Canadian manufacturing sales were up 1.0% in March. This was just shy of the 1.2% gain expected by economists but came atop of a downward revision to February sales which declined 0.6% (prev. reported as -0.2%). After accounting for price swings the volume of sales was up a respectable 0.2% on the month, but again, this came atop of downward revisions to the previous months.
Both durables and non-durables contributed to the headline gain, up 1.3% and 0.7% respectively. The gains in durables were broad-based, but led by transportation equipment (+2.1%), wood (+3.1%), electronics (+5.1%), and electrical equipment (+3.1%). Amongst non-durables, food manufacturing (+2.6%) and plastics & rubber products (+1.5%) accounted for most of the gains while petroleum (-1.7%) and chemicals (-0.8%) declined on the month.
Regionally, manufacturing sales were up in all but four provinces, falling in Newfoundland (-5.1%), Manitoba (-1.9%), and Saskatchewan (-1.1%). Sales were little changed in Quebec (-0.2%), but rose in Ontario (+1.3%), Alberta (+1.6%), B.C. (+2.9%), and surged in Atlantic Canada (+4.8%).
Inventories were up 1.2% on the month, with the inventory-to-sales ratio unchanged at 1.35. Forward looking indicators were encouraging, with new orders up 2.6% and unfilled orders up 1.8% in March.
Key Implications
There is little doubt that this is a mildly disappointing report given the miss on the headline and downward revisions to previous months’ performance. Having said that, despite the revisions, the Canadian manufacturing sector momentum remains quite robust, with most of the strength from late-2016 carrying over into the first quarter of 2017. In fact, first quarter manufacturing sales were up 1.9% in real terms – the fastest pace of growth in nearly three years. As such, we remain of the view that the Canadian economy expanded by about 3.5% during the first quarter of the year.
Moreover, the report offers some encouraging bits as far as future activity, with leading indicators remaining solid. Coupled with resurging U.S. manufacturing production, which was up 1% in April on the back of strong transport equipment activity, and a competitive loonie, these should support Canadian manufacturing activity over the coming months.
Having said that, the outlook is not without uncertainties, as the Canadian manufacturing and export sectors face increasingly protectionist trade rhetoric. This poses downside risk as far as investment and net exports over the longer-run. Alongside a cooling in housing activity and still soft inflationary pressures, these risks will likely see the Bank of Canada remain on the sidelines through early-2018.
