In total, these intermediaries produced services worth $64.8 billion. In 2006, the growth rate was just below the annual average of 6.1% since the survey began 10 years ago.

The industry performed favourably, thanks to volume growth in retail banking, strong trading revenues and significant merger and acquisition fees. However, income came under pressure from heightened competition and a narrowing interest-rate spread on lending products.

Net interest income rose 3.1% to $32.8 billion, largely the result of increased spreads on deposits and higher volumes in personal and business lending. Partially offsetting this growth was a drop in treasury and investment banking services, attributed to higher funding costs for equity trading strategies and lower new issue activity (that is, a lower volume of initial public offerings on Canadian exchanges).

Non-interest income rose 6.9% to $32.0 billion. Net interest income has outweighed non-interest income in this industry. However, strong growth in fee-based income over the past 10 years has almost closed this gap. In 2006, investment management and mutual fund fees grew significantly, as did credit card, deposit and payments services.

In 2006, deposit-accepting intermediaries increased their provisions for credit losses by 12.3% to $2.8 billion. These provisions reflected expected changes in losses from impaired loans and other credit instruments.

Most deposit-accepting intermediaries raised their provisions because of elevated lending volumes and higher write-offs on both personal and business loans, but this was not the case for all.

Retail banking volumes continue to thrive

The value of services in the retail banking segment rose 6.5% in 2006, due to growth in both net interest income (+4.9%) and non-interest income (+11.0%). These retail services accounted for 61.7% of the total value of services produced, emphasizing their position as the primary income-generating activity for deposit-accepting intermediaries.

Low long-term interest rates continued to fuel strong demand for both residential mortgages and personal loans. The labour market also contributed to this demand, as did a solid yet moderating housing market. Higher volumes and improved spreads on deposits were also widely reported.

This business segment has historically been mostly interest-based. Net interest income continued to contribute the majority (71.6%) of the value of services produced by retail banking. Nevertheless, this proportion has been steadily decreasing for the past five years, as fee-based income has become increasingly significant in the retail market.

Treasury and investment banking activities remain flat

The value of treasury and investment banking services remained flat in 2006 at $11.8 billion. They accounted for 18.3% of the value of total services produced.

Higher merger and acquisition fees and strong trading revenue could not compensate for weakened equity underwriting activity. However, this portfolio continues to be the second largest contributor to services produced for the industry.

Non-interest income rose 4.0% to $11.6 billion. Growth in investment management and mutual fund fees were factors in this increase, thanks to more money going into funds and higher-valued securities within the managed portfolios.

Net interest income dropped to $207 million due to disappointing equity-origination activity and higher trading-related funding costs. In addition, financial settlements and other losses against foreign operations were charged against net interest income in Canada.

Strong year for electronic financial services

The electronic financial services portfolio produced services worth $7.4 billion in 2006, an 8.7% increase from 2005. This portfolio has continued to be the fastest growing business segment of deposit-accepting intermediaries since the beginning of the survey.

Net interest income increased 11.3%, while non-interest income rose at a somewhat slower pace (+7.8%). Increased credit card balances and volumes were factors in this growth. Other factors included gains in payments services and, in many cases, expanded branch and automated banking machine networks.

Non-interest-related activities accounted for the majority (72.4%) of the value of services produced in this portfolio. Nevertheless, this was still down from the peak of 89.5% in 1999.

Electronic financial services are the third largest contributor to income for deposit-accepting intermediaries. In 2006, they accounted for 11.4% of total services produced, a proportion which has been increasing steadily since the inception of the survey. This portfolio serves as a means of delivery to extend the reach of other financial products and services.

Moderate growth in corporate and institutional finance portfolio

The value of services produced by corporate and institutional finance activities rose 7.0% to $4.4 billion in 2006, continuing the upward movement established in 2005. The corporate and institutional finance segment accounted for 6.8% of the total value of services produced.

Non-interest income climbed 13.5% to $2.6 billion, but was offset by a drop of 1.2% in net interest income to $1.8 billion.

Solid business loan demand and higher deposit volumes were partially offset by lower spreads on corporate loans and increased securitization of assets. Gains and losses from securitization are recorded as non-interest income, and thus have a negative impact on results for net interest income.

