UPDATE 3-Canada factory sales jump, add fuel to rate-hike talk
* Sales up 1.9 pct vs 0.3 pct forecast
* Shipments of petroleum, coal products drive gains
* Report points to March GDP rebound, rate hikes
By Louise Egan
OTTAWA, May 16 (Reuters) - Canadian factory sales blew past expectations in March with the biggest gain in six months due to vigor in the oil industry, putting the economy back on a growth track after a surprise contraction in February.
Manufacturing sales rebounded by 1.9 percent, Statistics Canada said on Wednesday, not quite compensating for the two previous months of declines, as shipments of petroleum and coal products jumped to their highest level in more than 3-1/2 years.
Analysts surveyed by Reuters had forecast, on average, a 0.3 percent increase in sales at the factory gate in the month.
At C$49.7 billion ($49.2 billion) in March, factory sales still have not regained their heights of before the 2008-09 recession as manufacturers struggle with a sluggish U.S. market and the effects of the strong Canadian dollar.
In volume terms, sales were also up 1.9 percent.
Analysts were cheered by the report, which bodes well for economic growth in March following a 0.2 percent decline in February from January. The figures also support the growing view that the Bank of Canada could resume raising interest rates later this year after a two-year hiatus.
"A 2 percent increase in new orders plus the observed improvement in hours worked and employment suggests that the manufacturing sector will contribute to growth heading into Q2 and help the wider recovery become better balanced," David Tulk, chief Canada macro strategist at TD Securities, said in a research note.
"Set against diminishing spare capacity, the prospect of stronger growth over the balance of the year will warrant the modest withdrawal of stimulus by the Bank of Canada."
New orders for manufactured goods rose for the second straight month in March, up 2 percent, while the backlog of unfilled orders also rose 2 percent to a level last seen in March 2009.
Canadian Finance Minister Jim Flaherty told reporters the manufacturing data was "encouraging". On Tuesday he had warned of a "lumpy" economic recovery, which has been reflected in the recent volatility of economic data from one month to the next.
Canada's economy has recovered all the jobs and economic output that was lost during the 2008-09 recession, but manufacturers have lagged behind on both fronts. The sector was among the hardest hit by the downturn, when demand in the United States, their top market, dried up, exacerbating a trend that had seen Canada's manufacturing base shrink steadily in favor of services.
Outside the auto industry, by far the biggest component of manufacturing, sales were still up 1.9 percent with advances in 15 of 21 industries tracked. Some of the strongest growth was in the chemicals, aerospace and motor vehicle assembly industries.
Inventory levels fell 1.2 percent in March, bringing the inventory-to-sales ratio to 1.30 in March from 1.34 in February.
Following the data, Canada's currency rose to C$1.0053 versus the greenback, or 99.47 U.S. cents, from around C$1.0072, or 99.29 U.S. cents, before the figures were released.
Canadian government bond prices extended losses across the curve on the back of the Canadian numbers and a broad pickup in global risk appetite.
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