2 TRANSPORTATION AND THE ECONOMY

CANADIAN ECONOMIC PERFORMANCE

The Canadian economy fared better in 2004 than in 2003, as real gross domestic product (GDP) at market prices grew 2.8 per cent. This was up from the 2.0 per cent increase of 2002, when it had been affected by the SARS outbreak, the mad cow scare and the increasing value of the Canadian dollar. In the first three quarters of 2004, the economy grew at about three per cent at annual rates. Consumer spending and business investment and exports for the first half of the year all provided strength. Beginning in the third quarter, however, the high dollar took its toll on exports but spurred imports. Overall growth in the economy fell in the fourth quarter to about half that of the first three quarters.

Consumer expenditures continued to provide strength to the economy in 2004, increasing 3.5 per cent in real terms. This reflected continued low interest rates and good employment growth. Retail sales were 5.0 per cent higher than in 2003, when they increased 3.8 per cent. New and used motor vehicle sales, while still high, fell 3.2 per cent, continuing the drop seen in 2003. New housing starts reached a seventeen-year high at 233,000 units. Investment in residential construction increased 8.4 per cent, almost a full percentage point above the 7.5 per cent increase in 2003. Investment in machinery and equipment rose strongly at 9.4 per cent, after increasing 4.5 per cent the previous year. Government spending on goods and services rose 2.5 per cent, while investment by government rose 1.9 per cent. The main weakness in the economy was the trade sector. While exports of goods and services increased 4.9 per cent, reversing the 2.4 per cent drop in 2003, imports also increased 8.2 per cent, compared with only 3.8 per cent in 2003.

Table 2-1 shows general economic indicators in Canada for 2004.

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

In 2004, GDP at basic prices by industry grew by 3.1 per cent in real terms. The output of goods-producing industries grew 3.7 per cent, while that of service industries grew 2.8 per cent. Resource-based industries all grew, as agriculture advanced 6.9 per cent, forestry and logging 5.8 per cent, and mining 3.1 per cent. The manufacturing industry recovered from very poor growth in 2003, expanding by 4.0 per cent in 2004, as transportation equipment, machinery and electronic equipment all showed good gains. The construction industry grew 3.7 per cent and residential construction was very strong at 8.7 per cent growth. The transportation industry grew 3.9 per cent which was similar to the growth of the goods-producing industries.

Figure 2-1 shows the changes in real GDP since 1999.

FIGURE 2-1: REAL GDP BY MAJOR SECTOR, 1999 – 2004

Source: Statistics Canada Cat. No. 15-001

The global economy expanded in 2004. World GDP rose 4.1 per cent, up from the 2.6 per cent increase in 2003. This improved rate of growth was due to the effect of expansionary monetary and fiscal policies in most of the major economies. However, a negative impact of this has been the rise in oil prices. While the depreciation of the U.S. dollar has stimulated the U.S. economy, it has been a drag on economies whose currencies have risen in value. The United States, which had real growth of 4.4 per cent in 2004, has been a major beneficiary of the expansionary policies and of its dollar’s decline. All sectors of the U.S. economy showed strength, as consumer spending rose 3.8 per cent, business investment 10.6 per cent, and exports 8.5 per cent. Mexico’s economy profited from the strong growth in the U.S. economy, growing 4.2 per cent in 2004, after increasing only 1.3 per cent in 2003. Latin America’s economy grew 5.7 per cent, as the Brazilian economy moved out of recession and grew 5.4 per cent. Other countries such as Argentina and Venezuela also had strong growth. Western Europe was again the weakest of the regions with growth of just 2.2 per cent in 2004. However, this was more than double the 1.0 per cent growth in 2003. Germany, France and Italy all had stronger economies in 2004; however, the rise of the Euro dampened exports, and employment and consumer spending remained weak. The United Kingdom had the strongest of Western Europe’s major economies, at 3.1 per cent growth. The Asia-Pacific region grew 4.7 per cent in 2004, up from 3.5 per cent in 2003. Japan had its highest growth rate since the mid-1990s, at 2.9 per cent, up from 1.3 per cent in 2003. This growth has been driven by the export sector, particularly to Chinese and U.S. markets. The Chinese economy, which grew 9.5 per cent in 2004, is having a major impact on the world economy, to which it provides low-cost consumer goods and looks abroad for the raw materials needed to fuel its rapid growth.

