Manufacturing GDP Analysis – December 2016

Manufacturing helps the Canadian economy end 2016 on a positive note

1. December
The Canadian economy closed out 2016 with a solid performance, ending what turned out to be a strong second half of the year. After a poor winter and spring, economic growth has gained noticeable momentum since the summer. GDP has risen in six of the last seven months and was up 0.32 per cent in December - equivalent to an annualized increase of about 3.8 per cent.

GDP rises

That reversal of fortune has turned what would have been a dismal economic performance in 2016 into one that, while still on the weak side, looks a lot better than it did halfway through the year. Preliminary numbers suggest that for 2016 as a whole, the Canadian economy grew by 1.4 per cent - a considerable improvement over the 0.6 per cent annual growth in 2015. Annual GDP figures are discussed in more detail, below.

momentum building chart

For the second month in a row, December's GDP gains were driven by strength in goods production. Value-added output in goods-producing industries rose by 0.54 per cent that month, compared to 0.23 per cent in services. By far the largest increase was in the utilities sector, where GDP was up by 3.4 per cent compared to November. Those gains were driven by a recovery in electricity generation and distribution, as well as natural gas distribution, both of which had dipped sharply the previous month. There were also solid gains elsewhere in the goods sector: construction GDP was up 1.0 per cent, while agriculture and renewable resource extraction (0.6 per cent) and manufacturing (0.4 per cent) also closed out the year well. The only down side in the goods sector was a dip in energy and mining activity.

GDP growth by sector

GDP in most services sector industries was also higher in December, although more modestly so. In fact, the only services sector industry to see a decline in value-added output was accommodation and food services, where GDP dipped by 0.5 per cent.

Looking specifically at the manufacturing sector, December's gains were fairly widely distributed with eight of the eleven major industry categories higher and three lower. Leading the way on the positive side was motor vehicles production, where GDP rose by 3.5 per cent - a welcome change for an industry that had been trending steadily downward for much of the year. There was a similar-sized spike in paper production, while petroleum refining and fabricated metals production are beginning to show signs of recovery after struggling mightily for nearly two years. Only food (-0.8 per cent), chemicals (-1.1 per cent) and primary metals (-1.5 per cent) were lower in December.

Manufacturing GDP by Major Industry      
  Nov-16 Dec-16 Nov-Dec Dec 2015-Dec 2016
  ($billions) ($billions) % growth % growth
Total Manufacturing 175.7 176.3 0.4 0.9
  Durables 100.5 101.1 0.7 -1.4
  Non-durables 75.2 75.2 0.0 3.7
Major Industries        
  Food 24.3 24.1 -0.8 5.4
  Motor vehicles and parts 17.5 18.1 3.5 -1.8
  Chemicals 15.3 15.1 -1.1 9.3
  Primary metals 14.0 13.8 -1.5 0.2
  Machinery 13.7 13.8 0.5 4.8
  Fabricated metals 12.1 12.3 1.9 -7.3
  Wood products 10.6 10.7 0.5 0.5
  Plastics and rubber prods. 10.2 10.3 1.1 8.2
  Paper products 7.1 7.4 3.4 -1.1
  Aerospace 6.5 6.5 0.4 -6.9
  Petroleum and coal prods. 6.1 6.2 1.8 -2.4

2. 2016 Year-End
With the release of December's GDP numbers comes the first draft of year-end totals for the Canadian economy. As noted above, preliminary estimates indicate that overall GDP grew at an estimated 1.4 per cent last year - hardly strong growth, but a considerably improvement over 2015.

modest improvements

Growth in 2016 was largely driven by consumer activity. Household consumption was up 2.2 per cent compared to the previous year, while government spending was up 2.0 per cent. By contrast, exports made a relatively modest contribution to economic growth, with value-added export output increasing by just 1.0 per cent.

However, the biggest, and by far the most concerning, story last year was the continued deterioration of business investment in Canada. Driven in part by the impact of low oil prices on capital spending in the energy sector, business fixed capital formation fell by 4.0 per cent last year. In the fourth quarter of 2016, it was 12.4 per cent below levels from two years earlier. Low business investment has not only been an anchor on the Canadian economy, it creates significant concerns about the future of economic growth and competitiveness in Canada. Business investment is critical to expanding output and driving productivity gains. If businesses are not investing in Canada, the entire economy suffers.

business investment decline

The other factor driving down Canadian GDP in 2016 was a massive decline in investment in inventories. While this contributes negatively to final economic growth numbers, the decline - which was driven by a drop in manufactured goods inventories - does create some potential for optimism about 2017 as businesses will either need to rebuild those inventories, or are completing the transition to a lower-inventory growth strategy.

At the broad industry level, there was positive economic growth nearly across the board in 2016. Of the fifteen general sectors in the Canadian economy, all but three were higher last year. Leading the way on the positive side were finance, insurance are other related industries (up 3.5 per cent over 2015), and agriculture and renewable resources (up 3.2 per cent). There was also solid year-over-year growth in transportation and warehousing, health care, and in accommodation and food services industries. On the negative side, there was a sharp decline in mining and energy output compared to 2015, and an even steeper drop in construction activity. A modest recovery in oil prices and a turnaround elsewhere in the economy should help both those sectors recover in 2017.

growth by industry chart

For its part, manufacturing sector GDP increased by about 0.6 per cent in 2016 - less than half the national average. Results within manufacturing were sharply divided with significant gains in some industry categories and large declines in others. On the positive side, the food processing and wood products industries enjoyed an excellent year. A lower exchange rate has been particularly beneficial to those industries because they typically do not rely as much on imported inputs. At the same time, the wood products industry has benefitted from a year of trade without the restrictions from the Canada-US Softwood Lumber Agreement which expired in October 2015.

On the negative side, 2016 was a difficult year for those in fabricated metals, machinery and aerospace. Demand for fabricated metal products was hit hard by the decline in energy sector investment. Machinery production was similarly affected, although the last few months suggest that a turnaround is underway. For its part, aerospace GDP has been in steady decline for the past two years.




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