- Cooling in U.S. housing markets foretells an imminent U.S. economic slowdown

- Softening in U.S. demand will dampen economic growth globally and in Canada

- Weaker U.S. economy will impact financial markets, leading to a decline in bond yields and commodity prices, as well as slower corporate profit growth

- Canadian economic growth to average 2.5 per cent over the next year

- However, the North American economic slowdown will prove short lived, lasting about one year, reflecting healthy underlying economic fundamentals of low unemployment, modest interest rates and subdued inflation

- Volatility will be a dominant theme in financial markets as the economies weaken over the next few quarters and then gradually recover in 2007

TORONTO- There is clear evidence that a U.S. economic slowdown is unfolding, which will dampen global economic growth, pose a negative shock to the Canadian economy and disrupt financial markets said TD economists in the June 14 issue of the TD Quarterly Economic Forecast. The report is available on the TD Economics website, at www.td.com/economics.

"While high-flying energy prices and the lagged impact of Fed rate hikes will play a role in the U.S. economic slowdown, the main catalyst will be a cooling U.S. housing market and a diminution of the powerful real estate wealth effects that have been driving consumer spending in recent years," remarked Don Drummond, Senior Vice President and Chief Economist of TD Bank Financial Group. Existing and new home sales have already pulled back from their peaks, inventories of unsold homes are on the rise and mortgage refinancing has diminished. "These trends are all expected to continue in the months ahead, which will place downward pressure on home prices and lead to softer consumer spending, particularly on big-ticket and luxury items," stated Drummond.

However, TD Economics anticipates a soft-landing in U.S. real estate. While certain dramatically overheated markets, such as that of California, could see significant price declines, the national average home price is forecast to only slow to a flat, or slightly negative, year-over-year rate. Even with this relatively benign outcome, U.S. economic growth is projected to drop towards a two per cent annual pace in late 2006 and early 2007.

The U.S. economic outlook has far ranging implications. "The Fed may hike rates again in late June, but that should be the last rate increase and the central bank is likely to be easing policy by the end of 2006 and early 2007," noted Drummond. This suggests that bond yields will retreat and the U.S. dollar weaken. The economic backdrop for equities will be challenging as corporate profit growth slows.

The slowdown in the world's largest economy will have global implications, with world real GDP growth dropping from 4.6 per cent in 2006 to 4.0 per cent in 2007. This foretells weaker global profit growth, which could sour investor appetite for equities, particularly in emerging markets that tend to experience extreme volatility. The softening in U.S. demand will also limit any further tightening in monetary policy by central banks overseas. "A slowdown in the world's largest economy will impact commodity markets negatively. We think prices will pullback by 10 per cent over the next twelve months, with the bulk of the adjustment coming from a more than 20 per cent decline in prices for crude oil and base metals," remarked Drummond.

The Canadian economy and Canadian financial markets will be buffeted by the above-mentioned trends. "The fallout from a weaker U.S. economy will be borne principally by exporters," stated Drummond. TD Economics also expects Canadian housing markets and consumer spending to moderate at the same time that exporters are struggling with diminishing U.S. demand. After expanding at close to a three per cent pace in recent years and by 3.8 per cent in the first quarter of 2006, Canadian economic growth will slip to around 2.5 per cent in the fourth quarter of 2006. However, this implies that the Canadian slowdown will be less pronounced than in the United States. The aggregate picture also masks wildly different regional trends across Canada. "Even with the expected correction in raw material prices, the high level of prices means that commodity-rich provinces (Alberta, B.C., Saskatchewan and Newfoundland & Labrador) will continue to experience robust economic growth, while central Canada will underperform the national average," commented Drummond.

"Although employment growth has surprised on the upside in recent months, the weaker economic growth ahead is likely to keep the Bank of Canada on the sidelines and there is a good chance that the monetary authority will deliver rate cuts towards the end of the year or in early 2007," added Drummond. Canadian bonds are forecast to rally in the second half of 2006, but still underperform their U.S. counterparts, resulting in narrowing negative spreads. TD Economics believes that the Canadian dollar has scope to strengthen in the near term on U.S. dollar weakness, but as the full extent of the commodity price correction unfolds, the loonie will eventually retreat towards 85 U.S. cents. For Canadian equities, the economic environment will be challenging, with slowing corporate profit growth and a further decline in commodity prices.

"The dominant theme is weaker times ahead, but it is critical to keep this slowdown in perspective. The economies are only expected to experience a softer pace of expansion, not a hard landing," stressed Drummond. Slower economic growth will also help to keep inflation pressures in check. Unemployment rates may edge up slightly, but they will remain low. And, even though interest rates have risen, they will peak at historically modest levels. "Equities may struggle as corporate profit slows, but remember that the stock market has a long history of being a leading economic indicator. If the economies experience a soft landing, equities are likely to rally strongly in response to central bank rate cuts and once there is clear evidence that a hard landing will be avoided," noted Drummond.

"The main message is that consumers, businesses and investors should be braced for a period of economic and financial market volatility. However, the economic weakness is expected to pass relatively quickly," concluded Drummond.

After a modest gain in March, exports declined 2.3% to $37.1 billion. Imports registered their second consecutive gain this year, rising 1.2% to $33.1 billion.

