Canadians Recognizing Strong Economy But Regional Disparity Evident

TORONTO - Consumer confidence in the current state of the Canadian economy has risen dramatically since mid-November, and the outlook for future performance is also better, suggest the latest findings from TNS Canadian Facts' Consumer Confidence Index.

"The public's confidence mirrors strong economic statistics," said Richard Jenkins, vice-president of TNS Canadian Facts, a Toronto-based marketing research firm.

TNS Canadian Facts' monthly tracking of consumer confidence indicates that the overall picture today is overwhelmingly positive. The Present Situation Index, which captures evaluations of the overall state of the economy, the employment situation and household income, now stands at 110.6, a slight decline from 111.7 in February but up significantly from 98.0 a year ago.

While Canadians' assessment of the current economy has faltered slightly, the Expectations Index, which measures consumers' estimation of the economy six months from now, rose to 103.5 from 101.8 the previous month. This represents the highest level of optimism about the future economy since the index was created nearly two years ago.

The Buy Index, which gauges the degree to which people think the current period is a good time to make major purchases, fell slightly. The Index now sits at 97.5, down 1.4 points since last month.

Confidence is higher on two of the three measures today than it was a year ago. The Present Situation Index is up a significant 12.6 points from where it stood in March 2005 (110.6 today versus 98.0 a year ago). Meanwhile, the year-over-year rise in the Expectations Index is a respectable three points (103.5 today from 100.6). But the Buy Index is down 7.1 points from where it was this time last year (97.5 today from 104.6). "Canadians are clearly feeling that the Canadian economy is not headed for a downturn anytime soon," Jenkins added.

Regionally, positive assessments of the economy (current and future) continue to be highest on the Prairies (particularly Alberta) and lowest in Quebec and the Atlantic region. For example, 67 per cent of those who live in the Prairie provinces (75% in Alberta) think the economy is good compared with 46 per cent in Quebec and 51 per cent in the Atlantic Provinces.

"Though regional disparities in terms of economic fortunes are clearly evident, the performance of the economy over the past several years has benefited all regions to varying degrees, and has perhaps insulated the federation from the strains of economic inequality so far," Jenkins added.

Consumer Confidence Index tracks Canadians' attitudes about the economy each month and is part of a global study conducted by TNS in 18 countries around the world. Three indices are produced each month to show how confidence in the economy is changing: Present Situation Index; an Expectations Index; and a Buy Index. The Canadian fieldwork is conducted using the firm's national bi-weekly telephone omnibus service, TNS Express Telephone. A total of 1,015 nationally representative Canadian adults were interviewed between March 6 and 9. The survey results are considered accurate to 3.1 percentage points, 19 times out of 20.

Business investment led growth in the fourth quarter, driven by rising commodity prices, according to the review of current economic conditions that appears today in the Canadian Economic Observer. Business investment consolidated its place as the most dynamic sector of the economy, rising 10.7% in 2005. This was its largest gain since early 1998.

Moreover, firms intend to invest 9% more in 2006 than they did in 2005, with energy and transportation leading widespread gains.

The most striking turnaround has been in non-residential construction investment. It has risen 10.6% in the past four quarters, a strong recovery from declines posted as recently as the previous year. This upswing was evident in both engineering (driven by the energy sector) and building.

Firms plan to step up investment in plant and equipment the most in the Prairie provinces. Manitoba leads the way in investment intentions with a 16% advance. Manufacturing is driving this increase, up 61%, followed by mining, utilities and transportation. Capital spending in utilities has nearly doubled over the last two years, powered by projects to supply electricity to Ontario.

The booming oil and gas sector fuelled higher capital spending plans in Alberta and Saskatchewan. In Alberta, the recent surge in development of the oilsands led to a sharp increase in pipelines this year to carry the output of these projects to market.

Ontario was next with an 11% forecast increase in business investment. Over one-third of the hike was in utilities as the province grappled with a shortfall of electric power generation. Finance, retailing, transportation and mining also plan large gains. Transportation equipment accounts for over one-third of manufacturing investment in Ontario.
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Study highlights Canada as the lowest-cost country among the G7

											

TORONTO, March 21 - Singapore is the most cost-competitive place to
do business among nine industrialized countries, according to the 2006 edition
of KPMG LLP's bi-annual study Competitive Alternatives. Canada ranks second
overall, retaining its previous position as the lowest-cost country among the
G7 countries.
    France and the Netherlands are the most cost-competitive European
countries studied, followed by Italy and the United Kingdom. The United
States, seventh in the rankings, has improved its competitive position since
2004, assisted by the lower value of the U.S. dollar relative to other major
currencies. Eighth-ranked Japan has also improved its competitiveness since
2004, overcoming its previous cost disadvantage to ninth-ranked Germany.
    KPMG's bi-annual Competitive Alternatives study measures 27 key cost
components - including labor, benefits, business facilities, taxes and
utilities - as applied to business operations in industrialized countries. The
2006 edition of the study includes a comprehensive analysis of 128 cities in
nine countries - Canada, France, Germany, Italy, Japan, the Netherlands,
Singapore, the United Kingdom and the United States. The study's basis for
comparison is the after-tax cost of startup and operation for 17 different
types of business, over a 10-year planning horizon.
    "Selecting the best site for a business operation requires balanced
consideration of many factors, including business costs, business environment,
personnel costs, and quality of life issues," said Mark MacDonald, director
with KPMG's Advisory practice in Canada. "This study offers a comprehensive
guide for comparing business costs and contains valuable information for any
company seeking a cost advantage in locating international business
operations."
    The 2006 edition notes several surprising results and trends since the
2004 edition. Singapore, new to the study, has a business cost advantage of
more than 20 percent over the benchmark United States results. With GDP per
capita now on par with some western European nations, Singapore is the first
newly industrialized country to be included in Competitive Alternatives.
    Among the returning countries, business cost differentials have narrowed
since 2004, and all G7 countries now have costs within eight percent of the
U.S. results. Within North America, the strengthening of Canada's currency has
lessened the gap between Canadian and US costs. In Europe, the Euro-based
countries have all gained ground against the United Kingdom. And Japan's
competitive cost position has improved significantly, assisted by the
weakening of the yen and improvements in local business costs.
    Rankings and relative cost indices are illustrated in the following
chart. The benchmark cost index (U.S. = 100) is defined as the
average of nine representative U.S. cities.

