Manufacturing slows in April, as global headwinds hit Canadian economy

OTTAWA – Production at Canada’s factories fell for the third time in four months in April in yet another signal the global slowdown is starting to hit the domestic economy.

Statistics Canada reported Friday that manufacturing sales declined 0.8 per cent to $49.1 billion over the month, partly reversing March gains.

Analysts, who had expected a slight increase, said the soft number suggests the second quarter of 2012 got off to a rocky start after a below-expectations gain of 1.9 per cent in first three months of the year.

Forward looking indicators were not much better, with new orders falling 3.2 per cent and unfilled orders flat.

“(This) does not bode well for overall economic growth,” said Dina Ignjatovic, an economist with TD Bank.

“And it (manufacturing) will continue to face a great deal of headwinds in the near term as economic activity around the world has slowed, confidence has soured and the Canadian dollar remains elevated.”

Analysts are divided about just how strong 2012 will be. Earlier this week, the Royal Bank said it still expects policy-makers to prevent a European financial meltdown, paving the way for a relatively robust 2.6 per cent expansion in Canada.

But the Organization for Economic Co-operation and Development has estimated that even without a European crisis, 2.2 per cent growth would be a good performance in Canada given weakness in the rest of the world. Some analysts think Canada will be fortunate to top two per cent.

In a speech in Ottawa, Finance Minister Jim Flaherty said Canada is as prepared as reasonable for a shock, although that doesn’t mean the country is “immune.”

And he said despite critics who blame manufacturing’s decline on a strong currency caused by resource exports — so-called Dutch disease — there is evidence riches from the oilsands are being spread across the country.

He referred the Canadian Association of Petroleum Producers estimate that the oil industry would add $63 billion to the economy in Ontario over the next 25 years due to demands for goods and services, and another $14 billion to Quebec and $2 billion to Atlantic Canada.

“My point is that a rising tide lifts all boats,” he said in notes released to the media. Listing off a number of resource projects around the country, he said “all (are) great opportunities for our country to grow and prosper over the next generation.”

In a report earlier this week, the OECD said there is little doubt resource riches are accruing primarily to Western Canada and hurting currency-sensitive industries such as manufacturing and tourism elsewhere.

For the second quarter, CIBC economist Emanuella Enenajor noted that some important data still needs to be confirmed, particularly next week’s wholesale and retail trade figures, before April’s picture comes into focus.

But, she conceded the factory performance raised doubts that the month would show the rebound many had hoped for after the weakness of the first three months.

The Canadian data continues a string of negative or flat economic readings in the past few weeks, including soft employment numbers in both Canada and the United States.

Friday saw more of the same. Overall U.S. production slipped 0.1 per cent in May, while the factory sector dropped 0.4 per cent and auto production crashed 1.5 per cent.

A University of Michigan consumer confidence survey showed early June sentiment south of the border was turning sour, dropping to the lowest level since December.

Meanwhile, the Canadian Real Estate Association said home sales slid 3.1 per cent last month, although they are still up nine per cent from a year ago.

“It’s a good thing when various data releases and surveys corroborate one another. It’s a bad thing when they are all pointing downward,” said Jennifer Lee, a senior economist with BMO Capital Markets.

On Thursday, the Bank of Canada warned that the risks of a major shock from Europe had increased in the past few months and that the impact on Canada would be “substantial.”

Economists say the deteriorating global situation is already materially impacting the Canadian economy through lower commodity prices and declining exports, which were previously reported to have fallen 1.2 per cent in April.

The manufacturing setback for the same month was relatively broad based, with 13 of 21 industries representing approximately 45 per cent of the manufacturing sector, reporting declines.

The biggest drop came in aerospace products, down 33.7 per cent, although analysts noted the industry can show wild swings from month to month. Sizable declines also occurred in clothing, shipbuilding, and in the petroleum and coal products industries, although the agency said the latter was mostly due to some temporary shutdowns.

On the bright side, sales of motor vehicles rose nine per cent to their highest level since November 2007, but the advance U.S. number suggests even that sector is due for a slowdown.

In volume terms, overall manufacturing sales declined 0.6 per cent in April.