That pushed Canada's merchandise trade surplus from a revised $5.3 billion in March down to $4.0 billion, its lowest level since January 2005.

Exports, which fell in April to almost all Canada's major trading partners, including the United States, were 8.4% lower than they were in December 2005. This year's slump follows a sharply rising trend that had started in November 2004. Between that point and December 2005, exports rose from $35.0 billion to $40.5 billion.

Imports from the United States remained virtually flat in April, while exports declined 1.5%. That narrowed Canada's trade surplus with the United States from $8.3 billion to $7.9 billion.

At the same time, our trade deficit with countries other than the United States increased from $3.0 billion to $3.8 billion.

Exports: Automotive products, machinery and equipment behind the decline

Exports rose in only two of seven export sectors in April — energy products and agricultural and fishing products.

The largest contributors to April's overall decline were automotive products, where exports fell 8.4%, and machinery and equipment, where they were down 3.2%.

Exports of automotive products had been rising since July 2005, reaching their most recent peak of $8.0 billion in January 2006. Sharp increases in fuel costs and finance costs have depressed demand for vehicles in both Canada and the United States. In April, light truck sales south of the border declined 7.7%.

Exports of passenger autos, the largest component of the automotive products sector, registered their third consecutive decline in April. Trucks and other motor vehicles, and motor vehicle parts have shown a generally declining trend since July 2005.

Exports of machinery and equipment, Canada's largest export sector, fell 3.2% to about $8.0 billion in April. The decline consisted primarily of a 7.7% drop in exports of industrial and agricultural machinery, and a 4.2% decrease in aircraft and other transportation equipment caused by a decline in aerospace production.

April's decrease in exports of machinery and equipment followed an upward trend that began in June 2003, hitting its most recent peak of $8.2 billion in March 2006.

Exports of forestry products fell 1.6% to just over $2.8 billion, the third consecutive monthly decline after reaching their most recent peak of $3.2 billion in January. Newsprint and other paper fell 3.4%, while exports of lumber and sawmill products slipped 2.1% in the wake of a decline in residential construction south of the border.

Industrial goods and materials edged down 0.3% to just over $7.2 billion. Growth in metals and alloys was offset by lower exports of chemicals, plastics and fertilizers, and other industrial goods.

Exports of industrial goods and materials had been on an upward trend since June 2003. The growth in metals and alloys in April was the result of gains in both prices and volume. Within the commodity group, both zinc and copper reached their highest levels since January 2000.

On the plus side, exports of agricultural and fishing products posted a second consecutive increase with a 1.2% gain in April. It was driven by a 36.7% surge in wheat exports. Agricultural and fishing products have been virtually flat since April 2002.

Energy products grew 1.5% to nearly $7.2 billion. Exports of crude petroleum grew 2.8%, while "other" energy products (including petroleum and coal products, and other bituminous substances, and electricity) were up by 13.5%.

On the other hand, exports of natural gas fell 7.4%, the result of a 5.7% decrease in prices and a 1.8% decline in volume. Record high inventory levels in the United States depressed demand as well as prices of natural gas. The energy products sector has shown a sharp declining trend since October 2005.

Imports: Energy products and automotive products drive most of the growth

Imports have been generally growing since September 2003. In April, four sectors (energy products, automotive products, agricultural and fishing products, and forestry products) registered growth.

This comes in the wake of 0.9% growth in Canada's real gross domestic product during the first three months of 2006.

Imports of energy products, which rose 14.1% from March, accounted for the vast majority (90%) of the net growth in total imports in April. Canadian companies imported more than $2.8 billion in energy products in April, following a period of sharp declines that have averaged 2.7% a month since November 2005.

April's increase in energy was the result of a 12.5% increase in volume and a 1.6% increase in prices. Imports of petroleum and coal products, and coal and other related products surged 36.2%, and crude petroleum gained 1.9%.

Companies imported nearly $6.7 billion in automotive products in April, up 2.8% from March, their second consecutive gain. This growth consisted of a 5.9% gain in imports of trucks and other motor vehicles, a 2.6% increase in imports of passenger autos, and a 1.5% rise in motor vehicle parts.

Imports of automotive products have been virtually flat since April 2004, as trucks and other motor vehicles, as well as passenger autos, have risen while motor vehicle parts have declined.

Agricultural and fishing products increased 1.0% to $1.9 billion, the second consecutive rise. The main contributors were increases in sugar and sugar preparations, beverages and tobacco. Imports of fruits and vegetables, which registered their third consecutive decline, were 4.1% lower than they were in January.

Industrial goods and materials edged down 0.3% in April, following a 4.1% gain in March. Chemicals and plastics explained most of the decline.

After an increase in March, machinery and equipment imports fell 3.2% in April with aircraft and other transportation equipment plunging 20.9%. This component accounted for over 98% of the net decline of the sector.

Industrial and agricultural machinery imports fell 2.8% while "other" machinery and equipment imports increased 1.7%.