   

                  -----------------------------------------
                            Cost-Competitiveness:
                          2006 Rankings by country
                  -----------------------------------------
                  Country            Cost Index        Rank
                  -----------------------------------------
                  Singapore            77.7              1
                  -----------------------------------------
                  Canada               94.5              2
                  -----------------------------------------
                  France               95.6              3
                  -----------------------------------------
                  Netherlands          95.7              4
                  -----------------------------------------
                  Italy                97.8              5
                  -----------------------------------------
                  United Kingdom       98.1              6
                  -----------------------------------------
                  United States       100.0              7
                  -----------------------------------------
                  Japan               106.9              8
                  -----------------------------------------
                  Germany             107.4              9
                  -----------------------------------------
                       Source: KPMG's 2006 Competitive
                             Alternatives Study
                  -----------------------------------------


    For international cities with populations of more than two million,
Singapore ranks as the most cost-competitive overall. Montréal is the most
cost-competitive large city in the G7, followed by Atlanta, Toronto, Tampa,
and Amsterdam. The city with the highest business costs is New York, followed
by Frankfurt, London and San Jose.
    Among medium-sized and smaller cities included in the study, the lowest-
cost city is Sherbrooke, Canada, while in Europe, the lowest-cost city is
Montpellier, France.
    Commenting on the cost competitiveness of cities in the study, KPMG's
Mark MacDonald, said: "There is often a tradeoff between larger cities with
deeper labor pools and better support infrastructure, and smaller cities,
which tend to have lower labor and facility costs."
    According to the study, labor costs typically represent the majority of
location-sensitive costs, for both manufacturing and non-manufacturing
operations. Facility costs represent the second largest location-sensitive
cost factor, accounting for 10 to 22 percent of costs for manufacturing
operations and 4 to 13 percent for non-manufacturing operations. Taxes are
another key factor, representing 3 to 13 percent of total location-sensitive
costs.
    The KPMG analysis is based on cost information collected primarily
between July 2005 and January 2006. Taxes reflect tax rates in effect on
January 1, 2006.

    

Study says Canada maintains cost advantage over US despite rising dollar



TORONTO, March 21 - Canada leads the G7 countries as the most cost-
effective location for business, according to a 2006 study that compares
business costs in nine industrial countries in North America, Europe and Asia
Pacific. Canada ranked second out of the nine countries examined, with
business costs approximately 5.5 percent below those in the United States.
    Singapore is the overall leader among the countries studied, with
business costs approximately 22.3 percent below those in the United States.
According to KPMG's study, Competitive Alternatives: KPMG's Guide to
International Business Costs, Japan and Germany rank as the most expensive
countries in which to do business.
    The study results were determined using recent exchange rates, with the
Canadian dollar valued at US85.2 cents (C$1.1735 per US$). "Even with the
strong appreciation of the Canadian dollar relative to the U.S. currency,
Canada continues to have a cost advantage relative to the United States," says
Mark MacDonald, a director in KPMG's Advisory practice. "The Canadian dollar
would have to rise in value by approximately 13 percent, almost to par with
the U.S., to bring Canadian cities to a breakeven position with the U.S. in
terms of overall business costs. While this would vary from city-to-city and
business-to-business, this is still positive news overall for Canada."
    KPMG's 2006 Competitive Alternatives study measured 27 cost components -
including labour, taxes, real estate, and utilities - as applied to business
operations in nine countries: Canada, France, Germany, Italy, Japan, the
Netherlands, Singapore, the United Kingdom and the United States. The research
included an analysis of these costs in 128 cities worldwide. The study's basis
for comparison was the after-tax cost of startup and operation for 17 types of
business, over a 10-year planning horizon.
    For larger cities in Canada, Edmonton and Montréal rank as those with the
greatest cost advantages relative to the United States. While costs in Toronto
and Vancouver are the highest within Canada, and on par with such low-cost
U.S. cities as Atlanta and Tampa, these cities do still offer significant cost
advantages over most of the large US cities included in the study. Among the
smaller cities examined, Canadian cities generally continue to offer lower
cost structures than equivalent U.S. cities, even after allowing for the
higher value of the Canadian dollar since 2004.
    "The advantage seen for many of the Canadian cities relative to the U.S.
is generally the result of combination of lower labour costs, including lower
employer costs for private medical coverage, lower real estate costs, and
lower electricity costs in Canada than in the United States, where
deregulation has seen electric costs soar in many regions." KPMG's Mark
MacDonald stated. "Various federal and provincial tax cuts over the last
decade have also made Canada's tax system more competitive with the U.S., and
have contributed to the positive position of the Canadian cities," MacDonald
concluded.

