Automotive and crude oil keep the sector buoyant, despite slow US recovery
Toronto—Canadian manufacturing will expand by 4.7 percent this year, driven by growth in motor vehicles, automotive parts and machinery, according to Scotia Economics.
The industry is bucking a slowing trend in the economy overall, with Scotia Economics revising its growth forecast down to two percent for 2012 and 1.9 percent in 2013.
The ongoing crisis in Europe is creating headwinds, along with the slow recovery in the US. The slowdown in China, Brazil and India has also been deeper than expected, according to the report, called “Industry Trends.”
Closer to home, policies aimed at slowing the housing market and the build-up of household debt are cooling the real estate and services market, causing softening in commodity prices, consumer spending and corporate earnings.
Canada’s primary and manufacturing sectors though, are benefiting from increased crude oil production and auto-related exports to the US.
Motor vehicles and parts manufacturing are expected to grow 13.3 percent this year, while machinery manufacturing will gain 12.5 percent.
The boost will keep manufacturing in growth mode, despite fall-offs in food and beverage, telecom and computer equipment.
Crude oil production has supported the Canadian economy through the global financial crisis, according to Scotia Economics. Crude represents just over 17% of exports year-to-date. The Canadian Association of Petroleum Producers expects production to increase by 19 percent over the next three years; though pipeline approvals will be crucial for export growth.
The downside is order growth has slowed for both durable and non-durable goods and order backlogs have eased, suggesting manufacturing may not be as robust going forward.
Interest rates could hold steady
Inflation is expected to average two percent over the next two years—down from 2.9% in 2011—due to lower oil and gas prices, according to the report. The leveling out of inflation should allow the Bank of Canada to keep interest rates low well into 2013.
Despite strong economic fundamentals, Canadian economic growth will be constrained as long as US performance remains lackluster. Canada has been slow to diversify its trade links; the US still absorbs 73 percent of overall exports. The European Union absorbs 10 percent, Scotia Economics reported.
• Automotive—Vehicle production in Canada jumped 20 percent year over year in the first half of 2012 and is expected to increase to 2.6 million units this year—the highest since 2007.
• Aerospace—Record order backlog and rising production by the global aviation industry bodes well for the 400 Canadian aerospace companies supplying the field. Commercial airplanes will drive a double-digit increase in business jet and turboprop production.
• Chemicals—The rebound in exports of plastics and petrochemicals has this sector in a moderate upswing.
• Metals and mining—This sector picked up in the first quarter of the year, after quarterly declines through 2011. But it’s still affected by the slowdown in China and rising input costs, keeping growth flat overall (0.2 percent) in 2012.
Government spending will be a drag on growth in 2012 and 2013 as the feds aim to eliminate the deficit by mid-decade without raising taxes. Spending cuts will total $1.7 billion this year, eliminating 12,000 public sector jobs.