Merchandise trade
	March 2006r	April 2006	March to April 2006	April 2005 to April 2006	January to April 2005	January to April 2006	January–April 2005 to January–April 2006
	Seasonally adjusted, $ current
	$ millions		% change		$ millions		% change
Principal trading partners
Exports
United States	30,236	29,783	-1.5	1.1	117,561	122,464	4.2
Japan	906	867	-4.3	3.6	3,325	3,420	2.9
European Union	2,823	2,457	-13.0	4.3	9,150	10,458	14.3
Other OECD countries1	1,352	1,367	1.1	12.7	4,560	5,310	16.4
All other countries	2,709	2,671	-1.4	10.7	9,647	10,526	9.1
Total	38,026	37,146	-2.3	2.4	144,243	152,179	5.5
Imports
United States	21,897	21,827	-0.3	2.2	85,360	87,029	2.0
Japan	890	1,105	24.2	18.9	3,810	3,905	2.5
European Union	3,339	3,210	-3.9	4.5	12,506	13,220	5.7
Other OECD countries1	1,891	1,944	2.8	-8.6	7,990	7,513	-6.0
All other countries	4,672	4,990	6.8	22.2	16,863	19,458	15.4
Total	32,689	33,076	1.2	4.8	126,529	131,125	3.6
Balance
United States	8,339	7,956	...	...	32,201	35,435	...
Japan	16	-238	...	...	-485	-485	...
European Union	-516	-753	...	...	-3,356	-2,762	...
Other OECD countries1	-539	-577	...	...	-3,430	-2,203	...
All other countries	-1,963	-2,319	...	...	-7,216	-8,932	...
Total	5,337	4,070	...	...	17,714	21,054	...
Principal commodity groupings
Exports
Agricultural and fishing products	2,630	2,662	1.2	8.5	9,761	10,537	8.0
Energy products	7,066	7,174	1.5	11.1	24,006	29,047	21.0
Forestry products	2,886	2,840	-1.6	-8.6	12,542	11,800	-5.9
Industrial goods and materials	7,275	7,250	-0.3	4.6	27,809	29,049	4.5
Machinery and equipment	8,217	7,952	-3.2	-0.6	31,228	31,851	2.0
Automotive products	7,262	6,650	-8.4	-1.6	28,435	29,159	2.5
Other consumer goods	1,447	1,393	-3.7	-2.2	5,775	5,675	-1.7
Special transactions trade2	731	666	-8.9	-0.7	2,666	2,900	8.8
Other balance of payments adjustments	512	557	8.8	15.8	2,020	2,157	6.8
Imports
Agricultural and fishing products	1,877	1,895	1.0	3.3	7,312	7,577	3.6
Energy products	2,474	2,823	14.1	12.0	10,138	10,429	2.9
Forestry products	248	254	2.4	-3.4	1,056	1,009	-4.5
Industrial goods and materials	6,885	6,868	-0.2	6.4	26,127	27,420	4.9
Machinery and equipment	9,496	9,197	-3.1	1.7	35,838	37,446	4.5
Automotive products	6,519	6,699	2.8	2.7	25,778	26,287	2.0
Other consumer goods	4,261	4,226	-0.8	6.4	16,219	17,030	5.0
Special transactions trade2	338	492	45.6	46.0	1,601	1,521	-5.0
Other balance of payments adjustments	591	623	5.4	2.1	2,459	2,407	-2.1
... figures not appropriate or not applicable r revised 1. Includes Australia, Canada, Iceland, Mexico, New Zealand, Norway, South Korea, Switzerland and Turkey. 2. These are mainly low valued transactions, value of repairs to equipment, and goods returned to country of origin.

Note to readers

Merchandise trade is one component of the current account of Canada's balance of payments, which also includes trade in services.

Balance of payments data are available for the United States, Japan and the United Kingdom. Trade data for all other individual countries are available on a customs basis only.

Revisions

In general, merchandise trade data are revised on an ongoing basis for each month of the current year. Customs basis data are revised for the previous data year each quarter.

Factors influencing revisions include late receipt of import and export documentation, incorrect information on customs forms, replacement of estimates with actual figures, changes in classification of merchandise based on more current information, and changes to seasonal adjustment factors.

Revised data are available in the appropriate CANSIM tables.

DATES AND TIMES:
June 13, 2006; 7 p.m. to 9 p.m.
June 14, 2006; 7:30 a.m. to 9 p.m.
June 15, 2006, 7:30 a.m. to 4:30 p.m.

PLACE:
Fairmont Tremblant Hotel
Mont Tremblant, Quebec

SESSIONS INCLUDE:

Social Cohesion in Urban Canada – Is the social strife in some large European urban centres lurking within urban Canada?

Fiscal Means and Needs: Striking the Right Balance – examining the fiscal capacities and demands of the three levels of government;

Ensuring Prosperity for Canada in 2020 – What must Canada do to secure prosperity and improve competitiveness of Canadian firms in the global economy? How do we “brand” Canada to attract foreign investment and world-leading talent?

Building more world leading Canadian Companies – how do we ensure that more Canadian companies are successful beyond our borders.