    
         Comparison of Cost Indices Among Selected Cities in Canada

            -----------------------------------------------------
             City                                     Cost Index
            -----------------------------------------------------
             Sherbrooke, QC                                 90.1
             Moncton, NB                                    91.1
             Charlottetown, PEI                             91.7
             Halifax, NS                                    92.2
             Quebec City, QC                                92.6
             Saskatoon, SK                                  92.8
             Edmonton                                       93.3
             Chilliwack, BC                                 94.0
             Winnipeg, MB                                   94.1
             Montreal, QB                                   94.3
             St. John's, NF                                 94.3
             Waterloo Region, ON                            94.3
             Calgary, AB                                    94.7
             Ottawa, ON                                     95.1
             Toronto, ON                                    96.5
             Vancouver, BC                                  96.9

           (*) Source: KPMG's 2006 Competitive Alternatives Study

    (*) Business Costs are expressed as an index with the United States being
        assigned a baseline index of 100.0. A cost index less than 100
        indicates lower costs than the US. A cost index greater than 100
        indicates higher costs than the US. For example, an index number of
        95.0 represents a 5.0% cost advantage relative to the US. Cost index
        is determined by averaging variables from various industries and
        operations.

    Canada and International Comparison

    -------------------------------------------------------------------------
    Canada
    -------------------------------------------------------------------------
    Canada ranks second overall and first among the G7 countries for low
    business costs, with a cost advantage of 5.5 percent over the United
    States.
    -------------------------------------------------------------------------
    Combining salary and wage costs along with all benefits, total labour
    costs are lowest in Singapore, followed by Canada. However, expressed as
    a percentage of payroll, benefit costs in Canada are lower than in any of
    the other countries studied.
    -------------------------------------------------------------------------
    Industrial facility costs, including land purchase and factory
    construction costs, are lowest in Canada, followed by Italy, the United
    States, and France.
    -------------------------------------------------------------------------
    Canada, along with the United Kingdom and France, are the countries that
    offer the greatest tax incentives to encourage research and development
    (R&D) activities.
    -------------------------------------------------------------------------
    Canada offers the lowest electricity costs among all countries studied.
    -------------------------------------------------------------------------


    -------------------------------------------------------------------------
    Other Countries
    -------------------------------------------------------------------------
    Singapore ranks first among the countries studied, with business costs
    22.3 percent lower than in the United States. With GDP per capita now on
    par with some western European nations, Singapore is the first newly
    industrialized country to be included in Competitive Alternatives.
    -------------------------------------------------------------------------
    France and Netherlands ranks third and fourth respectively, with overall
    business costs lower than in all other European countries, and a cost
    advantage of approximately 4.4 percent over the US.
    -------------------------------------------------------------------------
    Italy and the United Kingdom rank fifth and sixth respectively, with
    business costs approximately 2 percent below the seventh ranked United
    States.
    -------------------------------------------------------------------------
    Japan and Germany were the most costly places to set businesses, with
    business costs approximately 7 percent higher than in the United States.
    -------------------------------------------------------------------------
    Singapore, the United Kingdom and the Netherlands offer relatively low
    effective corporate income tax rates for the widest ranges of operations.
    -------------------------------------------------------------------------
    Office leasing costs are lowest in Italy, followed by Germany, and the
    Netherlands.
    -------------------------------------------------------------------------
    (*) Source: KPMG's 2006 Competitive Alternatives Study

    International rankings and relative cost indices are illustrated in the
following chart. The benchmark cost index (U.S. = 100) is defined
as the average of nine representative U.S. cities.

             --------------------------------------------------
                             Cost-Competitiveness:
                           2006 Rankings by Country
             --------------------------------------------------
               Country             Cost Index            Rank
             --------------------------------------------------
               Singapore              77.7                 1
             --------------------------------------------------
               Canada                 94.5                 2
             --------------------------------------------------
               France                 95.6                 3
             --------------------------------------------------
               Netherlands            95.7                 4
             --------------------------------------------------
               Italy                  97.8                 5
             --------------------------------------------------
               United Kingdom         98.1                 6
             --------------------------------------------------
               United States         100.0                 7
             --------------------------------------------------
               Japan                 106.9                 8
             --------------------------------------------------
               Germany               107.4                 9
             --------------------------------------------------
             Source: KPMG's 2006 Competitive Alternatives Study
             --------------------------------------------------

    To access copies of the full report, please go to
www.competitivealternatives.com

    About Competitive Alternatives

    KPMG's 2006 Competitive Alternatives study provides an independent
comparison of international business location costs in 128 cities around the
world. The study enables businesses executives to take a quick, initial scan
of how business costs compare among a variety of cities in leading
industrialized countries. It also assists KPMG professionals and economic
developers in their work with businesses considering relocation, and enables
policy makers to help determine the impact of a proposed tax and/or incentive
policy change on the cost-competitiveness of their jurisdiction in relation to
others.
    The study is available online at www.CompetitiveAlternatives.com

    About KPMG in Canada

    KPMG LLP is the Canadian member firm of KPMG International, the global
network of professional services firms whose aim is to turn knowledge into
value for the benefit of their clients, people and the capital markets. With
nearly 94,000 people worldwide, KPMG member firms provide industry-focused
audit, tax, and advisory services from more than 717 cities in 148 countries.
    KPMG assists clients as they consider expanding, relocating or
consolidating their business activities. More than 100 KPMG professionals
throughout the world offer a variety of global location and expansion
services, ranging from strategic planning, to site analysis, to determining
the availability of business incentives.
    KPMG's Canadian Web site is located at www.kpmg.ca
    

Although the share of natural resources in Canada's exports is increasing and the United States remains our dominant export market, the story is different for imports, which now come less and less from the United States and are more diversified by commodity group, according to a new study released today in the Canadian Economic Observer.