Decline in fiduciary services

The value of fiduciary services declined 13.7% to $1.2 billion in 2006, as fiduciary services continued to be incorporated under the treasury and investment banking portfolio.

Growth in customer assets under management and administration was widely reported in 2006, as were higher spreads on personal investment products.

Fiduciary services have traditionally represented a small portion of the overall value of services produced by deposit-accepting intermediaries. In 2006, they accounted for only 1.9%.

Value of services produced by deposit-accepting intermediaries
	Net interest income			Non-interest income			Value of services produced in Canada1
	2005	2006	2005 to 2006	2005	2006	2005 to 2006	2005	2006	2005 to 2006
	$ millions		% change	$ millions		% change	$ millions		% change
Retail banking services	27,323	28,650	4.9	10,239	11,365	11.0	37,562	40,014	6.5
Corporate and institutional finance	1,819	1,797	-1.2	2,271	2,579	13.5	4,090	4,375	7.0
Electronic financial services2	1,827	2,033	11.3	4,946	5,332	7.8	6,773	7,365	8.7
Treasury and investment banking3	716	207	-71.1	11,177	11,622	4.0	11,893	11,829	-0.5
Fiduciary services	97	93	-4.5	1,323	1,132	-14.4	1,420	1,225	-13.7
Total4	31,782	32,778	3.1	29,956	32,030	6.9	61,738	64,808	5.0
1. The value of services produced is not reduced by provisions for credit losses. 2. See Note to readers. 3. Certain international treasury transactions, which are netted out in consolidated world results, can significantly affect the Canadian data reported by multinational respondents. 4. Figures may not add up to totals because of rounding.

Distribution of income by activity of deposit-accepting intermediaries
	Net interest income			Non-interest income			Value of services produced in Canada
	2005	2006	2005 to 2006	2005	2006	2005 to 2006	2005	2006	2005 to 2006
	%		% point change	%		% point change	%		% point change
Retail banking services	86.0	87.4	1.4	34.2	35.5	1.3	60.8	61.7	0.9
Corporate and institutional finance	5.7	5.5	-0.2	7.6	8.1	0.5	6.6	6.8	0.2
Electronic financial services1	5.7	6.2	0.5	16.5	16.6	0.1	11.0	11.4	0.4
Treasury and investment banking2	2.3	0.6	-1.7	37.3	36.3	-1.0	19.3	18.3	-1.0
Fiduciary services	0.3	0.3	0.0	4.4	3.5	-0.9	2.3	1.9	-0.4
Total3	100.0	100.0	0.0	100.0	100.0	0.0	100.0	100.0	0.0
1. See Note to readers. 2. Certain international treasury transactions, which are netted out in consolidated world results, can significantly affect the Canadian data reported by multinational respondents. 3. Figures may not add up to totals because of rounding.

Type of income by type of activity
	Proportion of value of services produced in Canada
	Net interest income			Non-interest income
	2005	2006	2005 to 2006	2005	2006	2005 to 2006
	%		% point change	%		% point change
Retail banking services	72.7	71.6	-1.1	27.3	28.4	1.1
Corporate and institutional finance	44.5	41.1	-3.4	55.5	58.9	3.4
Electronic financial services1	27.0	27.6	0.6	73.0	72.4	-0.6
Treasury and investment banking2	6.0	1.7	-4.3	94.0	98.3	4.3
Fiduciary services	6.8	7.6	0.8	93.2	92.4	-0.8
Total	51.5	50.6	-0.9	48.5	49.4	0.9
1. See Note to readers. 2. Certain international treasury transactions, which are netted out in consolidated world results, can significantly affect the Canadian data reported by multinational respondents.

Note to readers

The annual Survey of Deposit-accepting Intermediaries covers the Canadian-based activities of the principal deposit-accepting intermediaries, namely chartered banks, trust companies, caisses populaires and credit unions. The report does not cover foreign operations.

Retail banking services (chartered banks, trust companies, caisses populaires and credit unions) cover all financial services to individuals and to small- and medium-sized businesses through a traditional branch network.

