Strong Gains in Manufacturing Support Canadian Economic Rebound
Manufacturing is picking up in Canada led by the transportation sector and buoyed by a weak loonie. It’s another sign the economy will rebound starting with the third quarter as policymakers and economists expect.
On Wednesday Sept. 16, Statistics Canada released July’s manufacturing report which showed manufacturing sales rose a higher-than-expected 1.7 percent with upward revisions to previously reported figures for May and June.
July’s increase mostly reflected a higher amount of goods sold, not just greater sales coming because of higher prices. Stats Can reports constant dollar sales increased 1.1 percent.
Motor vehicles (up 5.6 percent) and motor vehicle parts parts (up 12.1 percent) made up almost two-thirds of the July increase. Canadian auto parts manufacturers supply plants in Canada, Mexico, and the U.S; they are a key component of non-energy exports, which are expected, by policymakers, to be a source of strength in the Canadian economy.
The overall picture showed 12 out of 21 industries with higher sales or 63 percent of the manufacturing sector—a broad-based gain.
Food products and fabricated metal products also rose, however sales of primary metals fell. The fall in sales of primary metals is due to lower prices.
On July 15, Bank of Canada governor Stephen Poloz called the fall in non-resource exports a “puzzle that merits further study.” The Bank had downgraded growth forecasts, but was optimistic of a modest rebound in the third quarter.
That rebound appears to be underway as the BoC’s Sept. 9 statement mentioned, “exchange rate-sensitive exports are gaining momentum.”
In 2014, the manufacturing sector represented 10.6 percent of the Canadian economy. It has been a long recovery from the recession and last year was the first time sales surpassed pre-recession levels. The transportation sector continues its longer-term upward trend of showing recovery from the recession.
“Today’s report leaves data to-date tracking a 0.3 percent gain in overall GDP in July after a 0.5 percent surge in June that followed five consecutive monthly declines to start the year,” says RBC senior economist Nathan Janzen in a note.
Janzen suggests details of the report point to the manufacturing component of GDP gaining close to 1 percent, “which would mark the strongest increase since December 2014.”
RBC now feels a 2.5 percent increase in Q3 GDP is looking more likely than their previously forecasted 2.2 percent gain.
It’s another sign that Canadian manufacturers are starting to see bigger benefits of stronger U.S. growth and a weaker loonie.
The Canadian dollar started the year at nearly US$0.85, but fell to 0.81 after the Bank of Canada caught markets by surprise and cut rates in late January. Hovering around 0.80 for the next three months helped a pickup in these non-energy exports that is now being discussed. The loonie having taken another leg lower to 0.76 should support exports even more, given some time lag.
The strong gains are concentrated in a 4.4 percent rise in Ontario, while Quebec declined 1.8 percent due to the aerospace sector. Alberta declined 1.6 percent due to multiple industries.
Inventories rose 1.1 percent in July, mostly due to transportation equipment. The inventory-to-sales ratio stands at 1.4 months, meaning it would take that amount of time to sell the inventory with sales at their current pace. Both figures are at or near their highest levels in five years.
“Sales will have to maintain the pace to put a meaningful dent in the still-bloated inventories,” says National Bank senior economist Krishen Rangasamy in a note. “More importantly, the Canadian dollar will have to remain weak to give manufacturers a fighting chance in a highly competitive marketplace.”
While manufacturing output has picked up in Canada, it still falls far short of the U.S. In terms of output per worker, productivity has risen roughly 20 percent in Canada since 2001, whereas it has gone up roughly 55 percent south of the border.
Rangasamy calls low Canadian productivity relative to competitors the “Achilles heel of Canadian manufacturing.”
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