March 13, 2008 / 12:38 PM / 10 years ago

Canada capacity use slides to an 11-year low

OTTAWA (Reuters) - Industries ran at 81.8 percent of their production capacity in the fourth quarter of last year, the lowest rate in 11 years, in a slowdown that hit the auto and forestry sectors hardest.

Statistics Canada said on Thursday the capacity use rate, which is the ratio of an industry’s actual output to its potential output, fell from 83.4 percent in the third quarter of last year.

Statscan revised all of its figures back to the first quarter of 2005.

The performance was worse than analysts’ forecast for an 82 percent rate, and sank to the lowest level since the second quarter of 1996, when it was 81.7 percent.

Manufacturers, reeling from a sharp appreciation of the Canadian dollar and weak U.S. demand for exports, saw their capacity use fall to 80.3 percent in the fourth quarter from 82.4 percent in the previous quarter.

The slide in manufacturing -- which accounts for about half of total industrial output -- was led by the transportation-equipment and wood-products segments, Statscan said. Eighteen of the 21 groups within the manufacturing sector slowed their production.

Economic growth slowed to an 0.8 percent annual rate in the quarter from 3 percent in the third quarter with most of the weakness in export-oriented businesses such as manufacturing, while domestic demand remained robust.

Ted Carmichael, chief economist for Canada at JP Morgan, said the most striking aspect of the report was “how divergent the move in this measure of slack is with the unemployment rate.” Canada’s jobless rate in February was at a 33-year low of 5.8 percent.

“This divergence indicates that while the strong Canadian dollar and U.S. manufacturing slowdown are weighing heavily on industrial capacity utilization, continuing improvements in Canada’s terms of trade are supporting income and employment growth,” he said in a research note.

The Bank of Canada said last week that it believed the overall Canadian economy was running at above capacity in the final quarter of last year.

Extended plant closures in the auto sector pushed the capacity use rate in the transportation equipment sector down by three percentage points from the previous quarter to 83.4 percent, while the U.S. housing crisis contributed to a decline by wood products manufacturers to 71 percent from 76.2 percent.

On average in 2007, industries operated at 83.3 percent of their full capacity, down from 84.1 percent in 2006 and the lowest level since 1996.

The average annual rate for the manufacturing sector was 82.2 percent, down from 82.8 percent in 2006.

Reporting by Louise Egan; Editing by Peter Galloway

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