Published On: Tue, Jun 16th, 2015

Weak loonie, U.S. economy not enough to boost Canadian manufacturing

Desjardins said that if GDP contracts in April, the Bank of Canada could be forced to ease again.

 

 

The manufacturing renaissance that the Bank of Canada had hoped for doesn’t appear to be materializing anytime soon.

Even with a weak Canadian dollar and a hot U.S. economy, Statistics Canada said Monday that factory sales in April fell 2.1 per cent to $49.8 billion, falling short of the 0.5 per cent decline economists had been expecting

The decline was the third for factory sales in the past four months. It also means that sales are now 7.3 per cent lower than their post-recession peak of $53.7 billion in July 2014. Factory inventories also grew to $72.3 billion in April — the highest level on record.

The weakness suggests that much like the first quarter, the second quarter of the year will be another period of disappointing growth for the Canadian economy.
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“Essentially, all the early 2014 gains have now been wiped and volume sales are back to their average of 2012 and 2013, when they were going nowhere,” said Jimmy Jean, senior economist at Desjardins. “This will not help the BoC’s rotation sequence.”

Jean said that weak factory sales create the risk that gross domestic product may have shrunk again in April, which would mark the fifth contraction in six months. He said if that happens, the Bank of Canada may look at slashing interest rates even further this year, following a surprise 25 basis point cut to 0.75 per cent in January.

 

April’s weak data follow a particularly strong employment report from Statistics Canada earlier this month, which showed that the Canadian economy gained a net 58,900 jobs in May.

That created hope that the second quarter would make up for the lacklustre first quarter, which saw the Canadian economy unexpectedly contract by 0.6 per cent.

Krishen Rangasamy, senior economist at National Bank Financial, warned, however, that expectations should be lowered following Monday’s data.

“At this point, it seems the expected Q2 GDP rebound (after an awful Q1) won’t be spectacular, i.e. possibly in the 1-1.5% range (annualized),” he said.

Economists also note that the weaker Canadian loonie has not necessarily been the boon to the economy that was hoped for. Aerospace manufacturers, for instance, said they were hurt by the lower dollar as their inventories lost value.

“Real manufacturing has been on a clear downtrend since the middle of last year, highlighting that the factory sector will need more time to benefit from a cheaper C$ and firmer U.S. demand,” said Nick Exarhos, economist at CIBC World Markets.

The Bank of Canada has been stressing the importance of a rebound in Canada’s exports to help propel economic growth, which has been heavily reliant on consumer and government borrowing since the financial crisis.

While some economists see the decline of factory sales as potentially forcing the Bank of Canada to cut rates again, Randall Bartlett, senior economist at TD Economics, said he does not expect such a move this year.

“Although today’s manufacturing release stands in contrast to the Bank of Canada’s narrative of how it sees the future unfolding, we don’t believe it will be sufficient to budge the Bank from its policy of holding the line on interest rates in the near term,” he said. “A lack of economic and inflationary pressures are likely to keep this stance unchanged until the end of 2016.”

 

 

[“source-business.financialpost.com”]