SPEAKERS AND PANELISTS INCLUDE:

Al Gore, former U.S. Vice-President
Jeffery Sachs, the Earth Institute
Lewis Lapham, Editor-in-Chief, Harper’s Magazine
Jacques Attali, Principal Advisor to former French President François Mitterand
Don Walker, Co-CEO, Magna
Kenneth Courtis, Director, Asia-Pacific Foundation
Paul Lavoie, Chairman and Chief Creative Officer, Taxi Inc.
Marcel Coté, Founder, Secor
Michael Adams, President, Environics
David Pecaut, Chair, Toronto City Summit Alliance
Andre Pratte, Editor-in-Chief, La Presse

The conference co-Chairs are: The Honourable John Manley, The Honourable Anne McLellan and François de Gaspé Beaubien, Chairman and CEO Zoom Media.

A full conference agenda is posted at:
http://www.canada2020.ca/files/Agenda2006-web.pdf.

Assets of foreign-controlled corporations rose a healthy 8.3% to $1.1 trillion in 2004, while those of Canadian-controlled corporations jumped 8.9% to $3.9 trillion. This follows more moderate growth rates of 5.7% for Canadian-controlled corporations, and 1.5% for foreign-controlled corporations in 2003.

Foreign-controlled revenues increased 6.7% in 2004 to just shy of the $800-billion mark, nearly double the level of a decade earlier. The global boom in mergers and acquisitions activity during the 1990s contributed to this rapid increase.

Of the nearly 1.3 million corporations doing business in Canada in 2004, all but about 8,000 were Canadian-controlled. In other words, less than 1% were foreign-controlled, a proportion that has changed little over time.

However, foreign-controlled corporations tend to be much larger. In 2004, their operating revenues averaged $96 million, compared with less than $2 million for their Canadian-controlled counterparts.

Record profits for foreign-controlled firms

Foreign-controlled profits soared to a record $68 billion in 2004, up a staggering 21.7% from the previous year. Domestic-controlled profits also rose, although at a more moderate rate of 11.8%. Much of these gains, in both cases, came on the strength of the manufacturing sector, where profits rose 36.2%.

This was the second straight year that corporate profits were on the rise. Furthermore, in 2004, they hit an all-time high of $217 billion, eclipsing the old mark of $192 billion set in 2000.

Between 2002 and 2004, foreign-controlled corporations led the way with a 38.6% surge in profits, compared with a 22.4% gain for Canadian-controlled corporations.

Manufacturing on the rebound; oil and gas assets up

Manufacturing rebounded in 2004 from a weak performance the year before when the economy was hit by events such as forest fires and a power outage.

Operating revenues for manufacturers rose by $43.1 billion in 2004. Half that growth came from foreign-controlled corporations.

Manufacturing enjoyed a surge in profits, with foreign-controlled profits rising by $5.7 billion and those of Canadian-controlled corporations up by $6.2 billion. This is an industry which has 50.3% of its assets under foreign control.

Oil and gas was second only to manufacturing in terms of share of assets under foreign control. Foreign-controlled corporations accounted for 44.9% in 2004, and Canadian-controlled corporations 55.1%. Escalating oil prices and large investments in non-conventional oil sources have combined to boost Canada's energy sector, placing it among the world leaders.

In 2004, oil and gas assets rose by $34 billion, the equivalent of 13.5%, with the bulk of the increase occurring in the Canadian-controlled portfolio.

United States still by far the biggest foreign player

Among foreign-controlled corporations operating in Canada, the United States continued to be the dominant force by a wide margin. American-controlled firms held 61.0% of foreign-based assets and generated 62.6% of foreign-based revenues.

Well back of the United States were the United Kingdom, which accounted for 12.0% of foreign-based assets and 7.0% of foreign-based revenues, and Germany, with 6.5% of foreign-based assets and 6.9% of foreign-based revenues.

Despite this dominance, the United States has seen a decline in its share of revenues, particularly in the financial sector, in recent years.

In 2004, US-controlled corporations accounted for 45.0% of foreign-controlled revenues generated in the financial sector, a steep drop from 56.3% in 2002. On the plus side, corporations under British control and Dutch control recorded a gain in their shares.

Note to readers

The Corporations Returns Act is administered by the Chief Statistician of Canada under the authority of the Minister of Industry. The purpose of the Act is to collect financial and ownership information on corporations conducting business in Canada and to use this information to evaluate the extent and effect of non-resident control of the Canadian corporate economy.

The Act requires that an annual report be submitted to Parliament summarizing the extent to which foreign control is prevalent in Canada. The document being released today is that report for reference year 2004.

Asset-based measures of foreign control provide a longer-term perspective, reflecting economic decisions and market conditions that evolve more slowly over time. Revenue-based measures tend to reflect current business conditions and therefore, tend to be more volatile than asset-based measures. Both are of interest and both have been included in this report.

Service-producing industries surged ahead as retail and wholesale trade, finance, insurance and real estate all advanced. Output of goods-producing industries inched ahead as manufacturers continued to battle the effects of the rapidly increasing Canadian dollar, and growing international competition. Exports declined slightly, mainly automotive, forestry and industrial goods.

Production declined in the mining, utilities and non-durable manufacturing sectors. In total, industrial production fell 0.3%. In the United States the index of industrial production rose 1.3%, bolstered by manufacturing and mining, while utilities receded.