Figure 2-2 compares Canada’s economy to that of other regions from 2000 to 2004.

FIGURE 2-2: REAL GDP: CANADA AND OTHER REGIONS, 2000 – 2004

Note: GDP at market prices.

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

In 2004, on a balance of payments basis, merchandise exports increased by 7.6 per cent and imports increased by 6.2 per cent. This resulted in a $9.2 billion increase in the trade surplus. Exports to the United States rose 6.5 per cent, 1.8 per cent to Japan and 12.3 per cent to the European Union, while imports increased 4.2 per cent from the U.S. and 4.4 per cent from the European Union but fell 5.8 per cent from Japan.

The value of the Canadian dollar against the U.S. dollar fell in the first part of 2004 from US$0.788 in January to its low for the year of US$0.714 in May. It then rose steeply to reach a 12-year high of US$0.851 in November before closing the year at US$0.832. The average value of the Canadian dollar against the U.S. dollar increased 7.7 per cent in 2004 and follows a 12.1 per cent increase in 2003. This increase reflected a fall in the value of the U.S. dollar and an increase in commodity prices.

As measured by the GDP deflator, general prices in the total economy rose 3.2 per cent in 2004, equal to the increase in 2003. The average all-items consumer price index (CPI) rose only 1.7 per cent in 2004, compared with 2.8 per cent in 2003. Major contributors to this slowdown were automotive vehicle insurance premiums, which rose only 1.5 per cent in 2004 compared with a 22.1 per cent in 2003, and the price of natural gas, which fell 2.1 per cent in 2004 after increasing 30.1 per cent in 2003. Energy prices continued to rise, and consumers paid 6.8 per cent more on average for energy in 2004 after a 7.9 per cent increase in 2003. Transportation prices rose 2.4 per cent compared with 5.2 per cent in 2003.

Per capita disposable income rose 2.9 per cent in 2004, its fastest increase since 2001. In real terms it rose 1.5 per cent. These increases compare to a 2.1 per cent increase in nominal terms and a 0.5 per cent real increase in 2003.

Also in 2004, the average number of persons employed rose to 15.95 million, up 1.8 per cent and following a 2.2 per cent increase in 2003 over 2002. The mid-year population of Canada rose to 31.9 million, up 0.9 per cent from 2003.

PROVINCIAL ECONOMIC PERFORMANCE

In 2004, all provinces and territories, except Newfoundland and Labrador, showed some economic growth. Western Canada and Ontario, however, fared better (growth of more than three per cent) than Quebec and Eastern Canada (growth of less than three per cent). High commodity prices helped the West, while manufacturing activity and exports were important in Central Canada. The East had slower activity in the energy sector and in some areas of construction. Newfoundland and Labrador’s economic output fell slightly in 2004, as mining was affected by a strike, and offshore oil production declined. Prince Edward Island growth was weak due to difficulties in agriculture and tourism. Nova Scotia was adversely affected by declining natural gas production, but positively affected by strong manufacturing growth. New Brunswick was the strongest of the Atlantic Provinces as manufacturing bounced back. Manufacturing and construction activity in Quebec and Ontario have been aided by exports to a strong U.S. economy, despite the strong dollar, and by consumer spending and business investment. Manitoba had good performance in all sectors other than agriculture in 2004, and its relatively large manufacturing sector is benefitting from export growth. High commodity prices have meant strong growth in Saskatchewan and Alberta, with oil important in both provinces and potash important in Saskatchewan. Agriculture was affected by poor weather and by the continued closure of the U.S. border to live cattle. British Columbia had strong exports to both the United States and Asia; wood production and residential building contributed most to growth.

Table 2-2 shows provincial economic performance in 2004/03.

Source: Statistics Canada, Conference Board of 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