How shaky manufacturing affects economy, BoC

Canadian manufacturing sales unexpectedly fell in April as sales in the petroleum and coal products and transportation equipment industries dropped.

Statistics Canada said Friday factory sales dropped 1.3% to $56.2 billion in April, following two consecutive monthly increases.

Economists had expected an increase of 0.6%, according to Thomson Reuters Eikon.

Manufacturing sales in volume terms fell 1.9%.

TD Bank senior economist Michael Dolega said, on the whole, the Canadian manufacturing sector remains on shaky ground.

“Not only did sales pull back significantly, contrary to expectations, the decline was not at all a price story,” Dolega wrote in a report.

“In fact, volumes were far more disappointing than shipments measured in current dollar terms which effectively wiped out the March gain.”

Statistics Canada said sales fell in 10 of 21 industries, representing 49.6% of the manufacturing sector.

Sales in the petroleum and coal products industry fell 10.9% to $5.2 billion on lower sales volumes as the sector was hit by partial shutdowns at a number of Canadian refineries for maintenance work during the month.

Transportation equipment sales fell 2.3% to $10.9 billion in April, largely due to weaker sales of other transportation equipment.

Dolega noted that the weakness was highly concentrated, both geographically and sectorally.

“Moreover, it appears to be largely related to temporary shutdowns related to refinery maintenance and a return to normal levels after a one-off shipment of armoured vehicles to the Middle East,” he wrote.

“Taken together, these facts offer hope that the May/June numbers will see a bounce-back as shipments rebound as activity is restarted.”

Excluding the petroleum and coal products and transportation equipment industries, manufacturing sales rose 0.4%.

Sales were up in 11 industries with the largest increases in the primary metal manufacturing and food products industries.

Regionally, sales were down in six provinces, led by Quebec and Alberta.

Quebec sales fell 3.4% to $13.3 billion, while Alberta saw sales fell 5.3%. Saskatchewan posted the largest monthly increase in April as sales rose 6.7%.

Derek Holt, vice-president and head of Capital Markets Economics at Scotiabank, says the loonie depreciated further on the manufacturing news, in Friday commentary.

“This is a disappointing report overall with only a glimmer or two of encouragement in the broad set of details […],” he wrote, saying, “April GDP is now tracking flat […].”

Flat GDP for that month, he says, “would translate into early tracking of 1.4% GDP growth in Q2 over Q1 at a seasonally adjusted and annualized rate,” though he notes that call comes “with the usual cautions in using monthly industry data to map onto implications for quarterly GDP growth […].”

For the Bank of Canada, Holt says, soft growth “poses a conundrum.” The central bank is also dealing with trade policy risks and evidence of accelerating wage and price pressures.

If next Friday’s CPI data show inflation acceleration and the BoC doesn’t raise rates on July 11, that could mean “the real policy rate would push more deeply negative,” Holt predicts.

Also read:

Short-term outlook for loonie and U.S. dollar

Why economy lost 7,500 jobs in May

Causes and effects of Canada’s lower growth