A jump in household demand, particularly consumer spending on durables and housing, was behind most of the first quarter advance. Growth in final domestic demand matched the pace set in the fourth quarter and continued to outpace overall growth in GDP.

Real gross domestic product, chained (1997) dollars1
	Change	Annualized change	Year-over-year change
	%
First quarter 2005	0.6	2.2	3.2
Second quarter 2005	0.8	3.4	3.0
Third quarter 2005	0.8	3.2	2.7
Fourth quarter 2005	0.6	2.6	2.8
First quarter 2006	0.9	3.8	3.2
1. The change is the growth rate from one period to the next. The annualized change is the growth rate compounded annually. The year-over-year change is the growth rate of a given quarter compared with the same quarter in a previous year.

Economy-wide prices, as measured by the chain price index for GDP, fell 0.7% in the quarter. A large share of the decline was the result of falling energy prices. Economy-wide prices, excluding energy, increased 0.7%, a slight acceleration from the previous quarter.

The economy grew at an annualized rate of 3.8% in the first quarter, a sharp pickup from the 2.6% annualized pace set during the previous quarter. The US economy grew at an annualized rate of 5.3%.

Residential investment picked up following moderate growth in 2005

Investment in residential structures rebounded in the first quarter after stalling in the fourth quarter. The 3.4% first quarter increase was the strongest quarterly advance in more than two years. The value of new housing construction jumped, renovation activity remained strong and an active resale market all contributed to the strong growth.

Business investment in non-residential structures and machinery and equipment continued to climb in the first quarter, although at a slower pace than that of the last half of 2005.

Investment in non-residential structures grew by 1.8%. Investment in engineering projects slowed following two quarters of solid growth. Much of the growth over the last number of years has been in the red-hot oil and gas sector. Since 2002, engineering construction as a share of total investment in non-residential structures has risen from 67% to 71%.

Investment in machinery and equipment decelerated as expenditures in other transportation equipment slowed and telecommunications edged down following large increases in the last half of 2005.

Consumer spending accelerates

Consumers began 2006 much the same way they began 2005, by purchasing large amounts of durable and semi-durable goods. Expenditure on clothing and footwear, furniture and furnishings, household appliances and recreational, sporting and camping equipment all climbed well over 3%. All this activity pushed up output in the retail sector which advanced 2.0%. Personal expenditure by Canadians outside the country remained strong while spending by foreigners in Canada declined, driving up net expenditure abroad by 7%.

Spending on non-durable goods was essentially flat in the quarter as moderate growth in food, beverages and tobacco was more than offset by declines in purchases of energy related products such as motor fuels and lubricants. The warmer weather served to drive down consumption of natural gas and electricity, both of which fell for a second consecutive quarter.

Inventory buildup slows

A little more than $10 billion was added to inventories in the first quarter, down from the $15 billion buildup in the fourth. The bulk of this buildup was retail inventories which posted a second quarter of strong accumulation. This was offset by a large draw down in other non-farm inventories, specifically energy products. In the fourth quarter, imports of energy products jumped over 7%, oil and gas production climbed 3.5% while exports declined. The result was a large fourth quarter buildup in inventories. In the first quarter, the picture reversed as imports fell, production decelerated and exports rose, causing the large draw down.

Exports stall

Manufacturing output slowed to 0.1% in the first quarter, the result of declines in non-durable goods and transportation equipment manufacturing. Part of these declines has been attributable to weaker foreign demand, as exports stalled. Most commodity groups showed little growth or declined. Automotive exports, which increased over 15% in the last half of 2005, declined in the first quarter and exports of forestry products lost most of the gain they made in the fourth quarter.

Imports fell following two quarters of solid growth. Imports of energy products and machinery and equipment both declined. The quarterly decline in machinery and equipment imports is the first in three years. Imports of consumer goods advanced another 2.2%, on the heels of similar increases in the last two quarters of 2005.

Labour income pushes ahead, corporate profits falter on lower energy prices

Labour income advanced 1.2%, slightly off the 1.5% average quarterly increase registered in 2005. While service-producing industries were the source of strength for most of 2005, the goods-producing industries were behind most of the first quarter growth. Public administration wages and salaries stalled contributing to the weakness in service-producing industries, but educational services, health care and social assistance, posted first quarter increases. Growth in mining, construction and manufacturing helped boost growth in goods-producing industries.

Corporate profits fell 4.1%, the first significant quarterly decline since 2003, as lower export prices of energy goods put a lid on profits in the oil and gas sector. Excluding oil and gas extraction and refineries, profits posted a modest increase. Significant gains were registered in the real estate, rental and leasing, information and culture, and education and health industries.

GDP by industry: Highlights for March 2006

The Canadian economy edged up 0.1% in March, after increasing by 0.2% in January and by 0.3% in February. In March, growth in service-producing industries (+0.3%) more than offset a decline in the production of goods (-0.2%).

