World merchandise exports^{Footnote 5} grew 9.8% in 2018 to reach over US$19 trillion. Regionally, exports from the Commonwealth of Independent States grew the fastest at 24%, followed by the Middle East at 21%. North America had the lowest rate of merchandise export growth in 2018, at 7.9%. Among the major North American economies, Mexico had the highest rate of merchandise export growth, and Canada the lowest.

As a result, Mexican exports surpassed those of Canada, causing the two countries to switch rank (12th to 13th for Canada and 13th to 12th for Mexico) among the largest merchandise exporters to the world. The other change in ranking among top merchandise exporters was France overtaking Hong Kong SAR^{Footnote 6} and moving into 7th place.

At 7.7%, world commercial services exports grew slightly slower than the 9.8% pace of world merchandise exports in 2018. By region, the Commonwealth of Independent States led growth in commercial services exports at 12%, followed by Asia and Africa at 9.9% each. North America was the second-slowest growing region (4.1%), expanding only faster than South and Central America and the Caribbean (1.0%). Canada’s commercial services exports grew 5.6% in 2018 and dropped one place to the 18th spot among the world’s top commercial services exporters.

Both India and Japan dropped a place in the rankings as Ireland leapfrogged over them into 7th place, due to high growth (14%). China and India, the two largest emerging economies, experienced strong commercial services exports growth in 2018, at 17% and 11%, respectively. Among developed economies, the Netherlands increased its commercial services exports by 11% to US$241 billion.

World commercial services imports grew 7.4% in 2018, with Africa leading the way at 13% and accounting for 3.1% of overall world commercial services imports. In North America, commercial services imports increased 3.2%, recording the second-slowest regional growth rate. The United States remained the top importer of commercial services, at US$536 billion.

Canada’s imports grew 4.6%, to remain in 14th place among the leading commercial services importers. The large and fast-growing emerging economies of China and India saw high growth in commercial services imports, at 12% and 14%, respectively. Notable among developed economies, the Netherlands (11%), the United Kingdom (11%) and Belgium (12%) all saw high levels of growth in their commercial services imports.

Inflation, as measured by the Consumer Price Index (CPI), grew by 2.3% in 2018, the highest growth since 2011, but within the Bank of Canada’s targeted range of 1–3% for inflation. Leading the growth was the transportation category (4.7%), dominated by the gasoline (13%) and air transportation (15%) sub-categories.

Despite this growth, gasoline and energy^{Footnote 8} costs were slightly lower than in 2014, a peak year. Excluding energy, the CPI grew by 1.9% in 2018.

On an annual average basis, the Canadian dollar remained relatively steady in 2018 when benchmarked against the US dollar, appreciating by 0.2% compared to 2017.

However, on a monthly average basis, the Canadian dollar has been on a depreciating trend since September 2017.

The price of crude oil is of interest for the Canadian economy, particularly the price differential between West Texas Intermediate (WTI), which is representative of American crude oil pricing, and Western Canadian Select (WCS), which is representative of Canadian oil sands crude oil pricing. WCS oil is heavier than WTI and requires more refining. Because of this, WCS trades at a discount relative to WTI. Typically, the price differential is between US$10 and US$20.

However, in November 2018, the price differential between WCS and WTI widened to US$45.93 per barrel, well beyond the historical average, due mainly to excess supply and the lack of export capacity resulting from transportation bottlenecks. To address these issues and to provide price relief to WCS, the Alberta government put in place mandated crude oil production cuts, and made public its intention to acquire locomotives and rail cars for crude oil transportation.

Another issue of interest is the high level of household debt in Canada. While households in the United States have been deleveraging since the 2009 financial crisis, dropping the household debt to GDP ratio to 78% in 2017, Canadian households have not followed suit, and as a result household debt has exceeded 100% of GDP since the second quarter of 2016.

A persistently high and increasing level of household debt can cause constraints to household consumption, an important driver of economic growth. On the other hand, continued strength in the labour market should mitigate some of the negative impact of household debt.

Goods-producing industries grew at 2.2% in 2018, slightly faster than services-producing industries (2.0%). On the goods side, oil and gas extraction was up 7.1% in 2018, causing its share of GDP to increase to 5.5% from 5.3%. Construction grew by a meagre 0.7%, corresponding to slowdowns in housing activity. Within manufacturing, durables grew by 2.5% in 2018, despite a 1.4% decline in motor vehicle and parts manufacturing.

Growth in non-durables was more robust at 2.9%, but negative growth in petroleum and coal product manufacturing mitigated some of the gain. In 2018, growth on the services side was led by professional, scientific and technical services (3.3%), transportation and warehousing services (3.0%), and educational services (3.0%). Growth in real estate services moderated to 1.6% in 2018, after growing by 2.5% the year before. The information and communication technology sector continued to be a bright spot in 2018, growing at 3.5%, though slightly lower than the 4.0% growth in 2017.

Overall employment grew by 1.3% in 2018, with goods-producing industries advancing by 1.4% and services-producing industries by 1.3%. On the goods side, utilities employment grew the fastest—at 9.2%—but still only accounts for 0.8% of employment. However, utilities had the highest average hourly wage, at $41, and a low sectoral unemployment rate of 1.7%. Employment in the forestry, fishing, mining, quarrying, and oil and gas sector grew by 3.3% in 2018, but overall employment is still below the 2014 peak (373,600), and the sector had the highest unemployment rate and a slower wage growth than average, despite being the second-highest paying sector in terms of average hourly wage.

