The manufacturing sector helped drive the Canadian economy’s return to better than expected growth in January after ending 2012 with a mild contraction in December.

However economists cautioned that growth remained below the two per cent pace for the year expected by the Bank of Canada.

Statistics Canada said Thursday that Canada’s gross domestic product grew by 0.2 per cent in the month after shrinking 0.2 per cent in December, beating the 0.1 per cent gain that had been predicted.

CIBC World Markets economist Emanuella Enenajor said the manufacturing sector showed surprising strength given previous reports of softer sales, but cautioned that growth was still not as strong as some have expected.

“While today’s data suggest Q1 GDP could track somewhere in the neighbourhood of 1.5 per cent—an acceleration from the pace seen in prior quarters, that’s still softer than the Bank of Canada’s outlook,” Enenajor said in a brief note.

In its latest outlook, the central bank said it expected growth to gain momentum as the year progresses and result in 2.0 growth in GDP this year followed by 2.7 per cent growth in 2014—more optimistic than other estimates.

The Organization for Economic Co-operation and Development said Thursday that it expected the Canadian economy to expand 1.1 per cent in the first three months of this year and by 1.9 per cent in the second quarter.

Hurt by the December contraction, real domestic product output moved ahead by just 0.6 per cent in the fourth quarter of 2012 following a marginally better gain of 0.7 per cent in the third.

TD Bank economist Sonya Gulati said despite the better than expected results for January it was too soon to celebrate the economic recovery.

“Manufacturing was a particular area of strength, but this comes after several months of disappointments,” Gulati said.

“The sector has struggled to gain traction over the past year as global economic uncertainty has continued to dominate. Optimism about the health of the U.S. recovery is gaining momentum, but this will likely show up in the numbers in the second half of the year.”

Manufacturing, the biggest contributor to January’s gain, expanded 1.2 per cent following a 1.9 per cent decline in December.

Statistics Canada reported that Canadian goods production in January grew 0.4 per cent as mining, quarrying and oil and gas extraction also increased while there were declines in agriculture, the forestry sector and construction.

The output of service industries was up 0.2 per cent in January, mainly as a result of gains in wholesale trade, arts and entertainment and the public sector.

Enenajor said that the gains in arts and entertainment probably reflected the return of NHL hockey after the National Hockey League and its players union reached a contract settlement and began a shortened playing season.

Canadian Manufacturers and Exporters (CME) and the Society of Manufacturing Engineers (SME) both applaud the federal budget tabled yesterday by the Government of Canada that positions manufacturing and skills training as a top priority “and paves the way for a stronger, more competitive economy for all Canadians,” according to the CME.

The 2013 Economic Action Plan responds directly to the priority issues of Canada’s manufacturing sector championed by CME, most notably an extension of the Accelerated Capital Cost Allowance through 2015, investing in the aerospace and automotive sectors, supporting advanced manufacturing projects in southern Ontario and measures to close the skills gap.

“The federal budget sends an important signal,” says CME president and CEO Jayson Myers. “It positions manufacturing and exporting at the heart of Canada’s Economic Action Plan by focusing on practical steps that will enhance competitiveness, productivity, innovation, and business growth.”

Canada’s manufacturers and exporters can expect to realize more than $4.5 billion in direct benefits over the next four years as a result of targeted measures in the budget, CME estimates. Some of these benefits come in the form of $1.4 billion in tax relief for a two-year extension of the Accelerated Capital Cost Allowance, $200 million over five years for a new Advanced Manufacturing Fund in Ontario, $1.8 billion over six years for direct grants to employers for workforce training, $92 million over two years for forestry innovation, and $1 billion over five years for aerospace development.

What may the future of manufacturing in Canada look like with renewed support? “These investments in advancing technology and workforce development, coupled with tax relief and accelerated depreciation will equip manufacturers with the tools they need to be globally competitive,” reiterates Debbie Holton, director of industry strategy and events with the SME. “Canadian manufacturers are innovative, resourceful and productive—this government support should help them respond to global pressures and emerge as world leaders in industry. Ideally, more manufacturing businesses will be created, manufacturing output and GDP will increase and many more rewarding and lucrative careers begun, as Canada’s best and brightest choose ‘making things’ as their field.”

“This is very good news for companies creating jobs in Canada, investing in our communities, and developing and selling world-class products and services around the world,” Myers notes. “The budget recognizes the importance of manufacturing and exporting for each and every Canadian, as an anchor of high-value, high-paying jobs in all parts of the country and across all sectors of the economy.”

