Manufacturing GDP Analysis – February 2017

Economy slows to a crawl in February as manufacturing activity falls    

After an excellent start to the year, economic growth in Canada came to a halt in February as weakness in manufacturing and resource industries cancelled out gains in financial and business services. Overall, GDP grew by just 0.03 per cent in February, a far cry from the 0.62 per cent increase in January. It should be noted, however, that January was an exceptionally strong month for the Canadian economy – its best month-over-month performance in five-and-a-half years.

Although GDP was effectively unchanged in February, January’s strong performance, combined with a weak start to the year in 2016, has already set the Canadian economy up for a solid first half of the year in 2017. Through two months, GDP is 2.4 per cent higher than over the same period last year. Given last year’s struggles (GDP fell in three out of four months from February to May 2016), year-over-year growth is likely to accelerate in the coming months.  

As noted above, economic growth was dragged down by a decline in manufacturing and resources. GDP in agriculture, forestry and other renewable resource industries was down 1.2 per cent in February, while value-added output in manufacturing was 0.65 per cent lower. However, those sectors were by no means alone. There were notable declines in mining, energy, and utilities, as well as in wholesale and retail trade. It should be noted, however, that in most cases these declines came after unusually strong performances in January. This was especially true of manufacturing, energy, and wholesale trade.

In total, eight of the fifteen major economic sectors in Canada saw positive growth in February. However, there were meaningful gains in just three: finance, insurance and related services; professional, scientific and technical services; and construction.

Of those, the most interesting story has been in construction. Construction has been an anchor on the Canadian economy since the collapse in oil prices in late 2014. It has only begun to turn around in the last few months, led by residential building and, to a lesser degree, by repair and maintenance spending. While this is certainly good news in the short term, there remain deep longer-term concerns. GDP in non-residential building construction has been falling steadily now for more than two years. While energy-related construction is at least partly to blame, the lack of offsetting growth elsewhere  suggests that all is not well on the business side of the economy.

Looking specifically at manufacturing, February’s GDP decline of 0.65 per cent was fairly severe, but it also came on the heels of three consecutive months of spectacular gains. As a result, even with the drop in February, manufacturing GDP remains higher than at any point since the 2008-2009 recession.

Within manufacturing, losses were relatively widespread. Of the eleven leading manufacturing industries in Canada, only three saw positive growth. Leading the way were producers of fabricated metals, who are enjoying a long-awaited turnaround of their own. After nearly two years of steady declines, GDP in fabricated metals has increased by 13.2 per cent since November, including a 5.7 per cent jump in February. There were also smaller gains in food processing and primary metals.

At the other end of the spectrum, GDP fell sharply in wood products (-4.5 per cent), as well as plastics and rubber products (4.3 per cent).  There were also notable declines in aerospace (2.7 per cent), chemicals (1.5 per cent) and paper products (1.4 per cent).  It is worth noting that the decline in wood products GDP predates the recent imposition of countervailing duties on Canadian lumber exporters by the United States. Those duties are likely to continue to drive GDP in wood products lower in the coming months. 

 

 

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