December 14, 2009 / 1:51 PM / in 8 years

Canada Q3 industrial capacity use edges down

OTTAWA (Reuters) - Canadian industries used less of their capacity in the third quarter than ever before, but manufacturers had less slack in their production lines for the first time in five quarters as the economy stabilized.

Industries -- including mines, factories, utilities and drilling rigs -- operated at 67.5 percent of capacity, down from a revised 67.7 percent in the second quarter, Statistics Canada said on Monday. That was the lowest since record-keeping began in 1987 but stronger than expected largely because of a jump in auto production.

The median forecast of analysts in a Reuters poll was for a 67.0 percent capacity utilization rate, based on dismal industrial production data even as signs emerged that the economy was starting to recover from recession during the third quarter.

At the same time, manufacturers ramped up their capacity use to 65.6 percent from 64.7 percent, the first increase in five quarters after automakers reopened some production capacity shuttered earlier this year.

“Manufacturers of motor vehicles and motor vehicle parts significantly increased their production to meet rising demand, mostly from the United States,” Statscan said in a release.

The transportation equipment industry overall -- three-fifth of which is automakers -- jumped 5.5 percentage points to 53.6 percent capacity utilization.

Chemical and wood manufacturers also contributed to the gain.

Non-manufacturers scaled back their capacity use across all sectors, pressured by the mining and oil and gas extraction sectors.

Overall industrial capacity use was still down 11.4 percentage points in the third quarter compared with the same period of 2008 and manufacturing capacity use was down 12.9 percent.

Economists expect the third quarter to mark the low point on capacity utilization.

Stewart Hall, markets strategist at HSBC Canada, said the biggest question is how much capacity was temporarily idled during the downturn and how much was permanently shut down.

“We would suggest that capacity utilization rates could potentially begin surprising on the upside once economic activity begins to rise while at the same time the data begins to capture that capacity that has been permanently lost,” said Stewart Hall, markets strategist at HSBC Canada.

The Canadian economy grew a tepid 0.4 percent in the third quarter on an annualized basis. The Bank of Canada, which closely watches capacity use to gage inflationary pressure, said in October it expected the economy to have run at 3.5 percent below capacity in the third quarter and sees it returning to full capacity in the third quarter of 2011.

“From a policy standpoint, scads of excess capacity remain, suggesting that inflation - bottleneck inflation associated with capacity tightness - is a long way off,” said Hall.

Reporting by Louise Egan

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