`Dynamite' Factories Report Signals Canada 1Q GDP Rebound

  • Manufacturing sales rise to record on autos, parts and food
  • Data suggest Bank of Canada's long-awaited shift is underway

Canadian manufacturing is back.

Factory sales rose 2.3 percent in January to a record C$53.1 billion ($39.8 billion), surpassing even the most bullish forecast. This gain brought the inflation-adjusted value of manufacturing sales back to levels not seen since the financial crisis.

The surge in manufacturing sales was primarily attributable to advances in automobiles, vehicle parts and food, and the decline in the Canadian dollar relative to the greenback over the past two years supported sales, Statistics Canada said in a report Wednesday from Ottawa.

The acute strength in those three manufacturing sub-sectors belied the broad-based nature of January’s increase, which saw gains in 16 of 21 industries, according to Toronto-Dominion Bank Economist Brian DePratto.

“This is a pretty dynamite report,” he said. “It’s hard to find anything not to really like about it. This is more confirmation of our view that growth in the first quarter is likely to be north of 2 percent.”

The Bank of Canada called for growth of just 0.8 percent in the first quarter of 2016. Governor Stephen Poloz urged patience as the economy undergoes a lengthy transition process in the wake of subdued resource prices.

“The drop in oil and other commodity prices constitutes a significant setback for the Canadian economy, and has set in motion a protracted adjustment process,” Poloz said after the Bank’s Jan. 20 interest rate decision. “That will mean the continuation of a two-track economy, with the resource sector shrinking and other sectors picking up speed, all facilitated by a lower Canadian dollar and supported by very stimulative monetary policy.”

Economic Shift

The recent performance of portions of the Canadian economy sensitive to external demand and a lower currency suggests this re-balancing is well underway.

On the heels of robust increases in November and December, January’s jump in manufacturing sales brings the three-month moving average to the highest since September 2011, and looks increasingly like confirmation of a stronger trend rather than an aberration. Over this span, Canadian exports have also shown significant signs of life.

“The export figures also suggest building strength, and obviously the Canadian dollar is playing a big role in supporting demand for Canadian products,” said CIBC World Markets Economist Nick Exarhos. “We do see continued momentum here.”

This release also reinforced the divide between commodity and non-resource segments of the economy: sales in Alberta declined by 3.8 percent on the month as petroleum and coal product receipts fell 5.9 percent.

Motor vehicle manufacturing sales as a proportion of total manufacturing sales reached 12.5 percent, the highest since 2003, while petroleum and coal manufacturing represented only 7.5 percent, the lowest since 2004, according to the data.

Erik Hertzberg/Bloomberg

A somewhat sputtering U.S. consumer, with retail sales falling in the first two months of 2016, threatens to curtail the Canadian economy’s recent run of form.

However, Exarhos suggested the outlook for consumer spending south of the border remains bright, buoyed by strong job gains and a slow turn higher in wages. Moreover, recent weakness in the U.S. dollar has improved the competitive position of American manufacturers, which count Canadian firms as part of their supply chains.

“Given our linkages, weaknesses dissipating there could be another catalyst for growth,” he said.