Corporate and institutional finance services cover financing and operating services for institutions and large corporations. They include trade, export and project financing and syndicated lending.

Electronic financial services cover services to individuals, businesses and institutions through networks of banking machines, debit and credit cards, telephone banking and the Internet. Some of the respondents were unable to provide separate estimates for their activities in electronic financial services. This may result in some under-estimation of the values for these services and over-estimation for retail banking services. The aggregated totals including these two segments remain strong.

Treasury and investment banking services: Treasury banking manages the funds of the deposit-accepting intermediary, itself. Investment banking covers services to individuals, corporations and institutions such as securities brokerage, mutual fund management, corporate financing and other investment services.

Fiduciary services refer to all services provided when acting as a trustee or agent such as record-keeping, custodial and performance evaluation services for personal trusts, pension funds, corporate and institutional investments and group Registered Retirement Savings Plans.

Net interest income is the difference between interest income and interest expenses. Interest income covers all interest from loans, titles and deposits of deposit-accepting intermediaries. Interest expenses cover interest paid on deposits, subordinated debentures and other interest costs.

Non-interest income covers all sources of revenue other than interest income. Examples include revenue from brokerage and other securities services, credit services, deposit and payment services charges, trading, mutual fund management, card services, foreign exchange, securitization activities and trans-sectoral income.

Value of services produced is the sum of net interest and non-interest income. This value is not to be confused with service charges.

A more detailed analysis is available in Canadian Economic Accounts Quarterly Review.

Consumer spending eased in the third quarter from its robust showing in the second, while retailers and wholesalers added significantly to their inventories. Imports outpaced exports by a wide margin, as the Canadian dollar once again appreciated sharply (+5.1%) against its US counterpart.

Businesses took advantage of lower prices to invest heavily in machinery and equipment. Housing investment remained strong, propelled by new home construction, while the resale market retreated.

The output of the service industries expanded 0.9% in the third quarter, while the production of the goods industries contracted 0.1%. Significant growth was recorded in wholesale trade. Finance and insurance, construction, mining, and accommodation and food services also contributed to the overall increase. These gains were partly offset by declines in manufacturing, utilities, and forestry and logging.

Labour income grew at a slower pace than in the first half of 2007, while personal disposable income was up moderately. Corporate profits advanced on strong bank earnings.

The Canadian economy grew at an annualized rate of 2.9% in the third quarter, compared with 4.9% for the US economy.

Industrial production (the output of utilities, mines and factories) slipped 0.4% in the third quarter as utilities and manufacturing both declined. Mining moved forward as a result of the increase in oil and gas exploration and metal ore mining. In comparison, all three sectors increased in the United States, resulting in an overall gain of 1.1% for the quarter.

Economy-wide prices in Canada, as measured by the chain price index for GDP, edged down 0.3% in the third quarter, partly as a result of lower prices for energy exports. Excluding energy, economy-wide prices were up 0.2%, after a 1.5% increase in the second quarter.

Pace of consumer spending eases

Growth of consumer spending eased to 0.7% in the third quarter, less than half the pace posted in the second quarter and the weakest gain in two years.

After increasing 3.9% in the second quarter, consumer purchases of new and used motor vehicles were down a sharp 2.6% in the third. Spending was also down on motor vehicle parts and repairs as well as on motor fuels. Consumption of electricity, natural gas and other fuels all declined.

Continued strength in the housing market stimulated spending on household furniture and appliances. Outlays were also strong on recreational, sporting and camping equipment and on clothing and footwear.

Consumption of services was up 1.1% in the third quarter, matching its pace in the second. Net expenditure abroad was up sharply for a second consecutive quarter, as the stronger dollar boosted Canadians' travel spending abroad (which includes cars and trucks purchased in the United States and brought back) and restrained spending by visitors to Canada.

Large build-up of inventories

Businesses added $15 billion worth of goods and materials to their non-farm inventories in the third quarter, following two quarters of small increases.

Retailers accounted for just over $9 billion of the inventory accumulation, with motor vehicles responsible for nearly half of the build-up. Wholesalers also added significantly to their inventories of motor vehicles and machinery and equipment.