Attracting young people to careers in manufacturing is important. “Manufacturing is a knowledge industry where creativity is valued and future generations have new ideas that should be explored,” Holton says. “They will be the innovators of tomorrow and it’s important to utilize that ingenuity in the industrial base. Manufacturing jobs are lucrative with workers earning higher salaries in manufacturing careers—and with baby boomers retiring, there will be a definite need for young people to support manufacturing output and innovation in the years to come.”

The SME says the 2013 Economic Action plan supports this in two ways:
1) The Job Grant of $1.8 billion will provide workforce-training opportunities for young people and, consequently, career growth.
2) The Advanced Manufacturing Fund will promote innovation and technology research. These discoveries will reveal the true nature of advanced manufacturing as a technologically intensive industry with advanced processes and digital/IT influences that will attract future minds to the field.

More than 1.8 million Canadians are currently employed in our manufacturing sector generating 14 per cent of Canada’s gross domestic product (GDP). Every dollar in manufacturing output drives $3.50 in overall economic activity.

“Canada’s manufacturers and exporters are at the forefront of global competition and innovation,” says Myers. “The business is rapidly changing with new customers, new competitors, new technologies, and new skills requirements. This budget will make a real difference in helping our manufacturers and exporters compete and win in global markets.”

Finance Minister Jim Flaherty is signalling he’ll concentrate on skills training, infrastructure and the battered manufacturing sector in Thursday’s budget.

The finance minister outlines the three priorities in a letter to the Conservative caucus, but offers few specifics.

The letter is no surprise as the minister has also signalled he believes a major difficulty with the economy is that current training programs and post-secondary education do not sufficiently prepare Canadians for the jobs that are available.

“There are too many jobs that go unfilled in Canada because employers can’t find workers with the right skills,” the letter states.

“Training in Canada is not sufficiently aligned to the skills employers need. In Canada’s Economic Action Plan 2013 we will take steps to address this important issue.”

Recently, the minister said that while provinces remain the best place to deliver programs, the federal government wants a place at the table and believes provinces should be accountable for some $2.5 billion it gets from Ottawa to administer the programs.

Ottawa is also expected to extend and possibly expand funding for infrastructure projects and tax breaks for manufacturers that are due to expire.

While the letter does not mention the subject, Flaherty has also said the budget will look to close tax loopholes in order to increase revenues.

Canadian industries operated at 80.7 per cent of their production capacity in the fourth quarter, down slightly from the 81.1 per cent in the third quarter, according to new figures from Statistics Canada. The decline was a result of lower capacity utilization in the manufacturing sector.

The 2.1 percentage point decline in the manufacturing sector in the fourth quarter was partly offset by gains in the non-manufacturing sector.

The manufacturing sector operated at 80.2 per cent of its capacity in the fourth quarter, 2.1 percentage points lower than in the previous quarter.

The decline was largely attributable to transportation equipment manufacturing and food manufacturing, though most other industry groups were also down. Of the 21 major groups in the manufacturing sector, 14 reduced their capacity utilization.

In the transportation equipment manufacturing industry, capacity utilization fell 3.5 percentage points to 88.9 per cent in the fourth quarter. Real gross domestic product in motor vehicle manufacturing, a sub industry of transportation equipment, shrank 5.2 per cent in the fourth quarter, partly because seasonal shutdowns in the industry were of longer duration than in recent years.

For food manufacturers, capacity use experienced its largest quarterly decline ever, falling from 78.1 per cent in the third quarter to 73.8 per cent in the fourth quarter. Sharply reduced output of meat products was a key factor in the decline.

Lower production of agricultural, construction, and mining and oil and gas field machinery pushed the machinery industry's capacity utilization rate down 3.5 percentage points to 81.5 per cent.

In the fabricated metal products industry, capacity use fell from 83.5 per cent to 80.0 per cent as a result of weaker demand for metal work.

Capacity utilization was higher in the petroleum and coal products manufacturing industry and, to a lesser extent, the paper, chemical products and wood products industries.

In the non-manufacturing sector, there was a widespread increase in capacity utilization in the fourth quarter. This compensated for part of the sharp decline in the manufacturing sector.

The Canadian dollar was higher Monday as a series of manufacturing reports from around the world gave a somewhat optimistic glimpse of the economy.

The loonie ended the session up 0.05 of a cent to 101.87 cents US, while the U.S. dollar fell against the euro.

The Institute for Supply Management, a trade group of U.S. purchasing managers, says its index of factory activity rose to 51.5 in September, up from 49.6 in August. A reading above 50 signals growth and below indicates contraction.

The Canadian currency and the euro are considered riskier than the greenback and tend to strengthen when investors are more optimistic about the economy.

Meanwhile, the latest reading of China’s manufacturing sector showed weakness and there was also yet another month of contraction in the eurozone.

China’s Purchasing Managers’ Index for September came in at 49.8, marking a further contraction in activity in the region.

