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Manufacturing GDP Analysis – August 2017

GDP dips in August

A combination of lower exports, a reduction in resource extraction and manufacturing activity, and slowing employment growth caused the Canadian economy to contract in August. The drop in GDP (of 0.1 per cent) came after a flat performance in July, and provides further evidence that the strong growth seen earlier in the year may have run its course – at least in the short term.

The good news is that the momentum built up through the first half of the year is keeping year-over-year growth rates relatively strong. Through eight months, GDP is tracking 3.5 per cent higher compared to the same period in 2016. This is unlikely to change in the coming months as the Canadian economy was struggling at this same point 12 months ago. As such, year-to-date GDP growth will remain comfortably above 3.0 per cent through November or December, but will likely decelerate considerably thereafter. 

The economic contraction in August also makes it highly unlikely that the Bank of Canada will be increasing interest rates at its scheduled December 6th announcement date. Economic fundamentals are simply not strong enough to warrant additional rate increases, barring a dramatic turnaround in the next five weeks.

Canada’s poor economic performance in August was largely the result of weakness in goods-producing industries. All five broad industrial categories in the goods sector were lower, led by a 1.0 per cent drop in manufacturing GDP and a decrease of 0.79 per cent in mining and energy.

While GDP in the goods sector as a whole fell by 0.68 per cent, the services sector fared slightly better, posting an increase of 0.15 per cent in August. Most services-sector industries made modest gains, led by professional, scientific and technical services (up 0.27 per cent), health care and social assistance (0.25 per cent) and the public service (0.23 per cent). Those gains were muted by a sharp decline in retail trade activity (down 0.41 per cent) and a drop of 0.19 per cent in information and culture industries.

Looking specifically at the manufacturing sector, results were mixed, with six of the 11 major industrial categories posting lower GDP numbers and five making gains. Generally speaking, the weakness in manufacturing was concentrated in non-durable goods industries. In particular, chemicals-producing industries were hard-hit, with total GDP falling by 7.3 per cent in August. That decline was largely the result of lower value-added output in petrochemicals and other basic chemicals, as well as a sharp drop in pharmaceuticals production. GDP was also lower in petroleum refining (down 3.1 per cent), and in plastics- and rubber-producing industries (down 2.5 per cent).

It was a slightly better story on the durable goods side in August. While there was a sharp decline in GDP in fabricated metals (down 3.2 per cent), those losses were countered by an excellent month for a wide range of machinery producers, who saw value-added output jump by 5.8 per cent. While industry-level data only go back 20 years, GDP in machinery production has never been higher over that time. Value-added production was also higher in the aerospace sector (up 1.9 per cent) and in primary metals (up 1.4 per cent).

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