December 15, 2007 / 5:00 PM / 10 years ago

Canadian factories eke out gains despite loonie pain

4 Min Read

<p>Newly pressed Canadian one dollar coins, also know as loonies, at the Royal Canadian Mint in Winnipeg November 14, 2007. Canadian manufacturing held its ground in October despite the pain from a lofty currency, while other data showed inflation pressures easing, leaving expectations intact for a central bank rate cut in January.Fred Greenslade</p>

OTTAWA (Reuters) - Canadian manufacturing held its ground in October despite the pain from a lofty currency, while other data showed inflation pressures easing, leaving expectations intact for a central bank rate cut in January.

Manufacturing sales outperformed expectations, rising 0.1 percent in October as strong sales in aerospace and other sectors offset weakness in the auto industry, Statistics Canada said on Thursday.

Analysts in a Reuters survey had expected factory sales to decline by 1 percent.

"Overall, this was a very strong report, suggesting that there still remains some life in the Canadian manufacturing sector, despite the strength of the Canadian dollar and the slowing U.S. economy," said Millan Mulraine, economics strategist at TD Securities said in a note to clients.

"The big gain in real shipments will also have important upside implications for fourth-quarter GDP in Canada."

However, manufacturing was largely to blame for mediocre labor productivity growth of 0.2 percent in the third quarter, compared with 1.6 percent in the United States, according to a separate Statscan release.

"This is the ugly underbelly to the incredibly strong job growth figures churned out month after month in recent years," said Doug Porter, deputy chief economist at BMO Capital Markets.

The productivity update also revealed a slower rate of growth in labor costs in the third quarter of 0.3 percent, down from 0.7 percent in the second quarter.

A third report showed new home price growth of 0.1 percent, the fourteenth straight month of either slowing or steady price growth. Even the red-hot housing markets in western Canadian cities appeared to be cooling.

Good News on Inflation Front

Ted Carmichael, chief Canada economist at J.P. Morgan said the data pointed to lower core inflation, a measure of price growth that excludes volatile items and which the central bank uses to guide monetary policy.

"Core goods inflation is being pushed down by the strong Canadian dollar; core shelter inflation is falling as the new house price index decelerates; and core non-shelter services inflation is under less upward pressure as unit labor cost growth slows," said Carmichael in a note.

"Falling core inflation is expected to keep the door wide open for additional Bank of Canada easing," he said.

A majority of market players expect the bank to cut its overnight lending rate on January 22 after trimming by one-quarter point on December 4 to 4.25 percent.

Manufacturers showed unexpected resilience in October to the rising Canadian dollar, which shot past parity with the U.S. dollar in September and continued its upward climb until peaking at US$1.10 in early November. It has since fallen back and was around 98 U.S. cents on Thursday morning.

Using constant dollars, the volume of factory sales rose 1.1 percent in the month and 3.2 percent compared with a year earlier.

Sales of non-durable goods were up 0.2 percent, the first rise in the past five months. Durable goods were unchanged. Sales by vehicle manufacturers dropped 5.8 percent while aerospace product and parts makers reported an 8.4 percent jump.

New orders slowed less than in previous months, down 0.1 percent while unfilled orders fell 1.7 percent. Inventory levels were down for the third consecutive months.

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