December 14, 2011 / 1:52 PM / 6 years ago

Canada set for tamer growth as factories struggle

4 Min Read

OTTAWA (Reuters) - Canadian factory sales slumped in October after three months of gains, confirming suspicions the final stretch to the end of the year will see a slowdown from the brisk economic growth of earlier months.

Despite the struggling manufacturers, the economy overall in the second half has been stronger than anticipated. The Bank of Canada will likely feel compelled to keep interest rates on hold at 1 percent as a safeguard against any noxious effects from the European debt crisis.

Manufacturing shipments fell 0.8 percent to C$48.7 billion ($46.8 billion) in October as plant maintenance shutdowns hit sales in the oil sector, while aerospace and parts sales also fell, Statistics Canada said on Wednesday.

Analysts had expected a milder 0.6 percent drop. Still, Statscan said the sales were the second highest of any month in 2011.

Manufacturers were the hardest hit group during the 2008-09 recession and the sector's recovery has lagged behind the broader economy. Monthly sales remain below the pre-recession peak of C$53 billion.

"We view that the greater momentum displayed by the Canadian economy over the second half of the year reduces the likelihood that the bank will vindicate the pricing in the market for a cut in the overnight rate early in 2012," said David Tulk, an economist with TD Securities.

"Instead, we view that such a move would be a product of conditions in Europe deteriorating to the point where the Canadian funding market becomes impaired," he said.

Economists surveyed by Reuters expect the central bank's next move to be an interest rate increase, in the fourth quarter of next year, but yields on overnight index swaps indicate traders are betting on a rate cut in 2012.

In volume terms, the most relevant for gross domestic product, sales were down 0.9 percent in October. It was the first setback in four months and evidence the export boom has fizzled again despite signs of renewed strength in the United States, Canada's main market.

"The drop in manufacturing sales on a volumes basis is one factor behind our expectation that October GDP will likely show unchanged activity in the month," said Paul Ferley, assistant chief economist at RBC Economics.

This comes as no surprise after trade data last week showed exports fell 3 percent in October from September, producing a trade deficit for the first time since January.

The third quarter produced stronger than anticipated expansion of 3.5 percent, annualized, and analysts now see a fourth-quarter expansion in the order of 2 percent, compared with the central bank's dismal 0.8 percent growth projection.

Manufacturers continued to build inventories in October, while new orders and unfilled orders declined.

On the brighter side, the composite leading indicator rose by 0.8 percent in November from October, Statscan said in a separate release. It represented the largest climb in five months.

But the main driver behind the gain was, paradoxically, manufacturing because September data was used rather than the softer October data.

"As such, we are inclined to see through the strength implied by this number and focus on the deceleration in the housing index and the S&P/TSX, which are timelier," said Tulk.

The housing index fell 1.5 percent and the stock market component declined 1.7 percent.

The leading indicator is used as a predictor of economic trends.

($1=$1.04 Canadian)

Reporting By Louise Egan; editing by Rob Wilson

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