OTTAWA (Reuters) - Canadian industry has scaled back production and prices for new homes are no longer rising quickly, figures showed on Wednesday, highlighting an economic downturn a day after the Bank of Canada stunned markets by not cutting interest rates.
Statistics Canada said that industries ran at 79.8 percent of capacity in the first quarter, the slowest rate in 15 years and worse than expected. The auto and wood-products industries, both reliant on the U.S. market, were among the biggest contributors to the decline.
“The reduction in the rate of capacity utilization is further evidence of the retrenchment in economic activity in Canada, as producers reduce their level of production in line with sagging demand for their products,” said Millan Mulraine, economics strategist at TD Securities.
The report on new home prices, which feeds into the consumer price index, showed prices unchanged in April for the first time since December 2006. The annual price rise was 5.2 percent, the weakest pace since September 2005.
The weaker-than-expected figures did not have much impact on the Canadian dollar, which bounced back and forth in a tight range versus its U.S. counterpart. Bond prices all moved higher.
The two sets of data suggested the slowing economy, which contracted 0.3 percent in the first quarter, is also showing an inflation rate that is still relatively benign.
That contradicts the Bank of Canada statement on Tuesday that accompanied its decision to hold its key overnight rate unchanged at 3 percent. The statement highlighted the threat of inflation and showed less concern about the sagging economy.
“Disinflation evidence shines through in two Canadian releases today that shed doubt on inflation fears in Canada,” said Derek Holt, economist at Scotia Capital.
“This is consistent with our view that core inflation is not likely to be much of a threat in Canada such that the Bank of Canada returns to the table with further late-2008 and early-2009 (rate) cuts as evidence of broader weakening in the economy becomes clear.”
The Organization for Economic Co-operation and Development said on Tuesday that the bank might return to cutting rates soon. After releasing a report on Canada, OECD officials said they were less pessimistic on inflation and more pessimistic on economic growth than the bank was.
“There may well be a convergence of views in the coming months, indeed if the inflation rate doesn’t rise as much as they fear,” Peter Jarrett of the OECD’s economics department told a news conference.
In Canada’s manufacturing sector, rife with layoffs and plant closures, the capacity utilization rate sank to 77.2 percent in the first quarter from 80.3 percent in the previous quarter, dropping below 80 percent for the first time since 2001.
Most sectors registered setbacks in the quarter, with the transportation industry being one of the biggest contributors to the decline, Statscan said.
Wood products manufacturers lost business due to the U.S. housing crisis. Companies in that sector are expected to lose a total of C$750 million ($735 million) in 2008, the second straight year of loses, and return to profitability in 2009, according to the Conference Board of Canada.
Oil and gas was the only sector to post an increase in its capacity utilization rate in April from March.
On the housing front, the once-booming real estate market continues a slowdown that begin in late 2006. But overall, the market has averted the dramatic crash seen in the United States. Housing markets in Edmonton and Calgary, Alberta, led the decline.
Editing by Peter Galloway