Despite a 0.7% reduction in output, manufacturers built up stocks for the second consecutive quarter as higher inventories of finished goods more than offset lower inventories of raw materials.

Farm inventories dwindled for the third consecutive quarter, as farmers sold off grains at prices driven higher by demand for bio-fuels.

Imports outpace exports by wide margin

Imports of goods and services jumped 4.4% in the third quarter, following a 1.9% gain in the second. Imports have outpaced exports now in 12 of the past 17 quarters.

Machinery and equipment imports jumped 6.4% as Canadian businesses invested heavily in new machinery and equipment. Aircraft, engines and parts led in this category. Automotive products and other consumer goods were both up sharply.

Travel imports were up sharply for the second consecutive quarter as the soaring loonie stimulated Canadians' travel spending abroad.

Exports of goods and services increased 0.6% in the third quarter, after growing 0.8% in the second.

Exports of industrial goods and materials were up 4.5%, the strongest pace in a year, driven notably by higher shipments of nickel ores. Shipments of automotive products were up 2.0%, rebounding from two consecutive quarters of declines. Exports of energy products advanced 1.4% on increased oil and natural gas deliveries to the United States.

Labour disputes in the British Columbia forestry sector, as well as continued softening in US residential construction, contributed to a sharp 6.2% drop in forestry exports. The output of the forestry and logging industry slid 7.2%.

Heavy investment in machinery and equipment

Business investment in machinery and equipment picked up steam in the third quarter, advancing 3.6%, more than twice the pace set in the second quarter and the fastest pace in 10 quarters.

Investment in other transportation equipment jumped 14%, owing mainly to capital outlays by the airline industry. Outlays for telecommunications, computers and other office equipment and software posted solid increases.

On the downside, capital outlays for trucks slipped 2.8%, their third consecutive decline.

Continued gains in housing investment

Investment in housing posted another solid gain during the third quarter. Over the past three quarters, total investment in residential structures has grown 4.8%, compared with a decline of 2.9% over the preceding three quarters.

The strength in housing stemmed from new residential construction. Renovation activity gave an added boost, advancing 1.2% in the third quarter, twice its pace in the second.

The resale market cooled over the summer months, as ownership transfer costs (which include real estate commissions) slipped 1.6%, following two quarters of solid gains.

Labour income slows from first half of 2007

Labour income advanced 0.5% in the third quarter, less than one-third its pace in the first and second quarters, when special pay equity payments in Quebec and special pension contributions in Newfoundland and Labrador boosted labour income.

Excluding these special payments, labour income would have grown 1.2% in the third quarter, 1.6% in the second and 1.8% in the first.

Corporate profits boosted

Corporation profits before taxes increased 2.6%, the fastest pace in nearly two years. Profits were boosted by earnings in the banking sector. The oil and gas extraction industry, petroleum refineries and coal products, retailers and wholesalers also fared well.

Lower exports and labour disruptions in the British Columbia forestry sector contributed to lower profits for wood and paper producers, while lower commodity prices reduced profits in mining (excluding mineral fuels).

Gross domestic product by industry, September 2007

Economic activity was up 0.1% in September, after increasing 0.2% in August and 0.1% in July. The gain recorded by the service producing industries (+0.2%) was partially neutralized by the decrease in the production of goods (-0.1%). Increases in the energy sector and wholesale trade propelled the growth, while a decline in manufacturing and retail trade dampened it. Gains were also registered in construction and in the accommodation and food services sector. The finance and insurance sector and metal ore mining were additional sources of declines.

Wholesale trade rose 1.0% in September, for a fifth consecutive monthly increase. Gains were posted in the wholesaling of food and beverages, motor vehicles, and building supplies. These gains were dampened by declines in the wholesaling of oilseeds and grains, computer and other electronic equipment, lumber and millwork, and office and professional equipment. After a very strong showing in August, retail trade experienced a slight decrease of 0.3% in September.

