November 14, 2008 / 6:42 PM / 9 years ago

Economy solid before crisis hit, data show

OTTAWA (Reuters) - Canadian factory sales fared better than expected in September, suggesting the third quarter may have brought a respite from the dismal economic growth rates of the first half of the year.

<p>The new Ford Flex and the Ford Edge share this assembly line at the company's Oakville Plant June 3, 2008. REUTERS/Fred Thornhill</p>

But evidence that financial market volatility is taking a toll on consumer confidence in the fourth quarter also emerged on Friday, with home sales plummeting to a six-year low in October.

Statistics Canada said on Friday that manufacturing sales inched up 0.1 percent in September, defying expectations for a 1.5 percent decline on top of the sharp 3.7 percent tumble they took in August.

Strong demand from the aerospace sector in the quarter offset continued weakness in the auto sector and primary metals, both of which were hurt by the slowing U.S. economy and falling commodity prices.

The Canadian economy now appears to have been on stronger footing than thought in the period, ahead of what many see as the start of a recession in the fourth quarter.

The September factory data follows stronger-than-expected numbers on housing in September and employment in October.

“It’s correct to say the numbers of late haven’t been as bad as feared,” said Mark Chandler, fixed income strategist at RBC Capital Markets.

“The thing is, the numbers we’re seeing are still from the third quarter and also still reflect some of the residual strength from commodity prices, in terms of supporting income in Canada,” he said.

Any residual strength in the housing market appeared to evaporate in October, however, as residential sales activity fell 14 percent nationally from September, the Canadian Real Estate Association said.

It was the biggest month-over-month drop since June 1994.

“Many home buyers across Canada battened down the hatches in October as they were concerned with dire headlines about stock market volatility and a global economic downturn,” said CREA’s chief economist, Gregory Klump.

BOOMLET

Most economists are expecting the economy to begin contracting in the fourth quarter, in line with the Bank of Canada’s projection of a 0.4 percent decline.

The third quarter, however, is on track for growth of about 1 percent -- a pickup from the 0.3 percent growth in the second quarter and the 0.8 percent contraction in the first quarter.

The auto sector, which feeds the U.S. market, is top of mind for the Conservative government of Prime Minister Stephen Harper right now as Ottawa mulls how to help the ailing sector without resorting to a politically unpalatable bailout.

Factory sales of motor vehicle sales fell for the second straight month in September, down 0.3 percent in that month after shrinking 4.3 percent in August.

In that environment, the tiny rise in manufacturing sales is a “veritable boomlet,” said Stewart Hall, markets strategist at HSBC Canada.

Despite the trouble for automakers, the transportation industry saw the biggest gains in September due to a 4.8 percent jump in aerospace products and parts.

Thirteen of the 21 industries registered sales gains in September, with primary metals manufacturers taking the worst beating as a result of falling commodity prices.

New orders -- an indicator of future sales growth -- fell 3.6 percent in the month while unfilled orders dipped 0.3 percent.

Inventories also eased for the first time in seven months, down 0.3 percent. The inventory-to-sales ratio -- a measure of the months required to exhaust inventories -- dropped to 1.29 from 1.30 in August.

($1=$1.23 Canadian)

Additional reporting by Kay Yan Ng in Toronto; Editing by Peter Galloway

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