Canada's 'shaky' manufacturing sales unexpectedly drop, economists cut growth forecasts

A surprising drop in Canada's key manufacturing sales in April after two consecutive months of increases is leading some economists to cut their growth forecasts for the country in the second quarter.

Manufacturing sales unexpectedly fell 1.3 per cent to $56.2 billion in April from the previous month, according to data from Statistics Canada, released Friday.

Analysts were forecasting a rise of 0.6 per cent, according to a Reuters poll.

Sales fell in 10 — almost half — of the 21 industries, with declines in petroleum and coal, along with the transportation equipment sectors having a big impact on the overall slump. Without those industries, sales rose 0.4 per cent in the month.

But the volume of sales also dropped 1.9 per cent, with Statistics Canada saying partial shutdowns in a number of oil refineries for maintenance was a major contributor to the decline in volume.

Michael Dolega, senior economist at TD Economics, said that on the whole, the Canadian manufacturing sector remains on "shaky ground" and while he remains cautiously optimistic about the sector, his "optimism has been repeatedly tested as of late."

"Rising global demand and a strengthening U.S. economy bodes well for the export-oriented sector, with the weakish loonie also providing support," Dolega said in a note on Friday. "But, the implementation of export tariffs on Canadian aluminum and steel, the continued uncertainty regarding NAFTA, and the overall protectionist bend in U.S. policy poses a significant risk."

The Canadian dollar fell into the 75-cent US range for the first time this year on Friday.

Dolega has now "reduced" his expectations for Canada's growth in the second quarter to 2.7 per cent, from the higher end of the two to three per cent range.

Impact on interest rates

Paul Ashworth, chief North America economist at Capital Economics, took it a step further by saying that the disappointing data "is a blow" to the Bank of Canada, and is another reason the central bank will hold off from raising interest rates again.

"It suggests that economic growth has not picked up much after the disappointingly weak first quarter," Ashworth said in a note.

 "Even aside from the temporary disruptions [shutting of oil refiners], the outlook for sales is not great." 

Ashworth pointed out that the largest increase in sales of 3.8 per cent was in primary metal manufacturing, which presumably reflects the imposition of U.S. steel and aluminum tariffs that Canada was initially exempted from.

"Those gains will turn to heavy losses in the June sales figures when Canada's exemption expired," he said.

Meanwhile, Derek Holt, vice-president of Scotiabank Economics, said he thinks the manufacturing sales data, along with a 2.9 per cent drop in housing starts and a 0.1 per cent decline in hours worked from the employment data from April, suggest there was no overall economic growth in the month.

"Soft growth tracking poses a conundrum to the Bank of Canada alongside trade policy risks in the face of evidence of accelerating wage and price pressures," he said in a note.   

The odds of the Bank of Canada raising interest rates at its policy meeting next month, according to world currency markets, fell five per cent on Friday from the previous day, to 73 per cent.

However, Nathan Janzen, senior economist at RBC Capital Markets, was more optimistic about growth in the second quarter, despite the manufacturing data dropping "sharply."

"Looking through some of the volatility underlying the headline numbers in today's data, we continue to think that GDP probably inched up again in April after posting solid gains in March and February," he said in a note.