Manufacturing retreated 0.9% in September, on the heels of declines in August and June, while the Canadian dollar appreciated vis-à-vis the US currency. The production of non-durable goods (-0.7%) and durable goods (-0.9%) declined. Of the 21 major manufacturing groups, 16 decreased, these accounting for 78% of total manufacturing value added.

The energy sector advanced 0.8% in September, after remaining unchanged in August. Electricity production jumped 1.7% in September, while natural gas production posted a slight increase and crude oil production slipped. Oil and gas exploration moved ahead (+3.7%) for the fourth month in a row, but still remains well below the level of activity recorded in early 2007.

The construction sector advanced 0.4% in September, a fifth consecutive monthly increase. The gains recorded in residential construction (+0.8%) and engineering and repair work (+0.3%) overshadowed the modest slip in non-residential building construction (-0.1%).

Industrial production (the output of mines, utilities and factories) retreated 0.3% in September. The gains in utilities and mining were not enough to offset the decline in manufacturing. In the United States, industrial production increased 0.2% in September. Both manufacturing and mining moved ahead, while utilities fell.

'Employment and decent work need to be not a by-product but a central objective of development strategies,' said Under-Secretary-General for Economic and Social Affairs Sha Zukang at a press briefing to mark the launch of the Report of the World Social Situation 2007: The Employment Imperative....

A 'powerful lesson,' said the report, is that liberalization can benefit ordinary citizens, but only after 'the establishment of institutions, legislation and regulations that can limit its adverse effects.' ..." [Xinhua/Factiva]

The study allows direct comparison of tax systems from around the world. It shows how businesses are affected not only by tax rates, but also by the procedural burden of compliance. The report focuses on the number of tax payments made, the time it takes to comply, and the cost of taxes, which is measured by the total tax rate. The total tax rate (TTR) covers five types of taxes that firms pay: profit, social, property, turnover, and other taxes, such as municipal fees and fuel taxes. The steps, time, and cost indicators are used to determine the overall ease of paying taxes.

Canada’s ranking this year may seem a step backwards from its 2006 ranking of 77th out of 175. However, according to Tom O’Brien, a PwC Canada tax partner “Since this years report has been written, there has been the elimination of the Canadian Federal Large Corporation Tax which represents a real savings for many corporations operating in Canada. And, with decreases in Federal and some provincial corporate income tax rates announced for 2007 to 2010, and the harmonization of the Ontario and Canadian Corporate tax systems, Canada’s total tax rate ranking is expected to improve in the near future.”

The top ranking countries with the lowest total tax rate are Vanatu, the Maldives and the United Arab Emirates. The highest are Sierra Leone, Burundi and Gambia. In comparison, the US lands at the 102 spot and the United Kingdom at 52. Seven of the 10 countries in the world with the highest

TTRs are African countries, and it is largely the impact of these seven countries, and the sales and turnover taxes, that drive the average TTR for the sub Saharan African countries to nearly 70% – the highest of any geographical grouping.

In terms of time to comply Canada is 28th and 15th for number of payments. These results are a reflection of the overall efficiency of the Canadian tax system, which features a globally competitive Revenue Agency and incorporates technology such as the internet and electronic banking to increase the ease of remitting tax payments and complying with Federal and provincial tax legislation. The ease of paying taxes can range from filing a single online form in Sweden to making 124 payments a year in Belarus. In fact, countries in the former Soviet and Eastern bloc account for six of the bottom 10 countries in terms of the number of tax payments a company has to make.

Four of the bottom 10 countries have a TTR above 100% of commercial profits. That means that a company with sales of 120% of cost of goods sold cannot make enough profit to pay all the business taxes. Seven of the bottom 10 countries have to pay taxes at least once a week and spend at least 65 days per year in the process.

Obrien notes, “There is good news: paying taxes is now easier, especially in Eastern Europe and Central Asia, which had the most reforms in 2006- 07. Revenues are growing as well. For example, the Czech Republic saw its tax revenue rise by 2% after reducing the corporate income tax between 2004 and 2005. This is part of a longer global trend – the tax burden on businesses has decreased every year since 1985.”

This year, 31 economies improved their business tax systems, and 65 have done so over the past three years. Bulgaria was the top reformer, and Turkey was runner-up.

