June 16, 2008 / 1:09 AM / 9 years ago

Manufacturers get a break in April

4 Min Read

OTTAWA (Reuters) - There was good news from Canada's battered manufacturing sector in April but it came after a first quarter that was marked by an overall slide in labor productivity.

Statistics Canada reported on Friday an unexpectedly strong 2 percent surge in factory sales in April, more than offsetting a 1.7 percent slide in March, due in part to soaring prices for petroleum products.

The market was taken by surprise by the good news, having forecast a mere 0.1 percent gain. But analysts did not expect April's strength to carry through to the rest of the year as the manufacturing sector is a soft spot in Canada's economy because of its reliance on U.S. demand and its sensitivity to the Canadian currency.

"With the strong Canadian dollar and sluggish U.S. demand, we expect the manufacturing sector to be less buoyant in the coming months, as it is unlikely to maintain this brisk pace of activity, particular given the big drop in new orders," said Millan Mulraine, economics strategist at TD Securities.

A separate Statscan report showed a second straight quarterly decline in labor productivity in the first quarter, which was partly a result of manufacturers scaling back production. Productivity fell 0.3 percent as employment expanded and unit labor costs rose despite an economic contraction.

The data had little impact on the Canadian dollar as markets focused on U.S. inflation data. The currency slipped 0.3 percent against the U.S. dollar to C$1.0260, or 97.47 U.S. cents, down from C$1.0232 to the U.S. dollar, or 97.73 U.S. cents, at Thursday's close.

Widespread Gains

A spike in commodity prices helped jack up sales of petroleum and coal products at the factory gate by 9 percent.

But Statscan said gains in April manufacturers' sales went beyond the price effect and were widespread, with 17 of the 21 industries in the group, representing 80 percent of total sales, reporting increases.

In constant dollars, sales rose 1.3 percent.

However, manufacturing sales were still below first-quarter levels, pointing to a second quarter that might be only marginally better than the dismal first quarter.

Ted Carmichael, chief economist at JP Morgan in Canada, revised his second-quarter economic growth forecast to flat from a 0.4 percent contraction, and expects April GDP to come in at 0.2 percent on the month.

Productivity -- a measure of output per hour worked and often cited by economists and politicians as a key weakness in the Canadian economy -- disappointed again in the first quarter after slipping 0.7 percent in the final quarter of last year.

Even though the economy shrank in the first quarter, Canadian businesses reported that the number of hours worked remained unchanged.

Unit labor costs jumped 1.6 percent in the same period, the same as in the fourth quarter of 2007, but more than twice the average rate of growth in the rest of last year. However, adjusted for the exchange rate with the U.S. dollar, companies' unit labor costs actually fell 0.7 percent, compared with an increase of 0.6 percent for their U.S. counterparts.

Statscan conducted a review of its productivity data back to 2004, including a revision of the 2007 figure to a gain of 0.6 percent over 2006. It had previously estimated the gain at 0.5 percent.

Editing by Peter Galloway

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