Monthly gross domestic product by industry at basic prices, chained 1997 dollars
	Oct. 2005r	Nov. 2005r	Dec. 2005r	Jan. 2006r	Feb. 2006r	Mar. 2006p
	Seasonally adjusted
	Month-to-month % change
All industries	0.2	0.2	0.4	0.2	0.3	0.1
Goods-producing industries	0.4	-0.0	0.6	-0.5	0.5	-0.2
Service-producing industries	0.1	0.4	0.3	0.5	0.3	0.3
Industrial production	0.5	-0.1	0.7	-1.0	0.3	-0.1
Construction	0.8	0.9	0.9	0.9	1.1	-0.6
Retail trade	1.5	1.3	0.3	0.8	0.2	1.2
Energy sector	0.3	0.3	0.5	-3.0	2.0	1.1
r revised p preliminary

Retail trade benefited from an upswing in activity among most retailers in March. New motor vehicle dealers were responsible for much of the 1.2% growth in this sector. Excluding new motor vehicle dealers, retail trade advanced 0.4%. Growth in wholesale trade was flat, held back by a reduction in motor vehicle exports.

Manufacturing output retreated 0.4% in March. Eleven of the 21 major groups, accounting for 54% of total manufacturing output, registered declines. A decrease in American demand for motor vehicles resulted in a sharp drop in motor vehicle manufacturing in Canada.

Construction declined 0.6% in March, taking a pause after growing steadily for 20 consecutive months. Residential construction declined 2.2%, wiping out the gain in February. Non-residential construction advanced 0.6%.

Buoyant stock markets continued to contribute to the growth of the financial sector (+0.3%). By contrast, real estate brokers registered a 1.6% decline, reflecting weakness in the home resale market.

Building on the previous month's strength, the energy sector advanced 1.1% in March. This gain has been largely attributable to a sharp increase in oil exploration (+13%) and to a rise in oil and gas extraction (+0.2%). Electricity generation and transmission declined 0.7%. Mining activity fell sharply (-4.6%), mostly due to a marked decline in potash production.

Economic activity picked up in the first quarter as real gross domestic product (GDP) advanced 0.9% on the heels of continued strength in investment and personal expenditure. In March, monthly output edged up 0.1% from February.


Service-producing industries surged ahead as retail and wholesale trade, finance, insurance and real estate all advanced. Output of goods-producing industries inched ahead as manufacturers continued to battle the effects of the rapidly increasing Canadian dollar, and growing international competition. Exports declined slightly, mainly automotive, forestry and industrial goods.

Production declined in the mining, utilities and non-durable manufacturing sectors. In total, industrial production fell 0.3%. In the United States the index of industrial production rose 1.3%, bolstered by manufacturing and mining, while utilities receded.

A jump in household demand, particularly consumer spending on durables and housing, was behind most of the first quarter advance. Growth in final domestic demand matched the pace set in the fourth quarter and continued to outpace overall growth in GDP.

Economy-wide prices, as measured by the chain price index for GDP, fell 0.7% in the quarter. A large share of the decline was the result of falling energy prices. Economy-wide prices, excluding energy, increased 0.7%, a slight acceleration from the previous quarter.

The economy grew at an annualized rate of 3.8% in the first quarter, a sharp pickup from the 2.6% annualized pace set during the previous quarter. The US economy grew at an annualized rate of 5.3%.

Residential investment picked up following moderate growth in 2005
Investment in residential structures rebounded in the first quarter after stalling in the fourth quarter. The 3.4% first quarter increase was the strongest quarterly advance in more than two years. The value of new housing construction jumped, renovation activity remained strong and an active resale market all contributed to the strong growth.

Business investment in non-residential structures and machinery and equipment continued to climb in the first quarter, although at a slower pace than that of the last half of 2005.

Investment in non-residential structures grew by 1.8%. Investment in engineering projects slowed following two quarters of solid growth. Much of the growth over the last number of years has been in the red-hot oil and gas sector. Since 2002, engineering construction as a share of total investment in non-residential structures has risen from 67% to 71%.

Investment in machinery and equipment decelerated as expenditures in other transportation equipment slowed and telecommunications edged down following large increases in the last half of 2005.


Consumer spending accelerates
Consumers began 2006 much the same way they began 2005, by purchasing large amounts of durable and semi-durable goods. Expenditure on clothing and footwear, furniture and furnishings, household appliances and recreational, sporting and camping equipment all climbed well over 3%. All this activity pushed up output in the retail sector which advanced 2.0%. Personal expenditure by Canadians outside the country remained strong while spending by foreigners in Canada declined, driving up net expenditure abroad by 7%.

Spending on non-durable goods was essentially flat in the quarter as moderate growth in food, beverages and tobacco was more than offset by declines in purchases of energy related products such as motor fuels and lubricants. The warmer weather served to drive down consumption of natural gas and electricity, both of which fell for a second consecutive quarter.

Inventory buildup slows
A little more than $10 billion was added to inventories in the first quarter, down from the $15 billion buildup in the fourth. The bulk of this buildup was retail inventories which posted a second quarter of strong accumulation. This was offset by a large draw down in other non-farm inventories, specifically energy products. In the fourth quarter, imports of energy products jumped over 7%, oil and gas production climbed 3.5% while exports declined. The result was a large fourth quarter buildup in inventories. In the first quarter, the picture reversed as imports fell, production decelerated and exports rose, causing the large draw down.

