Canadian Manufacturing: Better Than Numbers Say

If you take the numbers at face value, the Canadian manufacturing story looks negative. The energy sector’s weakness has swept its way through the data, but gradual recovery in oil prices, a possible easing in trade tensions, and solid domestic demand are enough to make us think the sector isn’t as bad as it looks.

Recent manufacturing data is poor

On Thursday we received manufacturing data for December and it wasn’t great. Sales decreased for the third consecutive month in a row (-1.3%), with the most notable declines in the petroleum and coal products industry. December’s oil price weakness was largely to blame, and as a result, Alberta’s manufacturing levels took the brunt of it; Statistics Canada reported that sales in this province fell 4.0% in December – the second consecutive monthly decline.

The Alberta government-enforced mandatory oil production cuts starting 1 January, alleviating pressures on crude producers by helping to lift oil prices. But a reduction in output only implies that production within this province will remain on a lower trajectory despite our reasonably upbeat outlook for oil prices more broadly. 

Increased inventories, good or bad?

Inventory levels rose 0.3% month-on-month, leading the inventory-to-sales ratio to tick up from 1.48 to 1.50 in December. But the question is why have they increased?

  • Good: Businesses are looking ahead and aren’t seeing the widely-expected economic slowdown as a major headwind to sustaining decent levels of demand this year.
  • Bad: Insufficient demand has resulted in the growth of firm’s inventories, and if the ratio continues to trend higher – ie, build-up of inventories outpaces demand, and there’s a risk that businesses may have to offer discounts or slow production in order to shift their products.

If this is the case of increased inventories then it is something worth watching, but for now, we think there are enough reasons to think things won’t deteriorate much further from here.

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