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Manufacturing GDP Analysis - June 2017

Construction drives another strong economic performance in June

Led by a surge in construction activity, the Canadian economy had another strong month in June, with overall GDP expanding by 0.27 per cent compared to May. That growth rate was well below the 0.64 per cent surge in value-added output last month, but on an annualized basis is still equivalent to a healthy 3.3 per cent increase. The Canadian economy has now recorded positive growth for eight consecutive months. Through the first half of 2017, GDP is tracking 3.4 per cent higher compared to the same period last year.

 

The release of GDP numbers for June means that second quarter data are also available for 2017. In Q2, the Canadian economy expanded by about 1.1 per cent compared to the previous quarter and about 3.7 per cent compared to the second quarter of 2016. These are excellent growth numbers, especially for an economy that has languished in recent years. In fact, Q2 GDP growth in 2017 was the highest it has been since the summer of 2011.

As was the case when Q1 data were released, perhaps the best news coming out of the quarterly GDP numbers was the positive signs on business investment. Business investment had been in a freefall since the drop in oil prices in 2014 but companies finally began open their wallets for new capital projects in the first quarter of 2017. Although growth slowed, business investment was up again in Q2, recording a 0.5 per cent increase over the winter.

Even so, the business sector has a long way to go to make up the ground lost since 2014. Real business capital investment remains 8.1 per cent lower than it was three years ago.

Another encouraging sign from the quarterly expenditure-based GDP accounts was the performance of Canadian exporters. For years, consumers have been carrying the Canadian economy on their backs while businesses have struggled.  The Bank of Canada and other economy-watchers have been pinning their hopes for future growth on export-based growth. Q2 results suggest that that is finally beginning to happen; exports GDP in Q2 was up 2.3 per cent – more than more than double the overall growth rate of the Canadian economy.

Turning back to the monthly figures for June, GDP gains were relatively widespread across the Canadian economy, with 11 of the 15 major sectors recording positive growth. However, by far the largest increase was in construction, where both residential and non-residential building activity soared in June. In fact, construction accounted for just over half of Canada’s GDP growth in June.

Aside from construction, there were also solid gains in accommodation and food service industries (up 0.8 per cent), as well as utilities (0.7 per cent) and transportation and warehousing (0.6 per cent).

On the negative side, agriculture and resources industries saw a modest decline in GDP, as did information and cultural industries.  Meanwhile, real estate and leasing – which has been a major driver of economic growth in Canada in recent years – was down very slightly for the second month in a row. 

Turning to the manufacturing sector, June saw modest if unspectacular growth as value-added output increased by 0.16 per cent in June, compared to 0.27 per cent for the Canadian economy as a whole. Although growth lagged the economy-wide average in June, Canadian manufacturers have enjoyed a remarkable turnaround since last winter after recording essentially no growth at all for about two years.  Through the first six months of 2017, manufacturing GDP is tracking 3.0 per cent higher compared to the first half of 2016. Monthly GDP in June was more than 4.0 per cent higher than it was a year ago.  

Within the manufacturing sector, June’s results were mixed. Durable goods industries were largely positive – posting an aggregate increase of 0.86 per cent compared to May. By contrast, it was a disappointing month for producers of non-durable goods, where GDP fell by 0.66 per cent.

Leading the way on the positive side was machinery production, where GDP rose by close to 3.9 per cent in June. GDP trends in machinery production are emblematic of the manufacturing sector as a whole – after two years or more of flat or negative growth, fortunes began to change late in 2016 and have been on an upward trajectory ever since.

In addition to machinery, there were also notable GDP gains in primary metals production (2.0 per cent increase compared to May), as well chemicals (0.9 per cent) and fabricated metals (0.9 per cent).

On the negative side, June was a bad month for the forestry sector. Value-added output in paper products fell by 2.1 per cent, while GDP in wood products industries was down 1.5 per cent. GDP was also lower in plastics and rubber products manufacturing, as well as food processing and petroleum refining.

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