Dip in manufacturing output compounds oil price dive

‘There will be blood,’ analyst says, predicting worst is yet to come

Friday’s GDP report made crystal clear how grimly Canada’s economy — one that contracted 0.2 per cent in November — had been quietly tanking, which contributed to the Bank of Canada’s surprise move when it cut its prime setting rate.

While the bleak oil picture was fully developing, the thinking was Canadians shouldn’t worry about the economy, because manufacturing would carry the standard. However, manufacturing output, which accounts for 10.5 per cent of GDP, fell further than the energy sector, declining 1.9 per cent, even though the Canadian dollar had already begun sliding, according to Statistics Canada.

Oil, gas and mining activity fell 1.5 per cent while a barrel of crude was trading as high as $76.51 US, a price that is more than one and a half times the current figure, $47.86, according to StatsCan.

“You should be seeing the manufacturing sector step up, and it’s really disconcerting that it isn’t happening,” Kevin Hebner, an FX strategist at JP Morgan, said.

Concurrently, wholesale trade slumped 0.6 per cent in November, a second consecutive decline following a decrease of 0.2 per cent in October, coupled with a surprising drop in output of 0.4 per cent in the finance and insurance sector, which had previously risen for five consecutive months.

Making matters worse, GDP will likely fall short of the Bank of Canada’s forecasts, according to industry experts.

“The Bank of Canada is currently forecasting fourth- quarter growth at 2.5 per cent, which is so far looking like it will be difficult to attain, even with a strong December figure,” Scotiabank economists wrote.

Meanwhile, the International Monetary Fund added its voice to the dire warnings about Canada’s overheated housing market on Friday in a report that stated the country’s national housing sector is overvalued by as much as 20 per cent (but cautioned it could be as little as seven per cent accounting for the range of housing markets across Canada).

Earlier in the week, Fitch Ratings published similar data, and both predicted a soft landing.

Still, Canadians have yet to feel the full brunt of the collapse in crude prices, as it will take time for the ramifications to trickle down to the broader economy. “There will be blood,” Hebner warned in a research note to clients.

“We have so far only witnessed the tip of the iceberg in terms of direct damage” of low oil prices to the hardest-hit producers.

Finn Poschmann, vice-president, policy analysis at the C.D. Howe Institute in Toronto, said although the decline in manufacturing is surprising, he does not expect the slide to continue, primarily because of the falling Canadian currency, which closed at 78 cents US Friday.

According to Poschmann, “Things are looking rosier for manufacturing in the coming year because the U.S. economy is doing terrifically and our pricing just got a whole lot better for manufacturing output.”