The study also shows that the marked drop in the US share of imports is unprecedented in the history of Canada-US trade.

The United States and Japan are not as dominant in imports as in the early 1990s, and China has made inroads into many of Canada's consumer and investment goods. But some of the growth in China is illusory, reflecting its role in assembling parts manufactured in other Asian countries. Consequently, Canada's overall deficit with Asia did not deteriorate as it did during the 1990s. Much of the recent growth of imports from China can be explained by a large content from other countries in Asia.

About 40% of Canada's imports in 2005 came from countries other than the United States and Japan, an increase of more than 10 percentage points from the 1990s. Apart from China, Korea, Europe, Mexico and the Organization of the Petroleum Exporting Countries (OPEC) profited from the lower share of imports from the United States and Japan to Canada in recent years.

The US share of imports to Canada dropped primarily because of machinery and equipment, our largest import group. The United States accounted for about 54% of these imports in 2005, down from about 68% in 1990, displaced by China and Mexico. Canada's imports of electrical and electronic products alone from the United States shrank by $10 billion between 2000 and 2005.

Canadian imports of electrical and electronic products from countries other than China also declined. Between 2000 and 2005, these imports grew by nearly $4 billion from China (+300%) but part of this growth was at the expense of Japan and the rest of Asia, both down by a third.

Canada's deficit for electronic goods has levelled-off since 2000. That is because Canada imported less directly from Japan and other countries that supply the inputs for China's computer industry, such as Hong Kong, Taiwan and Singapore. Canada now imports much cheaper computer products that have been assembled in China, often from parts made throughout Asia.

On the exports side, Canada is increasingly reliant on resources. Resources have accounted, on average, for about half of Canada's exports over the last 15 years. In 2005, the proportion jumped to 57%, with energy exports to the United States leading the way. Exports of industrial goods to China have also contributed to this increase.

Energy is also one of Canada's least diversified exports in terms of trading partners and it became even less diversified after 2000. Roughly 95% of our energy exports went to the United States in 2005, compared with 84% in 1990. In 2005, energy made up one quarter of Canada's shipments to the United States, double their proportion in the 1990s. Canada exports mainly oil and natural gas, each of which earned at least $30 billion in 2005.

In contrast to resources, exports of finished products fell sharply after 2000. This drop was led by auto products, which hampered overall Canada's exports to the United States since it is the destination for 96% of our auto exports. The decline affected only North American manufacturers, as foreign automakers with operations in Canada have increased their exports appreciably.

Auto exports to Mexico also have grown, particularly in 2005. More than a quarter of Mexico's imports from Canada in 2005 were automotive products, an increase of more than 10 percentage points from 2004 and the highest proportion since 1991. Still, auto trade with Mexico is only 1% of Canadian auto exports. Trade between Canada and Mexico has been generally lacklustre despite the North American Free Trade Agreement, displaced by growing trade with China over the last 15 years.

Study: Canadian exporters and a booming China - 1998 to 2004

Canadian exporters in niche resource industries are fuelling, at least in part, the economic engine that has transformed the People's Republic of China into the world's sixth largest economy, according to a new study.

Since most Canadian firms do not specialize in manufacturing machinery or the kinds of components that Chinese factories assemble into finished products, they have not been significant sources of Chinese imports from Canada.

Rather, the study shows that Canadian businesses have achieved strong sales growth in other areas of high Chinese demand, such as natural resources. Exporting enterprises in niche resource industries are benefiting the most.

The leading sources of growth in Chinese imports from Canada have been raw materials, where growth was driven by rising sales of wood pulp, metals and fertilizer.

Chinese imports of Canadian crude materials have more than tripled since 1998, accounting for nearly one-third of total growth in Canadian exports to China.

Growing demand in China for raw materials to fuel its export industries and satisfy rising domestic consumption has raised global commodity prices. This has increased revenue in Canadian resource industries such as metals by not only increasing the value of exports to China, but also to major customers such as the United States.

The study found that the fastest growth of all commodities exported to China has been in exports of organic chemicals, used in China to make polyester.

At the same time, Canadian firms have profited from rising Chinese imports of iron ore and nickel, key ingredients in steel production. Also, our wheat exports to China rebounded in 2004 after a long period of decline.

China now Canada's fourth largest export market

Canada's economy relies heavily on trade; our exports alone equal more than one-third of our gross domestic product.

While over four-fifths of our exports head south to the United States each year, China has become the fourth largest market for Canadian exports behind the United States, Japan and the United Kingdom.

In total, Chinese imports from Canada have more than tripled since 1998, rising at an average annual rate of 21%. Nevertheless, in 2004, China's total imports of Canadian goods, worth US $7 billion, accounted for only 1.3% of China's total imports. To put that into perspective, China imported more than US $94 billion from Japan alone in 2004.

Feeding the dragon: A huge demand for imports

China's scorching economic growth during the past decade has helped to shore up other economies by sparking a huge demand for commodities, thereby driving up prices. According to Chinese authorities, real gross domestic product increased 9.6% a year on average over the last 25 years.

