May 16, 2011 / 12:41 PM / 7 years ago

Factory sales return to pre-crisis levels

OTTAWA (Reuters) - Manufacturing sales climbed 1.9 percent in March, bringing the industry measure to the highest quarterly level since the start of the recession and suggesting stronger-than-expected first-quarter economic growth.

The manufacturing sales data topped the consensus forecast for a 1.6 percent increase. It was based largely on strength in the auto sector and aerospace and followed a 1.8 percent drop in February, Statistics Canada said on Monday.

In volume terms, sales rose 1.9 percent.

Sales rose 4 percent from the fourth quarter in the January to March period and hit the highest level since the third quarter of 2008.

Canada’s manufacturing sector has been the weak link in the country’s economic recovery, struggling not only with weak U.S. demand for goods but a sharp appreciation of the Canadian dollar, which has made Canadian goods more expensive in foreign markets.

The latest data signaled that the Bank of Canada’s upbeat forecast of 4.2 percent annualized growth in the first quarter may be too low and reinforced expectations that the bank will raise interest rates in July.

“Today’s robust print confirms last week’s trade data that first-quarter annualized GDP growth is shaping up to be stronger than initially forecast, posing an upside risk to the Bank of Canada’s and our own estimates,” said Mazen Issa, macro strategist at TD Securities.

“In this sense, we remain comfortable with our long-standing call for a July rate hike and believe that pricing in the OIS (overnight index swaps) market is too dovish,” he said.

The central bank has held its benchmark interest rate steady since last September after lifting it three times to 1.0 percent from emergency lows during the recession. Most primary securities dealers expect the bank to keep rates steady on its May 31 policy announcement date and to resume tightening in July.

However, a Reuters calculation of overnight index swaps, which reflect expectations for the policy rate, show markets have not fully priced in a quarter-point rate hike by the bank until October.

Bank of Canada Governor Mark Carney will speak in Ottawa on Monday and may drop hints about rate intentions.

In the March manufacturing report, new orders and unfilled orders jumped 11.3 percent and 9.5 percent, respectively, both reflecting demand from the aerospace product and parts industry, which can be volatile from month to month.

Manufacturers’ inventories rose for the sixth straight month with a 2.1 percent increase, while the inventory-to-sales ratio was unchanged at 1.30.

Scotia Capital economists Karen Cordes Woods and Gorica Djeric cautioned that the March data is skewed somewhat by unusually weak conditions in previous months due to unseasonable weather and auto plant shutdowns.

Also, the pace of Canadian economic growth is seen slowing sharply in the second quarter.

“Bear in mind that some of this strength will likely be given back in the second quarter given the adverse impact expected from Japanese supply shocks on global industry and softening global fundamentals,” the Scotia economists wrote in a note to clients.

($1=$0.97 Canadian)

Reporting by Louise Egan and Howaida Sorour; editing by Peter Galloway

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