An employee oversees Canadian flags passing through a cutting machine at the Flags Unlimited facility in Barrie, Ont., in this file photo.Brent Lewin/Bloomberg
Sales volumes at Canadian factories posted their strongest growth in more than three years in December, evidence that while energy producers struggle, non-energy manufacturers are beginning to enjoy the fruits of a weakened Canadian dollar and growing U.S. demand.
Statistics Canada reported Friday that the value of Canadian manufacturing sales rose 1.7 per cent on a seasonally adjusted basis in December from November, nearly double what economists had expected, reversing November's 1.3-per-cent decline. The strong gain came despite a steep 9.3-per-cent tumble in sales of manufactured petroleum and coal products. Removing the effects of price changes, sales volumes were up an even stronger 2.9 per cent – the biggest one-month jump since July, 2011.
Economists said that while sinking commodity prices clearly dealt a harsh blow to energy products, it appears that the price advantage in foreign markets created by the loonie's retreat, coupled with growing demand from the accelerating U.S. economy, have begun to lift almost every other sector. Seventeen out of 21 manufacturing industries reported sales gains in December.
"The boost provided by the uptick in U.S. demand and the weaker Canadian dollar is being felt across the entire manufacturing sector," said Krishen Rangasamy, senior economist at National Bank of Canada.
Goods with a strong U.S. export component had a particularly strong month. Motor vehicle sales jumped 9 per cent, while vehicle parts were up 4.9 per cent. Machinery sales gained 5.2 per cent. Wood products rose 4.3 per cent and paper manufacturing gained 4.2 per cent.
But December's sales are also indicative of the new divide emerging in Canada along regional lines, as the central Canadian manufacturing heartland surged while the resource-focused Prairies struggled. Ontario's sales rose 2.3 per cent in the month, while Quebec's sales were up 1.5 per cent. In contrast Saskatchewan saw its sales fall 4 per cent in the month, while Alberta's declined 0.8 per cent. Over all, seven of 10 provinces enjoyed stronger factory sales in December.
Factory inventories fell 1.4 per cent in the month, suggesting that for now, manufacturers are meeting part of the demand increase by working down their stockpiles rather than stepping up their production. However, with inventories falling to a 12-month low, manufacturers may soon need to expand their output if, as economists expect, demand for non-energy exports continues to grow.
"Considering the uptick in U.S. demand, a more competitive Canadian dollar, and the fact that inventories are not overly bloated, we expect factory output growth to accelerate further this year," Mr. Rangasamy said.
That would be good news on the labour front, as increased production might well require additional hiring. But with the country's manufacturers already operating at nearly 84 per cent of capacity – the highest in seven years and well above their historical average – many economists are concerned that the sector has limited scope to ramp up its output to meet U.S. demand growth, unless companies start spending more on expansion.
"High-capacity utilization suggests that further growth might be more difficult to attain without increased investment in the sector," said Benjamin Reitzes, senior economist at BMO Nesbitt Burns.
For 2014 as a whole, manufacturing sales were up 5.2 per cent, marking a solid recovery after the tepid 0.3-per-cent rise in 2013. On a volume basis, sales rose 2.7 per cent last year, after shrinking 0.9 per cent in 2013.
The strong December manufacturing performance also implies that the country's gross domestic product may have grown faster than previously thought in the month and the fourth quarter as a whole. Several economists suggested December's month-over-month GDP growth could be in the 0.2-per-cent range, reversing November's 0.2-per-cent decline, while the fourth-quarter growth pace may have topped 2 per cent annualized.
"The Bank of Canada's 2.5-per-cent [fourth-quarter] forecast may now be in closer striking distance," said CIBC World Markets economist Nick Exarhos.