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Canada's industrial capacity-use rate jumps

Canadian industrial capacity use rose in the first quarter to its highest level since late 2007 as manufacturers, particularly automakers, showed renewed strength following a year of slowing growth.

The industrial capacity utilization rate rose to 79 per cent from a revised 76.8 per cent in the fourth quarter of 2010, Statistics Canada said Tuesday.

It was the seventh straight gain in capacity use and beat market forecasts of a 77.2-per-cent rate.

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The data helped boost the Canadian dollar but economists were not overly enthused, reminding markets that the frothy conditions of the first quarter have since given way to flatter second-quarter growth.

"(The rate) will likely drop again in the second quarter given what we already know regarding supply shock effects related to Japan's earthquake and tsunami, and demand destruction influences upon U.S. markets," Scotia Capital economists Derek Holt and Karen Cordes wrote in a note to clients.

There was also a one-off boost in the first quarter resulting from a backlog of auto production in late 2010 caused by unplanned plant shutdowns.

Industries were still operating at below the range of about 80 to 90 per cent of capacity seen between 1993 and 2007.

The big rise in capacity use in the first quarter was welcomed by markets after a year of marginal gains. The Canadian dollar strengthened to $0.9697 to the U.S. dollar, or $1.0312 (U.S.), from $0.9737 (Canadian) just before the data was released. It later gave back some of the gain.

Manufacturers ran at 79.7 per cent of their total capacity, driven partly by strong demand for motor vehicles, which pushed up capacity use in the transportation equipment sector to 83.8 per cent, the highest level since the third quarter of 2007.

Other sectors that contributed to the gain were machinery, chemicals, wood and fabricated metals.

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The Bank of Canada estimated in its April monetary policy report that excess capacity in the economy shrank in the first quarter to about 1 per cent of gross domestic product, a level lower than it had projected in January.

Toronto-Dominion Bank revised on Tuesday its forecast for the timing of the next central bank interest rate hike to January 2012 from September of this year.

TD said the risks to the recovery have cast doubt on the bank's projection that the economy would return to full capacity in mid-2012.

"It also reflects the possibility that there is more slack in the economy, and that the 'neutral' level of interest rates is lower than previously thought," wrote Craig Alexander, chief economist at the bank.

The Bank of Canada has kept its benchmark interest rate at 1 per cent since last September, following three successive increases.

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