The oil industry’s loss is the manufacturing sector’s gain

Strengthening U.S. demand and a lower Canadian dollar are shielding manufacturers from a gloomy outlook

 

The Bank of Canada’s Q2 Business Outlook, which surveyed about 100 representative companies across economic sectors, did not make for happy reading in general. Overall, what growth can be found is moderate, and companies are not feeling particularly optimistic about the next 12 months as they did at this time last year:

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What good news could be found, however, was in manufacturing. The Bank of Canada says that the recovering U.S. ecconomy, weak oil prices, and a low dollar are all contributing factors. Sales in the manufacturing sector have improved in the past 12 months, and the companies surveyed reported that strengthening U.S. demand is perking up their view of the next year:

In particular, plans to increase investment are more prevalent in Central Canada and in the manufacturing sector, where firms generally benefit from a lower domestic currency and a positive U.S. outlook. Conversely, in light of weak oil prices, firms in energy-related regions and sectors plan to further curtail investment over the next 12 months.

Manufacturing firms are actually more worried than they have been in some time about their ability to meet customer demand. Capacity pressure—essentially the ability to produce more goods if clients suddenly place more or bigger orders—rose again to its highest level since mid-2013:

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That’s driving an increase in investment and employment in the sector as manufacturers start to address capacity constraints and meet the rising demand.

Jamie Feehely, managing director of Canadian Structured Finance at credit rating agency DBRS, foresees the economy shifting away from oil and gas—which constituted a significant percentage of Canadian GDP in the last five years—and back to manufacturing. “With the oil and dollar decline, Canada may now be considered more competitive for manufacturers to build plants in the country.”

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