Exports stall
Manufacturing output slowed to 0.1% in the first quarter, the result of declines in non-durable goods and transportation equipment manufacturing. Part of these declines has been attributable to weaker foreign demand, as exports stalled. Most commodity groups showed little growth or declined. Automotive exports, which increased over 15% in the last half of 2005, declined in the first quarter and exports of forestry products lost most of the gain they made in the fourth quarter.

Imports fell following two quarters of solid growth. Imports of energy products and machinery and equipment both declined. The quarterly decline in machinery and equipment imports is the first in three years. Imports of consumer goods advanced another 2.2%, on the heels of similar increases in the last two quarters of 2005.

Labour income pushes ahead, corporate profits falter on lower energy prices
Labour income advanced 1.2%, slightly off the 1.5% average quarterly increase registered in 2005. While service-producing industries were the source of strength for most of 2005, the goods-producing industries were behind most of the first quarter growth. Public administration wages and salaries stalled contributing to the weakness in service-producing industries, but educational services, health care and social assistance, posted first quarter increases. Growth in mining, construction and manufacturing helped boost growth in goods-producing industries.

Corporate profits fell 4.1%, the first significant quarterly decline since 2003, as lower export prices of energy goods put a lid on profits in the oil and gas sector. Excluding oil and gas extraction and refineries, profits posted a modest increase. Significant gains were registered in the real estate, rental and leasing, information and culture, and education and health industries.

GDP by industry: Highlights for March 2006
The Canadian economy edged up 0.1% in March, after increasing by 0.2% in January and by 0.3% in February. In March, growth in service-producing industries (+0.3%) more than offset a decline in the production of goods (-0.2%).

Retail trade benefited from an upswing in activity among most retailers in March. New motor vehicle dealers were responsible for much of the 1.2% growth in this sector. Excluding new motor vehicle dealers, retail trade advanced 0.4%. Growth in wholesale trade was flat, held back by a reduction in motor vehicle exports.

Manufacturing output retreated 0.4% in March. Eleven of the 21 major groups, accounting for 54% of total manufacturing output, registered declines. A decrease in American demand for motor vehicles resulted in a sharp drop in motor vehicle manufacturing in Canada.

Construction declined 0.6% in March, taking a pause after growing steadily for 20 consecutive months. Residential construction declined 2.2%, wiping out the gain in February. Non-residential construction advanced 0.6%.


Buoyant stock markets continued to contribute to the growth of the financial sector (+0.3%). By contrast, real estate brokers registered a 1.6% decline, reflecting weakness in the home resale market.

Building on the previous month's strength, the energy sector advanced 1.1% in March. This gain has been largely attributable to a sharp increase in oil exploration (+13%) and to a rise in oil and gas extraction (+0.2%). Electricity generation and transmission declined 0.7%. Mining activity fell sharply (-4.6%), mostly due to a marked decline in potash production.

Note to readers
With the first quarter 2006 release of the Income and Expenditure Accounts, the data are revised back to the first quarter of 2002. For more information, consult The 2002 to 2005 revisions of the Income and Expenditure Accounts page on our website.

CALGARY, ALBERTA- Canadians should expect to pay more for products and services over the next 12 months. After a surge in confidence over the last two quarters, Canadian chief executives' economic expectations for the next 12 months slipped by 4.8 percent, according to a survey released today by TEC Canada. Canadian bosses' confidence, which rebounded in Q4 2005 and Q1 2006 from a two-year low of 112.1, slipped from last quarter's 122.4 to 117.6.

More than half of Canada's SME leaders feel that the current economy has improved over last year's, however they are not as confident as they were last quarter that the economy will continue to surge ahead over the next 12 months. They anticipate lower returns in revenue and profit than originally expected at the start of the year and will therefore curb their fixed investment expenditures and new staff hiring plans as a result.

Of the 69 percent of respondents who anticipate hiring in the next 12 months, a 10 point drop over Q1, the bulk will increase their staff size by steadily hiring over the next four quarters. However, 17 percent will be topping up their staff numbers during Q2 of this year.

When asked to identify their most significant business issue, Canada's bosses once again said it was staffing. Additionally, 47 percent of those surveyed saw a lack of qualified candidates as having the most significant impact on hiring, while 53 percent listed factors such as oil/energy prices, the rise of the Canadian dollar and the like as the issue.

Fueled in large part by the rising cost of oil and gas, the Canadian dollar will continue its upward climb, according to this quarter's respondents. To offset the cost of energy, 36 percent of business leaders will be raising their prices while 30 percent opted to absorb it; 6 percent of those surveyed are decreasing their labour costs as a result.

The strong loonie has had a mildly negative or negative impact on the industries of 58 percent of Canada's SME bosses, according to this quarter's survey. As a result of the dollar's northward climb, 20 percent of chief executives have decelerated their company's expansion plans.

On a brighter note, the 2006 federal budget is receiving positive reviews. When asked what impact the new budget will have on their businesses over the next 12 months, 52 percent of respondents expect a mildly positive or positive impact. Additionally, 72 percent anticipate a positive or mildly positive tax effect as well.

This positive outlook, however, was not reflected in their responses when asked about a rate hike by the Bank of Canada. A whopping 71 percent of CEOs surveyed anticipate a negative impact on the Canadian economy stemming from a hike in the Bank of Canada rate.

