Canadian Manufacturing Sales (June 2015)

Canadian manufacturing sales increased 1.2% in June, well below market consensus which had called for a 2.7% gain. Despite the improvement in June, the current level of sales remains 5% below the post-recession peak of July 2014. In real terms, sales advanced 0.5% following two consecutive declines.

Most manufacturing industries (18 of 21) recorded an increase in shipments in June. The chemical industry (+5.4%) recorded the sharpest gain in June. Statistics Canada noted that sales of pesticides, fertilizers and other agricultural products that normally take place in May were pushed back to June. Motor vehicle sales advanced a notable 4.2%, the third increase over the past four months. Fabricated metal products shipments dropped 8.2%, the steepest decline since December 2008. The steep decline partially reflects the recent completion of some long term contracts that were tied to the oil and gas extraction sector.

Regionally, shipments increased in seven of ten provinces with Quebec (+2.9%) recording the strongest advance - boosted by its aerospace sector. Sales in Ontario edged up 0.4%, as higher motor vehicle sales were weighed down by the pullback in the fabricated metal products industry.Inventories declined 0.5%, the second consecutive monthly decrease. As a result, the inventory-to-sales ratio moved lower to 1.42 from 1.44 in May.

On the surface, forward looking indicators of sales were not encouraging. Unfilled orders declined 1.8% while new orders advanced 0.6%. That said, stripping away the volatile aerospace category, unfilled orders were flat while new orders increased 2.9%.While the June increase in manufacturing sales is encouraging, a sharper gain was expected given the strong exports reading in the international trade report last week.

Looking ahead, it is believed that, Canada's non-commodity exports are poised to turn in a solid performance over the second half of 2015. This is based on forecast for a strengthening U.S. economy and a lower Loonie - both of which are expected to lift manufacturing activity over the next few quarters.

"With June's reading now in the bag, real manufacturing sales declined 1.3% (annualized) in 2015Q2. This is consistent with our tracking for a 1% contraction in Canadian real GDP in the second quarter - marking the second consecutive quarterly decline (albeit shallow) in real GDP. That said, the worst is likely behind us. We expect the Canadian economy to average quarterly growth around 2% annualized over the second half of 2015, largely based on rising export activity. This outlook is consistent with the view outlined by the Bank of Canada in its July Monetary Policy Report. As such, we expect that the Bank will remain on the sidelines until the second half of 2017", notes TD Economics.