Canada Manufacturing Sector Providing No Cure for Economic Ills

Canada's economy may be returning to health after an oil shock, but keeping up that momentum could hinge on whether manufacturers show more resilience. 

Gross domestic product grew 0.4 percent in November after a surprise 0.2 percent contraction the prior month, Statistics Canada said Tuesday, and advances in exports and jobs have economists projecting fourth-quarter growth at a 1.6 percent annual pace. Yet factories weigh on the outlook: despite a November rebound, they still aren't growing steadily enough to serve as a reliable economic engine. 

Bank of Canada Governor Stephen Poloz kept alive talk of an interest-rate cut at his last decision Jan. 18, citing uncertainties such as U.S. President Donald Trump's protectionist slant. That puts another cloud over the potential for Canada's factory production to ramp up after years of struggling to keep U.S. market share.

Canada this year will only see "a modest acceleration in non-energy export growth,'' according to Jesse Edgerton, an economist at JPMorgan Chase & Co. in New York. He cited suppliers who have lost orders through the oil shock and "the decline in competitiveness'' against other nations.

Canada's dollar has also crept back into the picture as an obstacle, with Poloz saying its recent rally was looking to be a bit too much. The currency is the third-best performer against the U.S. dollar over the last three months with a 2.3 percent gain.

The problem is that manufacturing output has gone sideways for more than two years and is a smaller part of the economy, making it harder to drive future growth. Manufacturing, like the country's battered energy industry, may not be ready deliver a huge jolt of momentum.

"We wouldn't expect manufacturing to be a significant driver of growth,'' Andrew Grantham, an economist at Canadian Imperial Bank of Commerce in Toronto, said in an e-mail.  "More investment is needed to raise capacity before production can increase much further,'' he said. "A lot of the new investment will likely be headed to the U.S.''

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