A Strong Third-Quarter Rebound for Canada’s Economy?

Canada’s latest manufacturing data could portend a strong third quarter for the economy, after last quarter’s gross domestic product (GDP) growth was undermined by historic flooding in Alberta and a province-wide strike in Quebec.

According to Statistics Canada, manufacturing sales climbed 1.7 percent month over month in July, to CAD49.5 billion, a solid rebound following June’s initial decline of 0.5 percent, which was subsequently revised to a decline of just 0.1 percent.

Sales growth was widespread, with gains across 15 of Canada’s 21 industries. Sales of durable goods rose 2.1 percent, to CAD24.8 billion, while sales of non-durable goods increased 1.2 percent, to CAD24.6 billion. Sales of motor vehicles, wood, fabricated metal, and non-metallic mineral products were important growth drivers, while sales in the aerospace sector detracted from growth.

July’s result trounced economists’ consensus forecast, which according to Bloomberg called for a more modest gain of 0.5 percent. Over the past five years, manufacturing sales have declined an average of 0.02 percent per month, while over the past year they’ve increased by an average of 0.04 percent per month. During the nearly five-year period preceding the 2008-09 global downturn, by contrast, factory sales grew an average of 0.3 percent per month.

As such, the July number is significant, though in reviewing data over the past year, February was the single best month for the manufacturing sector, when sales grew 3.4 percent month over month. Month-to-month data tend to be volatile, however, so that didn’t stop manufacturing sales from posting declines in three of the four months thereafter.

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This time around, some of the demand that would have ordinarily occurred in the second quarter, absent the aforementioned one-time events, was probably pushed back to the third quarter. That’s evidenced by the dismal number for June GDP, which dropped five-tenths of a percentage point from the previous month, for year-over-year growth of just 0.9 percent.

As a result, economic growth decelerated during the second quarter to a rate of 1.7 percent annualized from 2.5 percent in the prior quarter. But in addition to deferred demand, the third quarter should also get a boost from rebuilding activity following Alberta’s floods.

On that front, we’re still awaiting the Bank of Canada’s (BoC) next set of economic forecasts, which are scheduled to be published in late October. The BoC’s July projections, which came out before second-quarter GDP numbers were announced, showed an ultra-conservative forecast for last quarter of just 1 percent growth. Meanwhile, the central bank forecast growth for the third quarter of 3.8 percent.

Given that growth for the second quarter actually came in at 1.7 percent, it’s likely that the BoC modeled a stronger dampening effect on the second quarter than actually transpired, with more demand pushed back to the third quarter. As a result, the bank will likely lower its third-quarter projection in its next report on monetary policy. For instance, the Royal Bank of Canada is currently forecasting third-quarter GDP growth of 3.4 percent, four-tenths of a percentage point below the BoC’s July estimate.

One of the major headwinds for Canada’s manufacturing sector has been weak demand from the US, which is the country’s largest trading partner. If the nascent US recovery continues to strengthen, then that should bolster the economy of its neighbor to the north. Indeed, the BoC is hoping that the Canadian economy will transition toward export growth, which will, in turn, spur greater business investment.

To that end, Canada’s declining currency should help its exports become more competitive in the global market. The loonie traded above parity with the US dollar for much of the two-year period from 2011-12, but then dropped below this key threshold earlier this year in mid-February. The Canadian dollar fell as low as USD0.945 in early July, but currently trades near USD0.97, down about 5.8 percent from its trailing-year high.

While this latest snapshot of the manufacturing sector is just one piece of economic data, at the very least, it comports with economists’ narrative of a third-quarter rebound for Canada’s economy.