The eurozone’s manufacturing sector experienced a better month, though the September PMI still contracted for the 14th consecutive month.

“The rebound in the ISM manufacturing index in September will boost hopes that some of the recent slowdown in economic growth was just a summer phenomenon,” said senior U.S. economist Paul Dales at Capital Economics.

“But while GDP growth may accelerate a bit, a major improvement is not in the cards.”

But a positive sign in the U.S. housing sector added an extra glimmer to the economic data. The Commerce Department reported that builders spent more money to construct homes in August.

Statistics Canada gave a slightly different take on the domestic economy as part of a revision of Canada’s economic performance from 1981 to the present. The agency said the national economy grew by 1.9 per cent in the second quarter of this year, one-tenth of a point more than previously reported.

In commodities, November crude on the New York Mercantile Exchange gained 29 cents to US$92.48 a barrel.

The gold sector moved higher as December gold bullion increased $9.40 to US$1,783.30 an ounce, while December copper was up 2.8 cents at US$3.79 a pound.

Elsewhere, an independent audit of 14 Spanish banks was released after the market close on Friday and showed the lenders need an extra C60 billion (US$77.6 billion) in capital. The figure is roughly as expected and well within the C100 billion in rescue loans that Madrid can get from fellow eurozone countries to help the banks.

Despite a sluggish economic recovery, 85 per cent of Canadian manufacturers are optimistic about the future of their business over the next two years, finds KPMG’s third annual survey of Canadian manufacturers.

The Canadian manufacturing sector has proven to be relatively immune to the rise in global economic uncertainty and weaker economic growth around the globe, according to a new report from the Conference Board of Canada.

Two-thirds of Canadian industrial manufacturers say they are optimistic about Canada’s economic prospects over the next 12 months, according to a new PwC barometer report for the first quarter of 2012.

The report found 76 per cent of manufacturers cited optimism, up 19 points from last quarter. In all, 25 per cent who market abroad are also more optimistic about the prospects for the world economy over the next 12 months, four points higher than the prior quarter. In fact, Canadian-based industrial manufacturers that sell abroad reported stabilized international sales in first-quarter 2012, with 22 per cent reporting an increase in sales.

The bad news is that revenue growth projections for survey participants is 4.2 per cent, which has dipped off slightly from the calendar year forecast (4.9 per cent) and lower than the prior quarter's 12 month forecast (5.3 per cent). As well, fewer (42 per cent) of the survey respondents are planning major new investments of capital during the next 12 months. That figure is substantially lower than what was reported in last quarter (60 per cent) and the third quarter of 2011 (66 per cent).

"What we are seeing is that while there is plenty of optimism on the horizon, there is still the reality of financial instability in global markets. But it is positive that international sales are beginning to stabilize for Canadian industrial manufacturers," Calum Semple, PwC's national industrial manufacturing leader, said in a statement.

Topping the list of barriers to growth is oil/energy prices which is at 59 per cent in 2012, compared to 53 per cent during the last two quarters of 2011. Among the 34 per cent of respondents planning to hire within the next 12 months, the most sought-after employees will be professionals/technicians (22 per cent), production workers (17 per cent) and skilled labor (17 per cent)

While the Canadian economy continues to grow at a moderate pace, there is a widening gap between commodity-rich Western provinces and the manufacturing-heavy provinces in Central and Atlantic Canada, according to the latest edition of the Provincial Monitor report from BMO Economics.

Western Canada/Prairies
"The resource sector continues to fuel growth in Western Canada, with Alberta likely to lead the pack in 2012 after posting five per cent real GDP growth last year," said Doug Porter, Deputy Chief Economist, BMO Capital Markets. "Crude bitumen production rose 12 per cent in the province, and job growth is currently the strongest in Canada. Meanwhile, Saskatchewan is also benefiting from rising oil production in the Bakken, and continues to see a very tight labour market and strong population flows. Manitoba's diverse economy should see above-average growth in 2012."

Central Canada
The report notes that improved U.S. economic momentum since late last year is good news for exporters in Central Canada, but fiscal restraint continues to dampen the medium-term outlook in Ontario and Quebec. "Growth in the central provinces will likely run below two per cent in 2012," stated Porter. "The auto sector is one bright spot, with sales in both Canada and the U.S. showing strong momentum, and production climbing back to pre-crisis levels. But a rising tax burden will continue to weigh on growth in Quebec, and spending restraint will begin to bite in Ontario as the Province grapples with a near-$15-billion deficit."