Employment growth in manufacturing was tepid at 0.2% in 2018, but the unemployment rate (3.6%) and wage growth (3.3%) were solid. On the services side, transportation and warehousing led employment growth at 5.0%, supporting a low unemployment rate of 3.3%; however, wage growth was slightly below average at 2.7%.

Although Canada has the lowest level of national unemployment since 1976 (5.8% in 2018), disparities in regional employment performance continued to exist in 2018. Notwithstanding strong employment growth in Prince Edward Island (3.1%) and Nova Scotia (1.5%), the Atlantic provinces experienced persistent high rates of unemployment in 2018: Newfoundland and Labrador (14%), Prince Edward Island (9.4%), Nova Scotia (7.5%), and New Brunswick (8.0%). Quebec’s unemployment rate reached a historical low of 5.5%, despite slower employment growth (0.9%). Furthermore, its wage growth was the highest among provinces, at 3.2%. Continued solid employment growth (1.6%) helped lower Ontario’s unemployment rate to 5.6%, the lowest since 1989, and supported wage growth of 2.9%.

As a result of weak employment growth (0.6%), the unemployment rate in Manitoba rose to 6.0% in 2018, from 5.4% in 2017. However, wage growth in the province was solid, at 2.8%. Employment growth in Saskatchewan was the second-weakest among provinces and territories, and the unemployment rate was above the national average. Similarly, Alberta’s unemployment rate was above the national average, however, the province posted the second-fastest employment growth among provinces and territories and had the highest average weekly earnings among the provinces. At 4.7%, British Columbia’s unemployment rate was the lowest among provinces (and at its lowest level since 2008), but the province has the highest inflation rate among all provinces and territories.

In conjunction with slowing growth toward the end of 2018, forward-looking economic indicators, such as the Ivey Purchasing Managers Index (PMI) and the Bank of Canada’s Business Outlook Survey (BOS) Indicator, point to a decline in economic sentiment among Canadian businesses. The Ivey PMI, which measures the month-to-month variation in economic sentiment as indicated by a panel of purchasing managers from across Canada, has been trending downward to sit at 50.6 in February 2019, indicating that firms with positive outlooks continue to outnumber firms with negative outlooks, but the gap has been declining.^{Footnote 9} In recent months, the Ivey PMI has improved slightly to 55.9 in May 2019, but sentiments in the first five months of 2019 are still lower than for the same period last year.

Another indication of softening business sentiment can be seen in the Bank of Canada’s BOS indicator, which has declined since the second half of 2018 from positive levels to a negative one. Results for several BOS survey questions in the spring 2019 edition were below historical averages. The latest edition of theBOS(summer 2019) points to a slight improvement in business sentiment, but weakness tied to Western Canada’s oil industry and global trade tensions continue to dampen outlook.

Canada’s goods^{Footnote 12} exports continued to grow in 2018, up 6.5% to $585 billion, with export prices increasing by 2.2% and export volumes expanding by 4.1%.^{Footnote 13} Concurrently, Canada’s goods imports advanced 5.8% to $607 billion, as both import prices and import volumes increased, up 2.4% and 3.3%, respectively. As a result, total goods trade reached a record high of $1.2 trillion. Moreover, since exports outpaced imports in 2018, Canada’s goods trade deficit narrowed by $2.7 billion to $22 billion.

Exports

Canadian goods exports grew for the second consecutive year in 2018, with export up in all sectors, except motor vehicles and parts. Energy exports growth led the way, advancing $14 billion, or 15%, to reach $111 billion in value, followed by consumer goods (+ $3.6 billion) and forestry, building and packaging products (+ $3.4 billion). Unlike the previous year, the growth of Canadian exports was driven more by an expansion in volumes than in export prices, as volumes were up 4.1% compared to a 2.2% growth in prices. Notable increases in export volumes were registered for metal ores and minerals (+17%), aircraft and other transportation equipment (+12%), and energy products (+8.2%). On the price side, prices of forestry, building and packaging products were up 9.7%.

However, the growth of energy prices slowed from 22% in 2017 to 6.2% in 2018. Crude oil, the main component of this category, experienced large price fluctuations, as its average price rose steadily in the first five months of 2018 and then trended downward slightly until October, before falling sharply in November.^{Footnote 14} Other sectors that posted strong price increases were metal and mineral products (+5.9%) and chemical, plastic and rubber products (+5.4%). Exports of motor vehicles and parts fell by $2.8 billion, or 3.0%, in 2018, due mainly to a 3.1% decline in export prices.

By destination, goods exports to the United States increased 5.4%, or $22 billion, to $433 billion in 2018. However, exports to non-U.S. destinations grew even faster, up 9.8% (or $14 billion) to $153 billion. As a result, Canada’s goods exports continued to diversify away from the United States. Among Canada’s major non-U.S. trading partners, exports to China recorded the fastest growth (+16%), followed by South Korea (+9.7%) and Japan (+9.1%). Goods exports to the European Union rose modestly (+5.9%), but exports to the Netherlands and Italy posted strong growth, up 51% and 33%, respectively. However, due to falling gold exports, these strong gains were partially offset by declining exports to the United Kingdom (-9.7%).