September 14, 2012 / 12:42 PM / 5 years ago

Grim factory sales darken Canada outlook

OTTAWA (Reuters) - Canadian manufacturing sales dropped sharply in July on weakness across most industries, data showed on Friday in a troubling omen that analysts say may result in the economy failing to grow in that month.

Factory sales fell 1.5 percent in July from June versus market expectations of a 0.4 percent gain, dragged down mainly by a drop in sales of aerospace products, motor vehicles, and machinery, Statistics Canada said.

In volume terms, sales fell 2 percent in July.

“The decline in volumes will weigh on monthly industry gross domestic product. Though we require additional data to make a more accurate estimate, GDP may be hard-pressed to register growth,” Mazen Issa, macro strategist at TD Securities, wrote in a note to clients.

“With weak foreign demand and a sub-trend rate of domestic economic growth expected to persist over the balance of the year, manufacturing activity will likely be subdued,” he said.

Canada’s economy recovered from the 2008-09 recession more quickly than that of the United States but the manufacturing sector remains weaker than its pre-recession peak because of slow demand from the sluggish U.S. economy and a strong currency.

Bank of Canada Governor Mark Carney has been hinting that he’ll hike interest rates if the economy continues to absorb excess slack, but the manufacturing and other data indicate the economy may not be strong enough to warrant such a move.

Overall 11 of 21 industries, representing 60 percent of total manufacturing, reported lower sales in July.

“A look at the details is even more discouraging,” said Emanuella Enenajor, economist at CIBC World Markets, referring to declines in bellwether sectors such as autos, primary metals and machinery.

She said third-quarter growth could track below the Bank of Canada’s estimate of an annualized 2 percent unless lost ground is made up in the rest of the quarter.

After four months of gains, the transportation sector contributed most to the July weakness with a 6.4 percent drop in sales. The aerospace product and parts sector was mainly to blame, registering a 22.1 percent slide in sales, while motor vehicles fell 3.2 percent.

Machinery sales also sank 2.4 percent.

The petroleum and coal products industry, among the largest in the survey by sales, reported flat sales in July.

Inventories bounced back from a dip in June, gaining 1 percent and the inventory-to-sales ratio -- a measure of how many months it would take to exhaust inventories at the current pace of sales -- rose to 1.36 from 1.32.

New orders for factory goods tumbled 5.6 percent, due largely to weak demand for aerospace products, which can swing dramatically from month to month, and unfilled orders decreased 1.2 percent.

Reporting by Louise Egan and Alex Paterson,; Editing by Dave Zimmerman; and Peter Galloway

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