Manufacturing GDP Analysis – July 2017

Economic growth flattens out in July

After a stellar opening six months to the year, the Canadian economy was flat to start the summer. Overall GDP in July was essentially unchanged compared to June, with growth dampened by steep declines in the energy sector as well as in motor vehicles and parts manufacturing.

While there was no month-over-month growth to speak of, the surge in GDP in the first half of 2017 has given Canada enough economic momentum to keep year-over-year growth rates high. GDP in July was 3.8 per cent higher than it was 12 months earlier and through seven months, the economy is still tracking 3.4 per cent higher than it was over the same period in 2016.

At the same time, however, the economic weakness in July – which was predictable given softening data on job creation and exports –means that the Bank of Canada will likely hold off on interest rate increases for the remainder of the year. After raising its baseline rate twice in as many months on strong economic news, there appears to be little reason to pursue further monetary policy tightening until conditions begin to improve again.  

At the industry level, economic performance was mixed in July. As noted above, there was a sharp drop in oil and gas extraction   that month (down 1.2 per cent compared to June), as well as a decline in auto production large enough to drive the entire manufacturing sector down by 0.4 per cent. Construction activity also slowed in July, as did GDP in finance, real estate and other related industries. Offsetting those declines was a jump in wholesale trade activity (up nearly 2.0 per cent). There were also smaller gains in professional services, utilities and the public service.

For its part, the decline in auto sector activity was largely the result of businesses extending their normal summer shutdowns for longer than expected to help draw down their built-up inventories. That, combined with the shift of a production line to Mexico, drove GDP in autos and parts down by 9.1 per cent compared to June. In fact, when the impact of the auto sector is removed, July was a relatively good month for Canadian manufacturing; GDP in all manufacturing outside the auto sector rose by an average of 0.6 per cent compared to June.

Looking beyond the auto sector, July was a good month for fabricated metals industries, where GDP rose by 3.0 per cent, continuing a gradual recovery that began late last year. Value-added activity was also higher in plastics and rubber products industries, as well as in chemicals, paper and aerospace products.

Meanwhile, GDP in machinery production in July fell back to more normal levels after an unusual spike in June. There were also smaller declines in petroleum refining and food production.

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