So, Bank of Canada – how is that rebound in manufacturing coming along?
The manufacturing sector remains the weak link in Canada’s economy, and the latest monthly report from the beleaguered industry suggests the clouds are far from parting: Manufacturing sales slumped 2.4 per cent on a seasonally adjusted basis in April, the biggest drop since August, 2009. It was the fourth decline in five months; the sector hasn’t shown any discernible growth in the better part of two years.
This is distinctly bad news for the Bank of Canada’s economic outlook. The central bank has said – indeed, repeatedly – that it expects at least a modest recovery in exports and business investment to be vital cogs in Canada’s growth engine over the rest of the year. Manufacturing is a major component in both – and the latest downright miserable numbers don‘t suggest it’s anywhere near ready to deliver. Nor did the employment numbers released last week, which showed a discouraging 0.8-per-cent decline in factory jobs in May; manufacturers have shed 65,000 jobs, or nearly 4 per cent of their work force, so far this year.
It certainly does raise questions about the Bank of Canada’s economic projections, most recently updated in the central bank’s April Monetary Policy Report. (The next MPR is slated for release in mid-July.) The bank predicted that the country’s GDP growth pace would accelerate to about 2.5 per cent annualized in the second half of the year.
Granted, some surprising strength in the first quarter had blown away the bank’s growth estimates, and that, together with some surprising recent resurgence in the housing and labour markets, had many economists wondering if the central bank’s view for the rest of 2013 was going to need adjusting upward. But the utter lack of momentum in manufacturing casts doubt on whether the bank’s expected drivers of second-half growth are going to materialize.
“The data reinforce our view that Canada is set to decelerate in the current quarter,” wrote National Bank Financial economist Krishen Rangasamy in a research note.
“An additional concern is that the weakness of sales is now leading to a glut of manufacturing inventories, which could soon prompt manufacturers to slash production,” said Paul Ashworth, chief North American economist at Capital Economics, in a note to clients. “We don't expect to see much improvement in the fortunes of Canadian manufacturers over the next 12 months.”
Of course, not everyone sees it that way.
“In terms of near-term implications for GDP growth, the details of today’s report, including a stronger build in inventories, suggest that the decline in sales likely significantly overstates weakness in value-added production,” wrote Royal Bank of Canada economist Nathan Janzen.
How the Bank of Canada will read the recent data surrounding manufacturing is unclear, but might become somewhat clearer next week.
On Wednesday, the bank’s new boss, Stephen Poloz, gives his first public speech since assuming the job at the beginning of this month (he’s addressing an Oakville, Ont. Chamber of Commerce luncheon, with a press conference to follow). Given the location in the heartland of southern Ontario’s massive manufacturing industry (Oakville is Ford Canada’s home), and his history with the sector as president and CEO of Export Development Canada, it seems likely that Mr. Poloz will use this venue to express some of his views on the state of the sector.
He should also expect some tough questions from both the lunch audience and the media on the matter, as well as his views on how the stubbornly strong Canadian dollar is contributing to manufacturers’ plight.