Chinese exports nearly tripled from US $63 billion in 1990 to US $184 billion in 1998. By 2004, they had tripled again, hitting US $593 billion.

Given its competitive advantage in manufactured goods, China has scoured the world for raw materials, parts and factory machinery. As a result, its imports quadrupled from US $140 billion in 1998 to US $561 billion in 2004.

The biggest winners have been China's neighbours. Japan continues to be the leading supplier of goods to China, accounting for US $94 billion, or about 17% of Chinese imports in 2004. However, it is South Korea and the countries of Southeast Asia that have benefited the most from China's growth. South Korea has surpassed the United States to become the third largest source of Chinese imports in 2004.

Some Canadian exporters seizing the opportunity

China's rapid growth presented an opportunity for Canadian exporters to help supply expanding Chinese industries in areas of Canadian expertise, and the evidence shows Canadian businesses are benefiting.

Between 1998 and 2004, Canadian exports to China more than tripled to over US $7 billion, with annual growth since 1998 averaging 21%.

Given that Canada's exports to the world (in US dollars) grew by less than 7% a year on average over the same period, China has emerged as an important source of growth for Canadian exporters.

Organic chemicals have been the fastest growing Canadian export commodity to China, responsible for 17% of total export growth since 1998. By 2004, Canadian exports of these chemicals had grown to 30 times the levels in 1998.

Most of these exports consisted of ethylene glycol, a key industrial chemical used, among other things, to produce polyester in the apparel industry. Chinese factories have more than doubled their exports of apparel since 1998. One factor in recent years has been the phasing out of international quotas on apparel from China in accordance with an agreement under the World Trade Organization (WTO).

China's imports of ethylene glycol have grown to nearly 23 times their levels in 1998. Canada has emerged as the leader in this market in China, quadrupling its share of Chinese ethylene glycol imports from 0.9% in 1998 to 3.8% in 2004, an impressive achievement given the rapid growth in Chinese imports.

While chemicals have been Canada's fastest-growing export commodity to China, wood pulp is our leading export product. Wood pulp exports have soared on the strength of increasing demand in China, centred in this case in the burgeoning Chinese paper industry.

The elimination of tariffs on wood pulp imports, in compliance with China's WTO commitments, has helped spark a dramatic increase in pulp imports, which have nearly quadrupled since 1998, with Canadian exports also rising sharply.

Canadian pulp exports have shot up from US $251 million in 1998 to US $965 million in 2004. They accounted for nearly 13% of our total exports to China in 2004. China has now become Canada's number two export market for wood pulp behind the United States.

Nickel is a key ingredient in the production of stainless steel, and rapid growth in Chinese nickel imports have made it the third largest importer of nickel, behind the United States and Germany.

Canada has taken advantage of this growth, and has overtaken Russia to become the leading exporter of nickel to China. Our exports, which quadrupled between 2002 and 2004 to US $326 million, now account for 28% of total Chinese nickel imports. However, rising nickel prices have triggered a much larger gain in revenue from Canadian nickel exports to other customers, such as the United States.

China has re-emerged as a top export market for Canadian wheat. This rebound was a welcome turnaround from a long period of decline in Canadian wheat exports to China, which until 2004 had fallen almost every year since 1995.

Definitions, data sources and methods: survey number 2201.

The analytical article "Feeding the dragon: Canadian exporters and a booming China" (11-621-MIE2006037, free) is now available online in the Analysis in Brief series.

Industrial capacity utilization rates - Fourth quarter 2005

Industrial capacity utilization increased only marginally during the last three months of 2005, despite strong exports and personal expenditures. Higher international demand provided a significant boost to the durable goods-producing industries, while imports met most of the rise in domestic demand.

Industries finished the year operating at 86.3% of their capacity, compared with 86.1% in the third quarter. This slight gain left the rate 1.3 percentage points below the peak of 87.6% reached in the first quarter of 1988.

The industrial capacity utilization rate is the ratio of an industry's actual output to its estimated potential output. Rates have been revised back to the first quarter of 2003 to reflect the revised source data.

Foreign demand for durable goods, especially automotive vehicles, contributed greatly to the rise in capacity utilization in the manufacturing sector. Nonetheless, manufacturers do not appear to be planning significant additions to their production capacity in 2006.

A survey of private and public investment intentions for 2006 showed that manufacturers were planning only a moderate 3.4% increase in investment this year. Virtually all of it will be concentrated in plant construction, leaving investment in machinery and equipment at 2005 levels. The January 2006 Business Conditions Survey found that manufacturers were not expecting to increase production in the first three months of the year.

The oil and gas extraction and construction sectors also helped boost the rate in the fourth quarter, even though part of the increased production in these sectors was absorbed by the increase in production capacity.

Oil and gas companies took advantage of the high oil and natural gas prices, posting large increases in their profits in 2005. Employment remained high in the construction sector, and investments rose by 6.0% in 2005.

The forestry and logging, mining and electric power sectors slowed the rise in the rate from October to December as a result of lower use of their production capacity.

On an annual basis, the average capacity utilization rate for 2005 was 86.1%, slightly up from the 85.8% annual average for 2004. Inflation remained relatively stable despite consistently high rates over the past two years. The Consumer Price Index (excluding the eight volatile components identified by the Bank of Canada) rose 1.7% between January 2005 and January 2006.

