06/14/2013 02:19 EDT | Updated 08/14/2013 05:12 EDT

U.S. revival to inject life into Canadian economy, but not till 2014: forecast

OTTAWA - Canada's recovering economy hit a major pothole Friday with a manufacturing report showing activity in the country's factories slumped 2.4 per cent in April, the worst decline in almost four years.

As well, Statistics Canada said the sector suffered an even worse March than previously reported, with sales falling by twice as much as the original 0.3-per-cent estimate.

The double-whammy constitutes a major setback to an economy that had been thought to performing better than expected, given the strong 2.5 per cent growth spurt in the first three months of the year, strong housing starts, and the 95,000 new jobs created in May.

Analysts said the manufacturing data likely signals a return to the previous expectations of a weak first half to the year, with the pace picking up toward the latter part of 2013.

The Conference Board of Canada released a new outlook Friday morning in line with the scenario. It says the economy will likely be receiving a boost from stronger U.S. demand for Canadian products, but that won't be felt until 2014.

In the updated forecast, the Ottawa-based think-tank estimates Canada's growth rate at 1.8 per cent this year, the same as last year and four-tenths of a point below its previous call, before picking up to 2.5 per cent in 2014. That is near the Bank of Canada's call of 1.5 per cent growth in 2013 and 2.8 per cent in 2014.

"Overall, Canada's domestic economy is not expected to muster enough strength to get growth ... above two per cent this year," said economist Pedro Antunes, the think-tank's director of national and provincial forecasting. "The stronger pace of U.S. growth in 2014 should help lift spirits, resource prices, trade prospects and income here at home," he added.

TD Bank's analysis also says Canada must wait until its largest trading partner to the south fully swings into growth mode before seeing any significant pick-up here.

That remains a hope for the future, however. For the present, the manufacturing report constitutes a significant setback for this year, particularly in the short term.

"(It's) an upsetting report in many respects. This cools the mood a bit on Canadian fundamentals, after the robust employment and housing starts received recently," said Jimmy Jean, an economic strategist with Desjardins Capital Markets.

April's decline was the fourth in five months. In terms of volumes, shipments are down 3.5 per cent in the past year. The drop was also broad-based, with 13 of 21 industries representing about 86 per cent of manufacturing declining, led by an 8.8 per cent slide in petroleum and coal products sales, and an 8.7 per cent fall in primary metals. Autos fell 2.2 per cent.

Union economist Erin Weir of the United Steelworkers pointed out that despite reasonable growth in employment, manufacturing has shed nearly 100,000 jobs in the past year, and about 600,000 in the past decade.

Weir notes that trend coincides with the appreciation of the Canadian dollar from about 65 per cent of the U.S. currency's value to the current near-parity status. The U.S. recession and weak recovery has also kept the sector from making as strong a comeback as some others, particularly resource-based industries that are more closely tied to emerging economies such as China.

"Manufacturing is the sector that is perhaps the most integrated between Canada and the United States," he explained. "So I do think the recession in the U.S. explains a lot of the malaise to date and if the American economy picks up, that has the potential to bolster Canadian manufacturing again."

On that front, there was some encouraging news Friday. The International Monetary Fund reported the U.S. economy is on sounder footing than it was a year ago, although it expects recent tax increases and government spending cuts to shave 1.5 per cent from growth this year. Once those impacts fade later the year, the economy should start accelerating to a more healthy 2.7 per cent rate, the IMF said.