing sector adjusted to the high dollar. This was aided by strong U.S demand particularly for motor vehicles. Investment in machinery and equipment was strong in both provinces as businesses improved their competitiveness. While residential construction cooled, it was still strong. Heavy rainfall and cool temperatures adversely affected agriculture in the three western provinces. In Manitoba, manufacturing faired well in 2005, and heavy rainfall pushed up hydroelectric production. Sales of potash, uranium and energy as well as investment in these industries provided strength to the Saskatchewan economy. Alberta, driven by energy investments and exports, had the strongest growth of all provinces. People continue to migrate to Alberta to take advantage of the prosperity affecting many sectors of the economy there. British Columbia's forestry industry was strong in 2005 as it benefited from the housing boom taking place in both Canada and the United States.

Table 2-2 shows provincial economic performance in 2004/05.

TABLE 2-2: PROVINCIAL ECONOMIC GROWTH, 2004/05

(GDP at basic prices in chained $1997)
	Percentage Change 2004 – 05	Percentage Change 1999 – 2004
Newfoundland and Labrador	0.2	5.1
Prince Edward Island	1.9	2.3
Nova Scotia	1.5	2.6
New Brunswick	0.3	2.5
Quebec	2.2	2.6
Ontario	2.9	3.0
Manitoba	2.7	2.2
Saskatchewan	3.5	1.6
Alberta	4.7	3.7
British Columbia	3.6	3.1
Territories	1.4	8.3

Source: Statistics Canada

Canadian Economic Performance

International Trade and Trade Flows

Areas of Importance to Transportation

Productivity and Price Performance of Transport

Importance of Transportation to the Canadian Economy