Durable goods stimulate the manufacturing sector

Manufacturers used 84.7% of their production capacity in the fourth quarter, up from 84.1% in the previous quarter. Most durable goods-producing industries reported rising rates, while non-durable goods-producing industries generally posted decreases.

The transportation equipment, machinery, plastic and rubber products and fabricated metal products, manufacturing industries were particularly instrumental in raising the rate in the manufacturing sector. However, the wood products, chemical and food manufacturing industries reduced their capacity utilization in the fourth quarter.

In the transportation equipment industry, capacity use rose from 88.3% to 90.7%. Automobile manufacturers, who increased production by 5.3% to meet growing demand in the United States, were instrumental in the industry's strong performance.

Machinery manufacturers increased their capacity utilization by 4.9 points to 89.2%. This was the highest rate posted by this industry since the fourth quarter of 1997, when it reached 90.2%. Machinery exports increased significantly from October to December 2005 and production rose by 5.5%.

Production of plastic and rubber products rose 4.0% in the fourth quarter, as all of the main components of this group increased their production, except for tire manufacturers. As a result, this industry's rate hit 91.1%, up from 87.3% in the previous quarter.

After two consecutive quarterly declines, capacity utilization rose in the fabricated metal products manufacturing industry, from 78.5% to 80.9%. A key contributor was the 3.1-percentage-point hike in architectural and structural metals manufacturing.

Wood products manufacturers reported a 2.8-percentage-point drop in capacity utilization to 84.8%. This fourth consecutive quarterly decline set the average annual rate at 89.3% for 2005, down from the 2004 annual average of 92.1%. The decline in output in most key components in this industry, especially sawmills, was central to the fourth-quarter decline in the rate.

Chemical products manufacturers operated at 79.9% of their capacity in the fourth quarter, down from 81.4% the previous quarter. A 3.8% cut in pharmaceutical and medicine production played a key role in the decline.

Food manufacturers used less of their production capacity in the fourth quarter, when their rate fell to 79.8% from 80.8%. A decline in production among the main components in this group was at the root of the 0.4% drop in production in this industry.

Mixed performance in remaining sectors

In the forestry and logging sector, capacity utilization plummeted by 13.6 points to 80.9%. Production in this sector fell by 12.4% in the fourth quarter.

In the mining sector, the rate fell from 98.3% to 93.7%, completely cancelling any gains posted in the third quarter. The 11.0% drop in production in metal ore mines contributed significantly to the decline in mining production.

The demand for electricity fell due to the mild weather between October and December, and electric power generation dropped by 0.9% in the fourth quarter. As a result, capacity use in this sector fell from 89.2% to 88.0%.

In the oil and gas extraction sector, the rate rose by 1.7 percentage points to 84.5%. The drop in natural gas production failed to offset higher crude oil production, resulting in a 3.0% increase in production in the sector.

In the construction sector, where production grew by 2.2%, capacity use settled at 88.9%, up from 88.3% the previous quarter.

Available on CANSIM: table 028-0002.

Definitions, data sources and methods: survey number 2821.

Data on industrial capacity utilization rates for the first quarter of 2006 will be released on June 12.

For more information or to enquire about the concepts, methods or data quality of this release, contact Mychèle Gagnon (613-951-0994) or Richard Landry (613-951-2579), Investment and Capital Stock Division.

TORONTO, March 8 - The rate of growth in capital values more than doubled in 2005, pushing the total return on real estate in Canada to 18.7%, from 13% a year earlier, according to the ICREIM/IPD Canadian Property Index. The Canadian Property Index is published annually by The Institute of Canadian Real Estate Investment Managers (ICREIM) and Investment Property Databank (IPD) in the UK.

"An insatiable appetite for real estate as an asset class is driving values up," said Phil Tily, Director of International Operations at IPD. "All property sectors enjoyed stronger capital growth in 2005."

Real estate in Alberta benefited from the boost the oil and gas sector has given the local economy, with Calgary and Edmonton recording the highest returns of the 6 major markets (at 26.5% and 23.4% respectively). Vancouver compared well at 21.4%. Improved, but slightly lower, property returns were recorded in 2005 in Toronto (16.4%), Ottawa (16.8%) and Montreal (15.2%). Retail remained the strongest performing sector with a total return of 21.4%, but returns on offices made up noticeable ground, almost doubling to 18%. Industrial posted another solid performance (17.6%). Returns on residential rental properties continued to lag (9.9%).

Canadian international merchandise trade - January 2006

Canada's trade surplus with the world narrowed substantially in January as exports pulled back from record high values in December, thanks largely to falling exports of energy products. Imports remained stable at December's record high level.

Exports fell 3.3% to $40.0 billion, although they were still 11.8% higher than in January 2005. Export values had been increasing steadily throughout 2005, driven by gains in energy, industrial goods and materials and machinery and equipment.

Exports slipped in the wake of falling exports of energy products, which were mostly the result of lower prices. If energy exports were excluded, the total value of exports would have been virtually unchanged from December.

Imports, meanwhile, were steady at $33.6 billion, which was a 6.1% increase over January last year.

Imports from the European Union advanced in January, pushed up by increased inbound shipments of pharmaceutical products from Ireland and France as well as precious metals, which are refined in Canada, from the United Kingdom. Imports were also up from the "all other countries" category. China is the dominant trading partner in this category, but it also includes countries such as Brazil and India. Imports from "all other countries" rose 2.4% in January to a record high $5.2 billion. During both 2004 and 2005, imports in this category surged by more than 20% annually. Declining imports from the United States as well as from "other OECD countries," offset these gains.

