September 12, 2008 / 1:08 PM / 9 years ago

Canada's capacity rate hits 16-year low on exports

3 Min Read

OTTAWA (Reuters) - Weak exports meant Canadian industries ran at just 78.9 percent of their capacity in the second quarter of this year, the lowest level in 16 years and further evidence the economy is struggling.

The drop from the 79.6 percent recorded in the first quarter was the fourth consecutive quarterly fall in capacity use, Statistics Canada said on Friday.

Market analysts had predicted a rate of 79.3 percent. The second-quarter rate was the lowest since the 78.6 percent recorded in the first three quarters of 1992 and reflects an economy struggling to deal with the U.S. slowdown.

Companies are also being hurt by the strong Canadian dollar and increased foreign competition.

"Keeping in line with the fact that this report is typically the most pessimistic measure of Canadian capacity pressures, this was a weak release," said Ian Pollick, an economics strategist at TD Economics.

"U.S. economic weakness and a strong Canadian dollar remain the two key detractors of this report."

The soft economy is a factor in the campaign leading up to Canada's October 14 general election. Conservative Prime Minister Stephen Harper says only his government can be trusted to cope with the effects of problems in the United States.

Statscan said the drop in the rate was less pronounced than in the two previous quarters.

The figures would appear to question the Bank of Canada's claim that the economy was close to its production capacity in July. The central bank says it looks at a wide range of figures and factors to determine the overall capacity rate.

The automobile and wood products sectors were particularly hard hit by reduced U.S. demand in the second quarter. Capacity use in the transportation equipment sector dropped to 74.5 percent from 76.9 percent in the first quarter.

Capacity use in the wood products sector fell to a 17-year low of 65.0 percent from 66.8 percent.

"The auto sector -- much like the housing sector in the United States -- is in the midst of a major restructuring, right-sizing and product realignment which is hampering Canadian exports of these products," said Stewart Hall, an economist at HSBC Securities.

Statscan said strong results in the machinery manufacturers and petroleum and coal products industries softened the overall decline.

"Increased production of machinery for agriculture, construction and mining extraction, along with machine tools for metal working, was the catalyst behind this situation," it said in its daily bulletin.

Reporting by David Ljunggren; Editing by Peter Galloway

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