For over two years, the TEC Confidence Index has forecasted annual changes in the economy, including job creation and price increases. The quarterly survey continues to serve as an accurate snapshot of Canada's economic landscape.

Over 100 CEOs of small to mid-size businesses took part in the survey and shared their views on current economic trends, issues affecting business and Canada as a whole.

Excluding the oil and gas extraction and refining industries, operating profits for the remaining industries increased 1.1% in the first quarter.

The non-financial industries' profits fell 2.8% to $41.3 billion in the first quarter, just the second decline in the past 11 quarters. Financial sector profits were also down, falling 2.1% to $14.8 billion. Overall, about half of the industries posted profit gains, while the remainder were down in the quarter.

Mining companies lose ground

Oil and gas extraction companies saw profits slide 9.1% to $8.0 billion in the first quarter. Profits had previously risen for five straight quarters from the $4.9 billion earned in the third quarter of 2004. Profits were pared by lower crude oil export prices, as exports generally account for about two-thirds of domestic crude oil production. Natural gas export prices were also down notably in the quarter. As reported in the March release of Canadian International Merchandise Trade, the export value of crude oil and natural gas declined in the quarter. Mild weather conditions cooled demand, keeping North American inventory levels high.

The metal mining industry also lost some ground in the first quarter, as profits fell to $0.8 billion from $1.2 billion in the previous quarter. Potash producers reported lower first quarter profits as export demand for potash wavered. In addition, while non-ferrous metal prices swelled in the quarter, growth in ferrous metal prices eased. The export value of primary iron and iron ore declined substantially in the first three months of 2006.

Manufacturing shows some strength

Operating profits improved in 9 of 13 manufacturing industries in the first quarter of 2006. However, lower profits by the petroleum and coal refineries pulled overall profits down 4.6% to $10.6 billion. Manufacturing profits peaked in the second quarter of 2004 at $12.5 billion, but have faltered over the past few years due to the stronger Canadian dollar, rising input costs and volatile demand for products. The Business Conditions Survey recently reported that manufacturers are expecting tougher times ahead, anticipating lower levels of production and employment in the second quarter.

Petroleum and coal manufacturers saw their first quarter operating profits drop to $2.5 billion from a record high of $3.7 billion in the fourth quarter of 2005. North America's warmer-than-normal weather in the first quarter moderated demand for petroleum products. Petroleum and coal exports were well down, a combination of the weaker demand and lower export prices. Domestic sales of refined petroleum also declined in the quarter.

Wood and paper producers churned out $1.0 billion in first quarter profits, up from $0.9 billion in the fourth quarter. However, profits remained just half of the $2.0 billion peak earnings of the second quarter of 2004. Shipments of wood products moved ahead for the three month period, but the gains were largely achieved early in the quarter.

Demand for lumber products was buoyed by robust construction activity both domestically and south of the border. However, lumber prices stalled in the quarter and remained much below year earlier levels. The strong Canadian dollar and high input costs continued to undermine profits in the wood and paper sector.

Motor vehicles and parts manufacturers' operating profits edged up to $0.4 billion in the first quarter from $0.3 billion in the previous quarter. Profits have been volatile over the past several years, but have trended downward since peaking at $2.5 billion in the second quarter of 2000. In the most recent quarter, exports of automotive products slowed, but domestic new motor vehicle sales accelerated.

Retail up but wholesale profits edge back

Retailers earned record high profits of $3.3 billion in the first quarter, up 5.4% from the previous high in the fourth quarter of 2005. Confident consumers continued to spend, boosting profits for retailers of furniture and electronics (+ 26.1%), food and beverages (+10.9%) and for clothing and department stores (+7.4%).

Wholesalers saw their profits slip to $3.9 billion from the record high $4.0 billion in the fourth quarter.

Financial sector profits weakened

Profits in the financial sector slipped 2.1% to $14.8 billion, following a 5.4% gain in the fourth quarter.

Companies dealing in securities, commodity contracts and other financial investment activities earned $3.5 billion, down 4.8% from the fourth quarter. The chartered banks earned $6.0 billion in first quarter profits, little changed from the previous quarter.

Profitability ratios

The operating profit margin weakened to 8.1% in the first quarter from 8.3% in the fourth quarter, halting consecutive increases dating back to the fourth quarter of 2004.

The return on shareholders' equity also deteriorated, falling to 10.9% from 12.0% in the previous quarter. After-tax profits, the numerator in this profit measure, fell 7.7% in the first quarter, reflecting lower operating profits and a decline in interest and dividend revenue.

Note to readers

These quarterly financial statistics cover the activities of all corporations in Canada, except those that are government controlled or not-for-profit.

Operating profits represent the pre-tax profits earned from normal business activities, excluding interest expense on borrowing and valuation adjustments. For non-financial industries, operating profits exclude interest and dividend revenue and capital gains/losses. For financial industries, interest and dividend revenue, capital gains/losses and interest paid on deposits are included in the calculation of operating profits.

The quarterly financial statistics for enterprises for the period covering 2003 to date have been revised following benchmarking to the 2003 and 2004 Annual series and seasonal adjustment revisions.