As a result, the nation's merchandise trade surplus narrowed from $7.7 billion in December to $6.3 billion in January.

Exports to the United States fell 3.6% in January to $32.7 billion, while imports from south of the border declined 1.3% to $22.0 billion. That put Canada's trade surplus with the United States at $10.7 billion, down from December's record-high $11.6 billion.

Canada's trade deficit with countries other than the United States grew to a record high $4.4 billion in January. Despite an 8.7% gain in exports to the European Union, exports to non-US destinations slipped 1.9% to $7.3 billion. In contrast, imports jumped over a quarter billion dollars to $11.6 billion.

The deficit with countries other than United States has been widening since mid-2005. Though both imports and export registered gains in early 2005, exports stabilized in the later months while imports continued to climb.

Exports: Decline in energy exports pulls down total in January

Energy export values came down in January. Natural gas exports fell 23.9%, predominantly the result of a drop in prices, although volumes also declined. Crude petroleum exports decreased 6.0% due to drops in volumes and prices. Exports of other energy products fell 9.8%, as overseas demand for coal softened.

Strong automotive exports in the third and fourth quarters last year carried into January as exports rose 2.1%, with passenger autos accounting for the gain. While car exports were up 10.2%, exports of trucks and other motor vehicles fell 13.2% and motor vehicle parts were down 3.6%.

In the agricultural sector, export values of wheat surged 36.1% to $232.2 million, the first major gain since February 2005. Wheat exports fell to $2.6 billion in 2005 from $3.5 billion in 2004, largely as a result of reduced demand from the European Union and China.

As of February 24, 2006, the US tariff on Canadian hard red spring wheat, which was put in place in 2003, was dismantled. In 2002, Canada exported $400 million worth of wheat to the United States, and the United States was Canada's top market for wheat. In 2005, Canada's export values for wheat to the United States equalled $200 million, about half that exported to the European Union ($383 million), and less than the value exported to Japan ($240 million), China ($227 million) and South Korea ($218 million).

Overall, agricultural exports were stable ($2.7 billion), as were exports of machinery and equipment ($8.2 billion). Declines were recorded for exports of industrial goods and materials (-1.1%) as well as other consumer goods (-4.4%).

Forestry exports were up 2.5% in January, the second consecutive monthly increase. Lumber exports were up for the fifth month, rising 6.3% in January to $976.8 million. The warm weather in January has allowed builders in cold weather areas in the United States to keep breaking ground for new construction. The recent growth in lumber exports can be partly attributed to strength in US residential construction.

Imports: Continuing high demand for consumer goods

After rising for four consecutive months, imports were virtually unchanged from December's record-high level. Imports of energy products declined in January as prices retreated; however, the historic high import level was buoyed by all-time high imports of "other consumer goods." Imports of pharmaceutical products led the jump in "other consumer goods," which rose 4.4% to a record $4.4 billion. This category also includes imports of clothing, televisions and other household electronics, as well as sporting goods, toys and home décor products.

Imports of automotive products, agricultural and fishing products and forestry products also registered gains in January. Machinery and equipment imports were stable at $9.6 billion, while imports of industrial goods and materials were down for the month.

Imports of automotive products edged up 1.3% to $6.6 billion, as gains in passenger autos and trucks and other motor vehicles more than offset the fall in imports of motor vehicle parts.

Imports of passenger autos and chassis, which had been declining since September, rose 14.7% to $2.1 billion. Imports of trucks and other motor vehicles, which originate primarily in the United States and Mexico, increased 12.0% to $1.5 billion. Imports of motor vehicle parts fell 9.6% to $3.1 billion.

Imports of energy products fell for the second straight month, dropping 12.1% to $2.8 billion. Crude petroleum import values declined 7.6% to $1.7 billion while imports of the "other" energy products category, which includes coal, as well as heating and vehicle fuels, fell 18.7%.

Agricultural and fishing product imports went up for the fifth consecutive month, rising 2.5% to a record $1.9 billion. Although the growth was fairly widespread, the main contributor was a 2.9% gain in imports of fruits and vegetables.

Machinery and equipment imports were virtually unchanged from December. Industrial and agricultural machinery imports continued to rise, hitting a record $2.8 billion. This increase, accompanied by growth in imports of office machines and equipment, offset declines in aircraft and other transportation equipment and other machinery and equipment.

Imports of industrial goods and materials slipped 0.8% in January to $6.9 billion, primarily the result of a 2.0% drop in imports of chemicals and plastics. This followed large inbound shipments in December, which pushed imports of chemical and plastics to record levels. Despite widespread increases in imports of precious metals, and iron and steel products, overall metal and metal ore imports declined as imports of unrefined metals fell back to normal levels.

Available on CANSIM: tables 228-0001 to 228-0003 and 228-0033 to 228-0046.

Definitions, data sources and methods: survey numbers, including related surveys, 2201, 2202 and 2203.

The January 2006 issue of Canadian International Merchandise Trade, Vol. 60, no. 1 (65-001-XIB, $15/$151) is now available. The publication includes tables by commodity and country on a customs basis.

Current account data (which incorporate merchandise trade statistics, service transactions, investment income and transfers) are available quarterly in Canada's Balance of International Payments (67-001-XIE, $32/$100).

Merchandise trade data are available in PDF format on the morning of release.

