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Canada economy shrinks for first time in eight months, hit by U.S. auto strike – Financial Post

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OTTAWA — Canada’s economy unexpectedly shrank by 0.1% in October, the first monthly decline since February, partly because of a U.S. auto strike that hit manufacturing, Statistics Canada data indicated on Monday.

Analysts in a Reuters poll had forecast a gain of 0.1% following a 0.1% advance in September. Goods-producing industries posted a 0.5% loss while service sectors were essentially unchanged.

October’s growth figures were the latest in a string of disappointing data that analysts say could put pressure on the Bank of Canada to mull a rate cut.

“Today’s report may be seem easy to dismiss on its face given the strike-related disruption was well known in advance, but moving past that impact reveals some concerning weaknesses,” said Brian DePratto, a director at TD Economics.

“Don’t write off monetary easing in 2020 just yet.”

The central bank has held its key rate unchanged since October 2018 even as several of its counterparts, including the U.S. Federal Reserve, have eased. In October it forecast fourth quarter annualized Canadian growth would be 1.3% but analysts now say that is likely to be too optimistic.

“Because some of the softness is likely temporary, we look for growth to snap back above 2% in the first quarter of 2020,” said Robert Kavcic, senior economist at BMO Capital Markets.

The manufacturing sector contracted by 1.4%, the fourth decline in five months. Durable manufacturing dropped by 2.3% as a strike by the United Auto Workers prompted some Canadian plants and parts producers to scale back production.

The Bank of Canada’s next fixed rate announcement date is Jan 22 and market expectations, as reflected in the overnight index swaps markets, show operators expect it to stay put.

Statscan said retail trade in October fell by 1.1%, the largest decline since March 2016, on broad-based weakness. Transportation and warehousing rose by 0.6% on strength in the aviation sector, both in passengers and cargo.

“Although the Canadian economy is going through a soft patch in the fourth quarter, some of it is due to temporary disruptions that should be reversed early next year,” said Paul Ashworth, chief North American economist at Capital Economics.

(Reporting by David Ljunggren; Editing by Andrew Heavens and Alistair Bell)

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Economy

Canadian first quarter industry capacity use rises to 81.7%

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Canadian industries ran at 81.7% of capacity in the first quarter of 2021, up from a upwardly revised 79.7% in the fourth quarter of 2020, Statistic Canada said on Friday.

The increase in the first quarter was driven by gains in construction and in mining, quarrying, and oil and gas extraction.

Following are the rates in percent:

Q1 2021 Q4 2020 (rev) Q4 2020 (prev)

Cap. utilization 81.7 79.7 79.2

Manufacturing 76.5 76.7 76.2

NOTE: Economists surveyed by Reuters had forecast a first quarter rate of 80.6% capacity utilization.

(Reporting by Steve Scherer, editing by Dale Smith (steve.scherer@tr.com))

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Economy

UK, Canada agreed to redouble efforts for trade deal

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British Prime Minister Boris Johnson and Canadian Prime Minister Justin Trudeau agreed on Friday to redouble their efforts to secure a trade agreement as soon as possible to unlock such a deal’s “huge opportunities”.

“The leaders agreed a comprehensive Free Trade Agreement between the UK and Canada would unlock huge opportunities for both of our countries. They agreed to redouble their efforts to secure an FTA (free trade agreement) as soon as possible,” Downing Street spokesperson said in a statement.

“They discussed a number of foreign policy issues including China and Iran.”

 

(Reporting by Guy Faulconbridge, writing by Elizabeth Piper)

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Economy

Greater pricing power to help Canadian exporters withstand loonie surge

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A stronger Canadian dollar is usually seen hurting exporters, but the nature of the global economic recovery could help firms pass on their higher costs from the currency to customers, leaving exporters in less pain than in previous cycles.

Exports account for nearly one-third of Canada‘s gross domestic product, compared with about 12% for the United States, making Canada‘s economy more sensitive to a stronger currency, with the loonie trading near a six-year high versus the U.S. dollar.

But exporters could remain more competitive than usual after the COVID-19 pandemic led to a surge in the amount of money available for consumer spending, bolstered by government support measures. A global shortage of goods, due to supply chain disruptions, could also help.

“The appreciation that we are seeing in the currency now is less of an issue than in most other appreciations that we have seen,” said Peter Hall, chief economist at Export Development Canada.

“There are not enough goods and services available to satisfy the demands of the marketplace at the moment. And in that case there is probably pricing power,” Hall added.

The prices that Canadian manufacturers charge for their products increased at a record pace in May, while activity climbed for the 11th straight month, data from IHS Markit Canada showed last week.

Canada‘s major exports include autos, oil and other commodities. With commodity prices soaring, the Canadian dollar has been the top performing Group of 10 currency this year, advancing 5% against the U.S. dollar.

It hit a six-year high near 1.20 per greenback, or 83.33 cents U.S., last week. The Bank of Canada has said that further appreciation could weigh on the economy.

The loonie traded close to parity for much of the 2007 to 2013 period, contributing to a slow recovery for Canada‘s exports from the global financial crisis.

“What (business) was left behind after that period of an overvalued currency was relatively strong,” said Doug Porter, chief economist at BMO Capital Markets.

That reduces the risk of a “hollowing out” of the sector during the current episode of currency strength, Porter said.

At Magna International Inc, a major Canadian producer of auto parts, global diversification of its operations helps protect against currency strength.

“Movements in the Canadian dollar have become relatively less impactful to our overall business,” a company spokesperson said in an email to Reuters. “Increased global economic activity, and in particular global light vehicle production is a more important factor to our outlook.”

For now, the greater concern for manufacturers could be the reduced and more costly supply of inputs, such as semiconductor microchips, as well as the lengthy closure of the U.S. border.

“The challenge we have faced as an industry is the movement of personnel,” said Brian Kingston, chief executive of the Canadian Vehicle Manufacturers’ Association (CVMA). “If a piece of equipment on the line goes down, you may need to bring in someone from Michigan.”

For some industries, those logistical issues and the stronger Canadian dollar could be trivial compared to the jump in commodity prices.

“Under normal circumstances, a rising Canadian dollar would hinder the competitiveness of Canadian exports, but the way ag (agriculture) markets have risen overall, it’s a moot point,” said Lorne Boundy, merchandiser for Winnipeg-based crop handler Paterson Grain.

 

(Reporting by Fergal Smith; additional reporting by Allison Lampert in Montreal, Rod Nickel in Winnipeg and Shreyasee Raj in Bengaluru; Editing by Denny Thomas and Jonathan Oatis and Kirsten Donovan)

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