Manufacturing drives Canada’s better-than-expected economic growth

Manufacturing drives Canada’s better-than-expected economic growth

 

 
 
 
 
Figures for January showing the strongest monthly economic growth in more than three years indicates Canadian manufacturing is mounting a healthy comeback from the deep declines suffered through the recession.
 

Figures for January showing the strongest monthly economic growth in more than three years indicates Canadian manufacturing is mounting a healthy comeback from the deep declines suffered through the recession.

Photograph by: Don Healy, Leader-Post

OTTAWA — Figures for January showing the strongest monthly economic growth in more than three years indicates Canadian manufacturing is mounting a healthy comeback from the deep declines suffered through the recession.

Gross domestic product growth in January of 0.6 per cent on a month-over-month basis was driven in large part by the goods-producing sector, as opposed to consumer spending and housing. Manufacturing produced a 1.9 per cent gain in January, marking the fifth straight month of advances for this previously battered sector.

This trends needs to continue, analysts say, in order to keep momentum going once government stimulus measures and record-low interest rates abate.

“There’s only so far that consumer spending and housing can take the recovery,” said Douglas Porter, deputy chief economist at BMO Capital Markets. “The big issue through the rest of this year is whether we can see a bit more of a handoff from the domestic side of economy to manufacturing and exports. That will be the linchpin of the recovery.”

Early indications are the manufacturing comeback has legs, with carmakers General Motors and Honda releasing plans to add shifts and increase output at its Ontario factories.

The January GDP figure, revealed by Statistics Canada on Wednesday, surpassed market expectations of a 0.5 per cent month-over-month gain, and helped set some new benchmarks. For instance, it was the best one-month gain in GDP in more than three years; the best six-month performance, five per cent annualized, since 2000 at the height of the dot-com boom; and growth at a robust 6.9 per cent annualized pace for the three-month period ended Jan. 31, which compares favourably to the 5.1 per cent expansion recorded in the third quarter of 2000 but below the record 14 per cent gain reached in the fourth quarter of 1963.

“This is the story that we expected to see. It is just coming in higher than even optimists were looking for,” said Craig Wright, chief economist at Royal Bank of Canada, and consistently one of the more rosier forecasters on Bay Street.

“This is what a recovery looks like, and it is tilting more toward a V-shaped recovery than people were thinking about a few months ago.”

Based on the January numbers, economists upgraded their forecasts for the first quarter, with TD Securities arguing growth could hit six per cent annualized for the first three months of 2010, based on the impact of the Winter Olympics in Vancouver.

“This is quite something, and adds fuel to the fire for the Bank of Canada,” said Eric Lascelles, TD’s chief economics and rates strategist. “Barring some major unexpected economic shock, it is hard to imagine the Bank of Canada raising rates any later than July, and it must be conceded that June is at least theoretically possible.”

The next Bank of Canada rate announcement is April 20, when the central bank is expected to shed some light on its updated forecast, which at present seems to underestimate the strength of the economy. In January, it anticipated first-quarter growth of 3.5 per cent. Very few are expecting the Bank of Canada to raise rates in April, but it might provide signals as to when it might start. The central bank has pledged to keep its rate at a historic low of 0.25 per cent until July, conditional on inflation. Inflation, however, has come in firmer than expectations as well.

For their part, chartered banks are not waiting for the central bank, as they have begun raising rates charged on fixed five-year mortgages. Mortgage rates at strongly tied to bond yields, which have climbed in recent weeks as investors anticipate rate increases from the central bank.

In terms of the economy’s January performance, the goods-producing sector advanced 1.3 per cent month-over-month, led by manufacturing. The services sector advanced 0.4 per cent, powered by a 2.9 per cent gain in wholesale trade, or the business of selling large quantities of goods to retailers.

Stewart Hall, economist at HSBC Securities Canada, said the gains in manufacturing shouldn’t come as too big a surprise given the deep drubbing it suffered.

“You expect manufacturing to outpace the rest of the economy because it bore the brunt of the recession,” he said. “So you would expect a good portion of the recovery to manifest itself in that part of the economy.”

BMO Capital Markets has calculated that at present output levels, manufacturing is roughly 14 per cent below highs reached in 2007, and it might take years before the sector returns to those peaks.

In the early parts of the recovery, the red-hot housing market and strong consumer demand fuelled growth. But in January, the output from real estate retreated. And recent real estate industry figures suggest the housing market is beginning to cool down with existing home sales down for two straight months.

To ensure long-term gains in Canadian manufacturing, Porter said the sector would have to deal with a stronger Canadian dollar, continued restructuring in the auto sector and low-cost competition from China.

 

Posted via web from Toronto Real Estate News | Blog

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