UPDATE 3-Canada factory sales tumbled in bad omen for growth

Fri Feb 15, 2013 10:56am EST

* Sales tumble 3.1 pct vs estimate of 0.8 pct decline

* Auto assembly plants decline 15.4 pct in month

* Factory sales in 2012 as a whole up 3.4 pct

By Louise Egan

OTTAWA, Feb 15 (Reuters) - Canadian manufacturers ended 2012 on a dismal note, registering the biggest monthly decrease in sales since the Great Recession, a drop that suggests growth again disappointed in the fourth quarter.

Manufacturing sales fell 3.1 percent in December from November, the sharpest decline since May 2009 in seasonally adjusted terms, due mainly to weaker auto production but also to lower sales in 16 of 21 industries, Statistics Canada said on Friday.

The news drove down the Canadian dollar and disappointed investors, who expected a milder 0.8 percent decrease. Factory sales rose 1.9 percent in November but struggled to gain traction overall last year.

"You can't really paint a more negative picture of Canada's manufacturing sector than what we saw with the December shipments report," said Sal Guatieri, senior economist at BMO Capital Markets.

Manufacturers have been hard hit by a strong Canadian dollar and tepid U.S. demand for their products, and they have yet to see sales climb back to pre-recession levels.

"The report clearly underscores that Canadian manufacturers need U.S. consumers and businesses to ramp up their spending to see some revival this year," said Guatieri.

Excluding the heavyweight auto sector, sales fell 1.8 percent, dragged down by chemicals, energy products and fabricated metals.

In volume terms, overall sales sank 3.8 percent.

The Canadian dollar weakened by more than half a cent to C$1.0065 versus the U.S. dollar, or 99.35 U.S. cents, from C$1.0026, or 99.74 U.S. cents just before the data was released.

The December performance rounded off a mediocre year for the sector, based mainly in the province Ontario. In 2012 as a whole, factory sales rose 3.4 percent, less than half the 7.8 percent growth of 2011.

IMF WARNING

Economists scaled back their forecasts for December and fourth-quarter economic growth after the report, which also lent credibility to the Bank of Canada's message last month that interest rate increases are less imminent.

Indeed, the central bank's forecast of 1 percent annualized growth in the fourth quarter now looks high.

"Real GDP is expected to spend another quarter close to its dismal 0.6 percent advance in Q3, which speaks to the combination of persistent headwinds and negative shocks that undercut growth around the world through the end of last year," said David Tulk, chief macro strategist for Canada at TD Securities.

The International Monetary Fund predicted on Thursday that Canada's growth rate would gradually speed up in 2013 as the U.S. recovery gains momentum. But it warned that U.S. growth alone would not be enough to close Canada's current account deficit, as exporters will continue to grapple with a strong currency, poor productivity and competition from China.

In December, sales by motor vehicle assembly plants plummeted 15.4 percent. While that sector normally undergoes temporary plant shutdowns in the final month of the year, Statscan said the decline in December 2012 was greater than usually observed.

New orders for manufactured goods fell 4.4 percent in December while unfilled orders increased by 2.6 percent.

Inventories dropped 1 percent and the inventory-to-sales ratio, a measure of how many months it would take to exhaust stock, rose to 1.34 from 1.32 in November.