March 16, 2012 / 12:42 PM / 6 years ago

Canada manufacturing falters but U.S. offers hope

OTTAWA (Reuters) - The Canadian manufacturing sector’s long trudge to recovery from the 2008-09 recession faltered in January as sales at the factory gate unexpectedly fell, but new signs of life in the U.S. export market offered hope the pace would pick up again.

Workers piece together outerwear on the manufacturing floor of Canada Goose's facility in Toronto January 17, 2012. REUTERS/Fred Thornhill

Factory sales slid 0.9 percent in the month, dragged down largely by the aerospace sector but also by declines across 10 other industries, Statistics Canada said on Friday. Sales from auto assembly plants, however, rose to their highest level since November 2007.

Manufacturers have seen sales growth in five of the past seven months and January’s downturn followed a 0.6 percent gain in December. Analysts had expected a 0.2 percent gain in January.

The decline could not be blamed on falling prices as volumes also fell 1.1 percent, which will likely weaken Canadian real gross domestic product figures for the month.

“Canada’s manufacturing sector had also ended 2011 on a strong note, with five of the final six months of the year recording gains, and we won’t put too much weight on one-month’s data,” said Leslie Preston, economist at TD Economics.

With most exports destined for the United States, Canada’s manufacturing fortunes are closely tied to that of its neighbor.

“With economic news out of the U.S. coming in better than expected recently, we expect firmer U.S. growth to be supportive for Canada’s manufacturing sector exports,” Preston said.

Canada’s status as one of the best performing economies in the G7 club of rich countries after the global financial crisis has faded this year while more upbeat data continues to roll in from the United States, its top trade partner.

The Canadian job market has sputtered since the middle of last year, exports fell in January after two months of gains and the country is grappling with soaring household debt that is widely seen as the biggest domestic threat to the recovery.

SAFE HAVEN STATUS FADES

The Bank of Canada has made no hint that it plans to raise interest rates from the current 1 percent at a time when the U.S. Federal Reserve has signaled it will hold rates low for a prolonged period.

A separate report by Statscan on Friday suggested foreign investors are relying less on Canada as a safe haven in times of global stress and have begun withdrawing from Canadian stocks, bonds and short-term debt instruments.

Foreign investors reduced their holdings of Canadian securities in January by C$4.2 billion ($4.2 billion), halting a six-month buying spree in which they added C$55 billion of Canadian securities to their portfolios.

“The sharp selling of money-market papers in January points to an unwinding of these positions, which also coincides with better risk sentiment and a decline in global uncertainty,” said Charles St-Arnaud of Nomura Economics.

Foreigners mainly dumped short-term federal treasury bills but they also made their biggest divestment of Canadian stocks since 2008 and slowed their purchases of bonds.

“With emerging market central banks still intervening in the FX market, we believe that the Canadian financial market will continue to attract foreign inflows albeit at a slower rate than in 2011, attracted by solid economic fundamentals,” St-Arnaud said.

($1=$0.99 Canadian)

Reporting By Louise Egan Editing by Peter Galloway

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