In terms of income per capita, the Canadian economy grew significantly faster than the US economy between 2000 and 2006. Real income per capita in the United States grew by 9.1% during this period, while in Canada real income per capita grew 15.5%, nearly two-thirds faster than the US rate.

This is exactly the opposite of the situation prior to the turn of the millennium, when commodity prices were weak and the Canadian dollar was depreciating, according to a new study.

The study showed that a long downward trend in Canada's fortunes prior to 1999 was reversed in very short order. In three short years, real income relative to the United States returned toward levels not seen since the mid-1980s. And much of this "reversal of fortunes" has been due to Canada's resource economy.

In the two decades prior to 2000, the US economy tended to grow faster than the Canadian economy, regardless of whether labour productivity, real gross domestic product (GDP) per capita or real income per capita was examined. In fact, if real income is used as the yardstick for measuring performance, the Canadian economy fares worse than if either labour productivity or real GDP per capita is used.

The study found that between 1980 and 1989 and between 1990 and 1999, labour productivity, real GDP per capita and real income per capita all increased faster in the United States than in Canada. After 2000, labour productivity continued to grow faster in the United States than in Canada, while growth in real GDP per capita was similar between the two countries.

For real income per capita, however, the situation was reversed following the turn of the millennium. Between 2000 and 2006, real income per capita in the United States grew by only 9.1%. In Canada, the increase was 15.5%.

The study suggests that the Canadian economy's growth has shown the advantages of diversification coming from its resource base. A diversified economy has some of the same advantages as a diversified stock portfolio. Some sectors may decline slowly for long periods of time, only to experience a sudden and dramatic change in fortunes. Canada has had just such an experience.

All measures pointed to long-term relative decline in Canadian economy before 2000

Prior to 2000, all measures indicated a long-term decline in the Canadian economy relative to the US economy.

Those were the years in which Canada's resource economy was in decline. Resource output as a percentage of GDP was falling around the world. Relative commodity prices were declining. The earnings foreigners received from their investments in Canada were larger than those that Canadians earned from their foreign investments—and the difference tended to get larger each year. As a result, real income growth failed to keep pace with real GDP growth.

All that changed with the commodity boom that Canada experienced after 2003. Export prices rose sharply, the Canadian dollar appreciated and prices of imported goods fell. Canada's receipts of income from foreign investments increased dramatically relative to payments.

At the same time, China and India emerged as important players in the world economy, contributing to a dramatic increase in real income growth in Canada relative to GDP growth. This also affected comparisons between Canada and the United States.

Terms of trade improvements boost real income in Canada

An important ratio for determining how changes in commodity prices, imported consumer goods prices and the Canadian dollar will affect Canada is the "terms of trade." This is the price of exports relative to the price of imports.

When the ratio rises, it signals that the value of Canada's exports is increasing. Exports will now purchase more imports than they would have previously. A rise in the terms of trade indicates that the volume of goods and services Canadians can purchase with their earnings is rising.

The study found that Canada's terms of trade, spurred on by higher commodity prices, falling prices of imported goods and a higher dollar, were a driving force behind real income growth in Canada. The terms of trade rose noticeably, increasing the purchasing power of Canadian real incomes between 2002 and 2006.

At the same time, real income growth in the United States was held back by the rising commodity prices. As a result, Canadian real income growth significantly outpaced American real income growth after 2002.

Net income from abroad a factor in real income growth

The study also found that after 2000, international investment income contributed to real income growth each year, unlike during the 1980s and 1990s when it tended to detract from real income growth.

Between 1980 and 2001, the net amount of income sent abroad each year increased. In 1980, Canadians earned $8.5 billion less on their foreign investments than foreigners derived from their investments in Canada.

Over the next 20 years, the amount of income earned by foreigners from their investments in Canada increased at a faster rate than the income Canadians earned from their foreign investments.

By 1999, Canadian investments abroad were earning $33.2 billion less than foreign investments in Canada.

Beginning in 2000, and accelerating from 2005 to 2006, the income earned by Canadian investments abroad rose sharply. The earnings from foreign investments in Canada failed to keep pace, and the amount of money sent abroad each year became smaller. By 2006, it had shrunk to $10.8 billion, close to the same balance observed in 1980.

