03/16/2012 08:53 EDT | Updated 05/16/2012 05:12 EDT

Canada Manufacturing Sales: January Sees 0.9 Per Cent Decline

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OTTAWA - Canada's manufacturers remain a key laggard in the economic recovery, recording a surprisingly weak performance in January despite improving U.S. markets.

Sales from the manufacturing sector, which is concentrated in Ontario, fell 0.9 per cent to $49.6 billion during the month and 1.1 per cent in real or volume terms.

Economists had been expecting a 0.2 per cent increase in sales in line with improving U.S. economic conditions, and recent monthly gains.

But even though activity at Canada's factories picked up in the second half of 2011, after a steep downturn last spring — particularly auto parts and assembly lines — the sector as a whole is still a below its pre-recession level.

In terms of jobs, the sector is doing worse. It has recovered only about one-third of the jobs lost during the 2008-09 slump and in the past 12 months, it shed a further 41,000 workers.

That makes it one of the few economic areas still struggling to climb out of the hole created when global demand collapsed, particularly in the United States, in the months following a credit crisis that erupted in the fall of 2008.

Analysts say a main impediment for manufacturers is the strong Canadian dollar, which makes exports less competitive in foreign markets. The loonie has been trading above parity with its U.S. counterpart since early February after dipping below the U.S. dollar in September.

"The Bank of Canada is facing two very divergent economies in Canada. The consumer has plodded on to new record highs, but the manufacturing sector has barely recovered," said Derek Holt, vice president of economics with Scotiabank.

"So what does the Bank of Canada do? That's why I think they stay on hold for a long time because if they start to hike rates and light up the Canadian dollar even further, you can imagine the howls of protest from manufacturers and exporters."

Analysts caution against reading to much meaning into one month of data, pointing out that most of January's losses were attributed to a 34 per cent dip in the volatile aerospace industry.

There were also some positives in the report. New orders rose 0.8 per cent, suggesting sales down the pipeline, and inventories also rose, which may mean the hit to January's gross domestic product will not be as severe.

But the big thing the sector has going for it, says TD Bank economist Leslie Preston, is that the stronger economic news coming out of the United States — Canada's biggest export market.

"Overall, we expect manufacturing output to improve upon its 2011 performance, and still grow by a modest 2.3 per cent this year," Preston said.

David Madani of Capital Economics also sees some growth this year, although he cautions the persistently strong Canadian dollar will "continue to challenge" manufacturers in the non-resource industries.

The details of the Statistics Canada report show that while the losses were concentrated in aerospace, it was not the sole drag. In total, 11 of 21 industries representing approximately 44 per cent of manufacturing declined.

Manufacturing sales in the primary metal industry slipped 3.5 per cent, while machinery manufacturers reported a 4.5 per cent decline.

The strength came in the auto industry, which rose 2.6 per cent to $4.5 billion, the seventh consecutive month of increases. January sales hit the highest level since November 2007.

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