Atlantic Canada
In Atlantic Canada, modest U.S. economic growth, a strong loonie and fading public-sector capital spending will mean lower growth in Atlantic Canada this year, with all provinces in the region at or below two per cent. "While preparatory work for Nova Scotia's $25 billion Federal shipbuilding contract is underway, growth likely won't get a significant boost until 2013," noted Porter. "Meantime, Newfoundland & Labrador, the region's recent growth leader, is likely to see offshore oil production drop in 2012 amid maintenance shutdowns and gradually falling output-broader domestic demand, however, should remain solid."

"Despite some clear regional differences, Canadian businesses are demonstrating their remarkable adaptability by diversifying their supply chains, opening-up new markets for their products and services, and by making critical investments in their companies," said Cathy Pin, Vice-President, BMO Commercial Banking. "This year we are also seeing many businesses beginning to look for opportunities to strengthen their financial underpinnings and competitive positioning, by taking greater advantage of available cash flow management tools and strategies."

The full Provincial Monitor can be downloaded at www.bmocm.com/economics.

Operating conditions in Canada's manufacturing sector strengthened in March, according to the RBC Canadian Manufacturing Purchasing Managers Index (RBC PMI), a monthly survey, conducted in association with Markit and the Purchasing Management Association of Canada (PMAC), which offers a comprehensive and early indicator of trends in the Canadian manufacturing sector.

The headline RBC PMI - a composite indicator designed to provide a single-figure snapshot of the health of the manufacturing sector - registered 52.4 in March, up from 51.8 in February, signalling a modest improvement in Canadian manufacturing business conditions. Index readings above 50.0 signal expansion from the previous month; readings below 50.0 indicate contraction.

The RBC PMI found that new orders and output both increased further in March, reflective of greater client demand. However, production growth was nonetheless the second-weakest in the 18-month survey history. Job creation was at a four-month high in March, while the rate of input price inflation eased since February.

"Activity in the Canadian manufacturing sector has been bucking the general trend of softening conditions, particularly in Europe and Asia," said Craig Wright, senior vice-president and chief economist, RBC. "Canadian manufacturers will continue to benefit from the strengthening U.S. economy, which started 2012 on a much more promising note. We expect to see continued demand for key Canadian exports, such as autos, machinery and lumber, south of the border, with real exports returning to pre-recession peak levels in 2013."

In addition to the headline RBC PMI, the survey also tracks changes in output, new orders, employment, inventories, prices and supplier delivery times.

Key findings from the March survey include:

• Output and new orders both increase modestly in March;
• Fastest rate of job creation since last November; and
• Average selling prices fall for first time in 18-month series history.

Firms generally linked the latest improvement in business conditions to greater client demand. Incoming new work rose modestly in March, with the latest expansion the strongest in three months. Moreover, new export orders also increased over the month, albeit fractionally, in contrast to declines reported in January and February.

Reflective of greater client demand, Canadian manufacturers raised production during the latest survey period. Output has increased in each month since data collection began in October 2010, but the latest rise was nonetheless the second-weakest in this sequence of growth. Panellists also depleted stocks of finished goods to help fulfil new order requirements, while backlogs of work fell moderately overall.

The amount of inputs purchased by monitored companies increased in March, albeit marginally and at the weakest pace in the 18-month series history. Meanwhile, input inventories were depleted for the seventh consecutive month. A number of panellists cited leaner stock holding policies. Concurrently, suppliers' delivery times lengthened further in March. Anecdotal evidence suggested that vendors struggled to meet greater demand for inputs during the latest survey period.

Employment in Canada's manufacturing sector rose solidly in March. Approximately one-fifth of respondents hired additional staff (while 11 per cent reduced their workforces), with the overall rate of job creation the strongest since last November.

Canadian manufacturers reported higher input costs in March, with fuel, steel and resin all particularly mentioned as having increased in cost. Although the rate of input price inflation remained strong, it was nonetheless the weakest in three months. Meanwhile, firms reduced their selling prices during the latest survey period, largely commenting on stronger competitive pressures. Notably, this was the first reduction in factory gate prices in 18 months of data collection.

Regional highlights include:

• PMI data signalled that manufacturing business conditions improved in all four regions in March. The weakest monthly improvement was registered in Alberta and British Columbia, however.
• New order volumes increased at the fastest pace in Quebec, but were broadly unchanged in Alberta & British Columbia.
• Job creation was registered in all four regions during March.
• The fastest rate of input price inflation was reported by manufacturers in Ontario.

"Following the sharp slowdown in January, growth in the Canadian manufacturing sector continued to recover in March. New orders increased at the fastest pace in 2012 so far, helped by greater client demand. However, the latest improvement in overall business conditions was modest, with output growth the second-slowest in 18 months of data collection," said Cheryl Paradowski, President and Chief Executive Officer, PMAC. "Input cost inflation eased in March, while Canadian manufacturers reduced their selling prices slightly."
www.rbc.com