Note to readers

Real income refers to real Net National Income (NNI), which is a measure of the real purchasing power of income that remains in Canada after returns from international investment and capital consumption are accounted for.

Real NNI is an officially recognized accounting aggregate in the 1993 System of National Accounts. It is related to real gross domestic product (GDP) through three accounting differences.

The first is the trading gain, which adjusts for relative price changes—primarily, the terms of trade. The trading gain is captured using the same deflator for exports and imports. When the trading gain is added to real GDP, the resulting measure is referred to as real Gross Domestic Income (GDI).

The second accounting difference is net income from abroad. When foreigners invest in Canada they earn a return that can be repatriated. Similarly, the return that Canadians earn on their foreign investments can be returned to Canada. The net flow each year raises or lowers the earnings that accrue to Canadians. When the real net flow is added to real GDI, the result is real Gross National Income (GNI). This aggregate was formerly known as real Gross National Product (GNP).

The third accounting difference is depreciation of the existing physical capital stock. Each year wear and tear, obsolescence or accidents lowers the stock of physical capital. If it is not maintained or replaced, the stock of physical capital would be reduced each year, eventually leading to a declining standard of living in Canada. When real depreciation is added to real GNI, the real NNI aggregate is generated. This aggregate was formerly known as real Net National Product (NNP).

Excluding energy, the all-items index climbed 1.9% in the 12 months preceding October 2007, a slowdown from the 2.1% growth recorded in September. Lower prices for the purchase and leasing of passenger vehicles were the main factor behind the slowdown of this index.

The Bank of Canada's core index, used to monitor the inflation control target, increased by 1.8% between October 2006 and October 2007, a slowdown compared with the rate of 2.0% in September. This was the weakest growth of this index since June 2006. This slowdown was mainly the result of lower prices for the purchase and leasing of passenger vehicles.

Consumer prices fell by 0.3% in October compared with the preceding month. This decrease was primarily the result of lower gasoline prices. The core index was down 0.2% over that period. Significant downward pressure on both indexes came from lower prices for traveller accommodation (-8.8%), passenger vehicles (-1.4%) and women's clothing (-2.3%).

The all-items index excluding energy declined 0.1% between September and October, following a 0.2% growth between August and September.

Gasoline drives growth in year-over-year consumer prices for a second straight month

The upward pressure on consumer prices between October 2006 and October 2007 was driven by gasoline, as it was in September.

In October 2007, the price at the pump rose 13.5% compared with the same month in 2006, a change due largely to a drop in last year's gasoline prices.

Upward pressure from the cost of owned accommodation (+4.8%) continued in October, due mainly to the growth in mortgage interest cost, homeowners' replacement cost and property taxes.

Mortgage interest cost rose 6.7% in October compared with 6.4% in September. October's growth was the highest since June 1991. This upturn is more a reflection of increases in amounts borrowed because of higher new housing prices than of increases associated with the renewal of mortgage loans at higher rates.

The growth in homeowners' replacement costs (+5.0%) has been slowing for several months and is now in line with the changes observed at the start of 2006. This slowdown follows the change in the evolution of new housing prices. Homeowners' replacement cost represents the worn-out structural portion of housing and is estimated using new housing prices (excluding land).

Property taxes were up 3.8% in October compared with October 2006. Property tax hikes were higher in Newfoundland and Labrador (+8.8%) and in Alberta (+6.0%). In both provinces, tax rates fell but a re-assessment of properties led to an increase in the amounts paid. The only province in which residents paid less in property tax was Manitoba (-1.5%). Properties were not assessed in this province in 2007 and the amounts paid out in property tax credits for education rose.

Canadians also had to pay 3.0% more for restaurant meals in October 2007 compared with the same month last year. Higher prices for dairy products and certain meats contributed to the increase, along with the cumulative impact of higher minimum wages in almost all provinces and territories during the 12-month period.

A 2.4% price decrease for the purchase and leasing price of passenger vehicles was the main factor in dampening the rise in consumer prices. This decline was due mainly to an increase in discounts given by manufacturers on 2007 models. This index continued the downward trend that began in July 2007.