For more information on products and services, contact Anne Couillard (1-800-294-5583; 613-951-6867). To enquire about the concepts, methods or data quality of this release, contact Diana Wyman (613-951-3116), International Trade Division.

OTTAWA, March 8 - The seasonally adjusted annual rate(1) of housing starts was 240,900 units in February, down from 248,100 units in January, according to Canada Mortgage and Housing Corporation (CMHC).

"Despite the modest decline, the rate of housing starts in February continued to be very strong." said Bob Dugan, Chief Economist at CMHC's Market Analysis Centre. "However, we expect activity to moderate over the course of 2006, as higher mortgage carrying costs due to rising house prices and modest mortgage rate increases contribute to a softening of demand for both existing and new housing."

The seasonally adjusted annual rate of urban starts fell 3.3 per cent to 208,300 units with decreases in both single and multiple starts. Multiple starts eased by 2.0 per cent to 101,400 units and single starts fell back 4.6 per cent to 106,900 units in February compared to January.

The vibrant economy in western Canada propelled starts higher in both British Columbia and the Prairies. Urban housing starts in the Prairies were up 11.5 per cent to 45,400 units while in British Columbia they surged 22.6 per cent to 39,100 units. In the rest of the country urban housing starts were down. The sharpest declines were in the Atlantic region and Ontario where urban starts fell 16.8 per cent to 10,900 units and 15.1 per cent to 73,700 units respectively. In Quebec, starts were down 8.8 per cent to 39,200 units. Rural starts in February were estimated at a seasonally adjusted annual rate of 32,600 units.

For the first two months of the year, actual urban starts were 17.7 per cent higher than in the same period in 2005. Single starts increased 21.9 per cent and multiple starts rose 14.0 per cent compared to the same period last year.

China and other emerging economies will soon catch up or even overtake the leading western industrialized nations as the world's biggest economies by 2050, a study published by PricewaterhouseCoopers (PwC) in Frankfurt showed on Friday, reports Agence France Presse (03/03).

According to the study, while the US was likely to hold on to the number one position by the middle of the 21st century, China was likely to follow closely as the world's second biggest economy. The current number two and three economies -- Japan and Germany respectively -- would slip in the rankings. Japan would fall behind India and Brazil to become the fourth biggest economy in the world, while Germany would fall even further to rank number eight behind Mexico, the consultancy firm estimated. Demographic changes would play a key role in the redistribution of economic power around the world. While the birth rate was low in Germany, the number of people of a working age was rising in almost all developing nations aside from China and Russia. For the current Group of Seven (G7) richest nations -- Britain, Canada, France, Germany, Italy, Japan and the US -- the development would bring both advantages and disadvantages.

The Independent (UK, 03/03) and The Canberra Times (Australia, 03/06) write that PwC found that people with low or medium-level skills would come under threat - both from having their jobs moved overseas and having them taken by migrant labor. Eventually, even high-skilled professionals such as lawyers and accountants could find their livelihoods under threat from increasingly well-qualified citizens of the "E7" (China, India, Brazil, Russia, Indonesia, Mexico and Turkey). But it said that many business sectors and trades would be better off as long as Western countries adapted to take advantage of a surge in wealth in these fast-growing countries.

The Guardian (UK, 03/06) writes that over the coming years, this group of emerging economies will grow in number and size, according to the report. By 2050, the firm estimates the E7 will have a combined size at least 25 percent bigger than the G7, and perhaps 75 percent bigger, depending on the measure used to gauge the size of an economy. Measured using market exchange rates, the GDP of China is 18 percent that of the US; by 2050 PwC forecasts it will be 94 percent as big. Using purchasing power parity

(PPP) - which takes into account that a dollar in China buys more than a dollar in the US, China's GDP is already 76 percent as big as that of the US; by 2050 it could be almost half as big again.

China's ageing population means it won't sustain its high levels of growth for much longer, according to John Hawksworth, PwC's Chief Economist. India, with its younger population, will be the fastest growing of the E7 nations, and will be as big as the US (by PPP) by the middle of the century. Britain will continue its decline down the league table. Having just been overtaken by China as the world's fourth biggest economy (at market rates), Britain will have slipped below India, Brazil, Indonesia and Mexico to ninth place by 2050.

The Times (UK, 03/03) notes that Hawksworth said Britain should see being overtaken by these economies as an opportunity, and not a threat. With investment in education, Britain could successfully specialize to its advantage while enjoying the benefits of low-cost imports from emerging markets, he said. Figures from the Office for National Statistics highlight the size of the opportunity for UK companies. The figures show that the share of Britain's exports going to the E7 economies was only five percent in 2004. This compared with about 44 percent going to the other six G7 countries.

Cited as the countries to watch are: Mexico, which has 105 million people, a falling state ownership of industry and free trade agreements with the US and the EU; Indonesia, which is the world's fourth-largest country by population, with 242 million people and five times the land mass of Germany, spread over 18,000 islands; and Turkey, which has 70 million people and is projected to have the fastest-growing working-age population of any large economy except India.

TORONTO, March 6 - A new RBC Royal Bank survey reveals the number of Ontarians who say they are planning to buy a house within the next two years is on par with last year (30 per cent versus 31 per cent in 2005). However, the number who are "very likely to purchase" is down from 14 per cent last year to 10 per cent and is among the lowest in Canada.

The new survey indicates 11 per cent of Greater Toronto Area residents are "very likely" to purchase a home in the next two years, a decrease of 9 per cent from last year and on par with the national ave