SIGNS OF SLOWDOWN NO LONGER RANK AS ‘JUST A ONE-OFF BLIP’

Manufacturing, exports continue to struggle despite strong jobs growth

Getting a solid grip on the Canadian economy can be like a juggling act, not knowing whether the pins will remain in the air for an extended period or fall flat during any given month.

More often than not, we have witnessed both.

On one hand, for example, job creation has been steadily going up — for 10 straight months, in fact, as of September — and that has produced the best track record since the Great Recession.

On the other hand, Canada’s manufacturing sectors continue to present major uncertainties for the overall economy. Output levels are down and the deficit with our global trading partners widened in August for a third straight month — to $3.4 billion from $3 billion, the fifth-biggest shortfall to date.

Not since 2011 have exporters strung together that many declines. Some of that drop can be attributed to this year’s extended maintenance period at manufacturing facilities, with shipments of motor vehicles falling by 0.5 per cent, for example.

“A lot of auto plants in Ontario have scheduled shutdowns — usually in July — and a lot of those (shutdowns) were extended beyond their normal length of time because of a buildup in inventories,” said Mike Holden, chief economist at the Canadian Manufacturers & Exporters (CME) industry group.

“So, they were shutting down longer than expected (and) that’s put a dent in auto manufacturing exports,” Holden said. “There wasn’t much recovery in August.”

Export sales overall were down one per cent in August from the previous month, according to Statistics Canada, compared to declines of 2.6 per cent in July and 1.9 per cent in June. As well, there have been fewer exports in raw metals and consumer goods — such as food products — into the U.S. and other markets.

“You don’t want to read too much into a few months, but there’s been enough evidence to suggest the economy is slowing down, that it’s not just a one-off blip,” Holden said.

“In manufacturing, we have built up inventories (because) they don’t have as much business coming down the pipe as they did earlier in the year. So, that’s going to be reflected in continued slower output growth in the next little while.”

Overall, Canadian exports have been stymied by a stronger domestic currency — thanks, in large part, to recent hikes in interest rates.

Robert Kavcic, senior economist at BMO Capital Markets, said in a note to investors that exports have “continued to struggle with a strengthening loonie.”

“Weakness was spread across a few sectors including metals, industrial machinery and consumer goods, while some sectors that fell sharply in July — autos and aircrafts — saw little rebound in August,” Kavcic said. “Meantime, imports were flat in the month.”

These concerns come as most forecasters, including the Bank of Canada, are anticipating lowerfor-longer economic growth beginning in the second half of 2017, after high-firing annualized output of 4.5 per cent over the first six months of the year that was met with two quick interest rate hikes by monetary policy-makers.

“There is now downside risk cast on our overall Q3 GDP call — currently 2.5 per cent — and is another argument for the Bank of Canada to take a breather (on future rate hike),” said Kavcic, and something BoC governor Stephen Poloz has indicated would be a prudent position to take for now. At the same time, the pace of overall employment growth that Canada has recently experienced — nearly 27,000 a month — will likely begin to cool over the next year, following 320,000 job gains over the past year.

“There had been a substantial run-up in manufacturing employment growth for the last six to eight months, ending in about May or June. And since then, things have fallen back off,” said CME’s Holden.

“Those kinds of short-term gains really depend on demanddriven activity. So, you’ve got fewer new orders coming in on average — obviously, it varies from industry to industry — then that’s going to potentially reduce demand for employment, or at least dampen the rate at which it would increase,” he said.

“Longer term ... the expectation is that manufacturing employment would remain constant or increase slightly.”