Prices for fresh vegetables went down 14.6% in October. A year-over-year drop of this magnitude had not occurred since June 1996. It follows on the heels of the 9.2% drop recorded in September.

A 13.8% decline in prices for computer equipment and supplies also moderated the advance in the all-items index. However, this decline was weaker than decreases observed during the first eight months of 2007.

CPI growth faster in the Atlantic provinces

Gasoline prices and mortgage interest cost were among the five main contributors to the rise in the all-items index in every province.

The 12-month change in the Consumer Price Index (CPI) accelerated in all Atlantic provinces, where higher gasoline prices were among the main contributors to the acceleration.

The rate of growth of the CPI surpassed the national average in Prince Edward Island (+3.1%) and New Brunswick (+3.3%), along with Alberta (+5.0%) and Saskatchewan (+3.6%). CPI growth remained stable in Saskatchewan, but increased slightly in Alberta in response to a surge in natural gas prices and property taxes.

The upward movement of consumer prices slowed substantially in Manitoba (+1.9%), mainly because gasoline prices did not rise as much in October as in September and property taxes fell 1.5%.

Monthly change: Gasoline drags consumer prices down between September and October 2007

Consumer prices fell 0.3% between September and October 2007, after posting growth of 0.2% in the previous month.

This turnaround stemmed mainly from changes in the variation in gasoline prices. On a monthly basis, gasoline prices fell 3.3% in October after a 0.8% rise between August and September.

The price of traveller accommodation also fell by 8.8% as the high season came to an end. This followed a comparable decline of 10.4% between September and October 2006.

A 2.3% decline in the price of women's clothing also had a significant dampening effect on the all-items index. Lower prices stemmed from specials at several retailers.

The downward movement in these areas was partially offset by increases in other components, including property taxes, which were up 3.8%. Since the change in this component is only calculated annually it has a significant impact on the monthly index.

A 0.8% gain in mortgage interest cost also played a large role, a pace unchanged from last month. The rise in new housing prices had a greater impact than the renewal of mortgage loans at higher interest rates in October.

The 3.3% increase in natural gas prices also moderated the drop in the all-items index.

OTTAWA – The Bank of Canada today released its October Monetary Policy Report, which discusses current economic and financial trends in the context of Canada's inflation-control strategy.

There have been a number of significant economic and financial developments since the July Monetary Policy Report Update. Against a backdrop of robust global economic expansion and strong commodity prices, the Canadian economy has been stronger than projected and is now operating further above its production potential than had been previously expected.

Since the July Update, the outlook for the U.S. economy has weakened. The Canadian dollar has appreciated sharply, and credit conditions have tightened. Despite these tighter credit conditions, the momentum of domestic demand in Canada is expected to remain strong. The combined effect of a weaker U.S. outlook and a higher assumed level for the Canadian dollar implies, however, that net exports will exert a more significant drag on the economy in 2008 and 2009 than previously expected. As a result, Canada's gross domestic product is projected to grow by 2.6 per cent in 2007, 2.3 per cent in 2008, and 2.5 per cent in 2009.

With the economy moving back towards balance, and with the direct effect of the stronger Canadian dollar on consumer prices, core inflation is projected to gradually decline to 2 per cent in the second half of 2008. Total CPI inflation is expected to peak at about 3 per cent later this year and then move back down to the 2 per cent target in the second half of 2008.

But there are a number of upside and downside risks to the Bank's inflation projection. The main upside risk is that excess demand in the Canadian economy could persist longer than projected. The main downside risk is that output and inflation could be lower if the Canadian dollar were to be persistently higher than the assumed average level of 98 cents U.S. for reasons not associated with demand for Canadian products.

All factors considered, the Bank judges that the risks to its inflation projection are roughly balanced, with perhaps a slight tilt to the downside.

Against this backdrop, the Bank left its key policy rate unchanged on 5 September and 16 October at 4.50 per cent. The Bank judges, at this time, that the current level of the target for the overnight rate is consistent with achieving the inflation target over the medium term.