Manufacturing GDP Analysis – September 2016

Manufacturing contributes to building economic momentum in Canada

Although it is still early days, it appears as if momentum is finally starting to build in the Canadian economy. Driven once again by a rebounding energy and mining sector, the economy posted its fourth consecutive month of growth in September. GDP was up by a solid 0.34 per cent compared to August, equivalent to an annualized growth rate of about 4.1 per cent. While a strong performance, this increase will not be enough to change the fact that, on the whole, 2016 will be another weak year. Through nine months, GDP growth is still on pace to come in at less than 1.0 per cent for 2016.

Positive growth for GDP

The release of September's GDP numbers means that third quarter data are also available. In Q3, the Canadian economy expanded by 0.9 per cent, equivalent to an annualized increase of about 3.4 per cent. While this would otherwise be considered a strong showing, it is worth noting that this growth is built on a weak base: GDP in the previous quarter was heavily impacted by the Ft. McMurray wildfires which singlehandedly drove the Canadian economy into negative territory in Q2. As a result, the 3.4 growth rate in Q3 represents more of a return to normal economic activity than it does strong expansion. Underscoring this point, GDP growth in Q3 was largely driven by a rebound in goods exports, which were up 2.3 per cent after falling 4.7 per cent in the previous quarter.

snap-back effect continues

There are a number of other weak points in the Canadian economy that bear monitoring in the coming months and years. Most significantly, business investment continues to be a source of concern. Investment fell by 0.5 per cent in Q3 and has now fallen for eight consecutive quarters. The decline over the last two years has taken place in all three major categories of business investment: buildings and structures; machinery and equipment; and intellectual property. All have seen double-digit losses since late 2014.

business investment in gdp declines

Turning back to September's economic numbers, while energy and mining led the way, growth was once again well-distributed across the economic base. Of the 15 major economic sectors, 11 posted gains, three saw declines and one (accommodation and food services) was essentially flat.

GDP Growth by sector

Most of the aggregate gains were in goods-producing industries. Energy and mining activity jumped by 2.4 per cent - equivalent to about 70 per cent of all economic growth in September. Construction and manufacturing also made notable gains, with increases of 0.7 per cent and 0.5 per cent, respectively. The largest decline was in wholesale trade, which fell by 1.3 per cent in September.

September's increase marks the fourth consecutive month of GDP growth in Canadian manufacturing. The only bad news is that results within the sector were mixed. Of the eleven largest manufacturing industries in Canada, five were higher while value-added output fell in the other six.

Leading the way on the positive side were machinery producers, who appear to be finally seeing a turnaround in their economic fortunes. After a year and a half of consistent declines, machinery output began to trend upward a few months ago. September's 4.7 per cent surge in GDP is the exclamation point on what will hopefully be a sustained recovery. Fabricated metals producers also saw an uptick in GDP in September (3.0 per cent), after struggling with falling demand for nearly two years. It remains to be seen, however, whether that industry is also on the rebound.

Manufacturing GDP by Major Industry      
  Aug-16 Sep-16 Aug-Sept Sept 2015 - Sept 2016
  ($billions) ($billions) % growth % growth
Total Manufacturing 174.6 175.4 0.5 1.4
  Durables 99.6 100.4 0.8 -0.2
  Non-durables 74.9 75.0 0.1 3.3
         
Major Industries        
  Food 24.2 24.5 1.2 6.4
  Motor vehicles and parts 18.1 17.8 -1.8 -1.4
  Chemicals 14.8 14.7 -0.7 7.5
  Primary metals 14.4 13.9 -2.9 4.4
  Machinery 13.2 13.8 4.7 4.4
  Fabricated metals 12.4 12.7 3.0 -5.1
  Wood products 10.1 10.3 1.9 7.9
  Plastics and rubber prods. 10.0 9.9 -0.6 4.1
  Paper products 7.1 7.2 1.1 -2.8
  Aerospace 6.7 6.6 -0.6 -3.9
  Petroleum and coal prods. 6.4 6.3 -1.4 -0.8


On the negative side, primary metals producers saw GDP fall by 2.9 per cent in September, erasing the gains made by a comparable jump in August. Motor vehicles and parts producers also saw economic activity drop by about 1.8 per cent.

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