Manufacturing sector takes hit during pandemic, but Statscan sees bright future

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The COVID-19 pandemic wiped out more than a quarter of Canada’s manufacturing sales in April through slumping demand and widespread shutdowns, a period that appears to have been the low point of the crisis for the country’s factories.

Statistics Canada reported Monday that manufacturing sales plunged a record 28.5 per cent in the month, even worse than the 20 per cent economists had estimated. That adds to the 9.8-per-cent drop in March, as COVID-19 containment measures sent the economy into a deep freeze. The decline amounts to $20-billion in lost monthly sales from prepandemic levels.

Losses came across all segments, as 85 per cent of manufacturing firms reported being affected by the outbreak. Motor vehicle sales were all but wiped out in April – down 97.5 per cent – with the country’s auto assembly plants idled. Petroleum sales were cut almost in half as prices plunged and lockdowns dramatically reduced fuel consumption.

But Statscan said brighter days are on the way.

“During the second week of May, many manufacturers resumed production after full or partial shutdowns in April. Provinces and territories started a phased reopening of non-essential businesses in May ... which is expected to bolster sales compared with April,” the agency said in its monthly manufacturing report.

“April's hit was significant but expected, especially given the previously announced shutdowns in the auto sector. The good news is that the worst is likely in the rear-view mirror,” Toronto-Dominion Bank economist Omar Abdelrahman said in a research report.

“That said, the path to recovery in the sector will be long and mired with uncertainty.”

Statscan said more than 90 per cent of manufacturers in printing products, furniture, transportation equipment, textiles, clothing and computers and electronics reported they were “operating at limited capacity or ceased operations completely” in April.

Even the food manufacturing segment, which had been strong earlier in the pandemic as consumers stocked up on staples, suffered a 12.8-per-cent slump in April. Statscan said a key contributor was the shutdown of many meat processing plants after employees tested positive for COVID-19. It added that dairy processors were hurt by falling demand, as restaurants, hotels and schools were closed.

Thanks to curtailed production, inventories dipped 0.6 per cent in the month. Still, the dramatic drop in sales meant the inventory-to-sales ratio – measured as the number of months of sales that could be covered by existing inventories – spiked to 2.41 from 1.74 in March.

“Elevated inventories, which looked high relative to sales even before the outbreak, are another reason to expect the manufacturing recovery to be slow,” said Stephen Brown, senior Canada economist for independent research firm Capital Economics.

Despite the easing of pandemic restrictions over the past month or so, there are indications that manufacturing output continues to be substantially constrained by the impact of the crisis on global demand, supply chains and health-related operating changes. The IHS Markit Manufacturing Purchasing Managers Index (PMI), a closely followed gauge of activity in the sector, registered at 40.6 for May – well up from April’s 33.0 but still far below the 50 mark that represents the threshold between growth and contraction. It suggests the sector was still a long way from normal in May.

Indeed, economists said it could be many months before manufacturing output approaches prepandemic levels again.

“The surge in unemployment worldwide, coupled with permanent capacity destruction [due to business failures amid the shutdowns], is likely to crimp demand for factory wares going forward,” National Bank of Canada economist Jocelyn Paquet said in a research note.

“The weak and uncertain global backdrop will continue to weigh on the sector’s prospects well into 2021,” TD Bank’s Mr. Abdelrahman said.

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