October 16, 2012 / 3:24 PM / 5 years ago

Good month for Canadian manufacturers, but can it last?

OTTAWA (Reuters) - Canadian factory sales bounced back in August after a two-month slump and foreign investors continued to favor the country’s capital markets that month, according to data on Tuesday that contrasted with gloomy reports on Monday.

The unexpected 1.5 percent jump in manufacturing sales in August from July brought sales to the highest level since March and suggested the economy picked up speed that month.

But in the longer run, most economists are still calling for modest growth at best.

Statistics Canada said big gains in the oil sector partly explained the strength, but also cautioned that the data would likely be revised as oil refineries gradually resume normal operations after partial shutdowns between April and June for maintenance and retooling.

After outperforming the United States since the global financial crisis and recouping all the jobs lost in the downturn, Canada’s economy is being buffeted by global woes. Manufacturers are particularly exposed to the sluggish U.S. economy.

Adding to the uncertainty, domestic economic data has flip-flopped between upbeat and gloomy, leading analysts to second-guess the numbers.

“We would fade the headline strength in manufacturing sales, as this number could be revised lower by Statistics Canada,” said Mazen Issa, Canada macro strategist at TD Securities.

“Moreover, set against the backdrop of weak foreign demand, the prospects for a robust rebound in manufacturing activity over the balance of the year are dim,” he wrote in a research note to clients.

Economists rolled back their growth forecasts in a Reuters poll earlier this month. Their median forecast is for 1.7 percent annualized growth in the third quarter and 2.0 percent growth this year and next.

The petroleum and coal sector, motor vehicles and primary metals were the biggest drivers of the manufacturing sales success in August, Statscan said.

In volume terms, manufacturing sales rose 1.8 percent in the month. New orders for factory goods rose 1.4 percent while unfilled orders slid 0.7 percent. Inventories slipped 0.1 percent and the inventory-to-sales ratio eased to 1.32 from 1.34.

INVESTMENT HAVEN

As if on cue, the day after Bank of Canada Governor Mark Carney described Canada as an attractive investment destination in an uncertain world, Statscan data on Tuesday showed foreigners kept adding Canadian securities to their portfolios.

Foreigners bought C$6.9 billion ($7.0 billion) in Canadian securities in August, investing mainly in corporate bonds and dumping stocks - the reverse of the previous month.

Still, they have accumulated C$19.5 billion in federal government bonds so far in 2012, four times the amount bought in the same period last year.

Carney said on Monday that capital inflows were pushing up the value of the Canadian dollar and dampening growth but also keeping longer-term interest rates low, which supports growth.

“The bank takes all of this into account when setting monetary policy,” he said.

The bank’s next interest rate announcement is October 23 and it will release updated economic projections the following day.

($1=$0.98 Canadian)

Editing by James Dalgleish

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