Manufacturing sales down in December as high interest rates take their toll

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The Bank of Canada expects the impact of its eight consecutive interest rate hikes to slow business investment and consurmer purchasing, flatlining economic growth during the first half of 2023, and bringing runaway inflation to a halt. PHOTO by Pexels.

Advance results from Statistics Canada indicate that total manufacturing sales fell 1.8% in December. The largest decreases were in the primary metal industries as well as petroleum and coal, and wood products industries.

Statistics Canada is providing advance estimates of sales in the manufacturing sector to stay on top of the “rapidly evolving economic situation.” The estimate was calculated based on a weighted response rate of 57.3%. Full results for December will be provided next month.

On the same day as the advance estimate was provided, the Bank of Canada announced it will increase its benchmark interest rate by a quarter of a percentage point to 4.5%. The move was Bank of Canada’s eighth consecutive increase as it continues its battle to cool the national economy and reduce runaway inflation. However, the Bank of Canada this time said it expects to hold off further rate hikes, making it the first central bank to say so.

“If economic developments evolve broadly in line with the [Monetary Policy Report] outlook, Governing Council expects to hold the policy rate at its current level while it assesses the impact of the cumulative interest rate increases,” the Bank of Canada said in a statement.

So far, the Canadian economy has proved resilient in the face of rising interest rates. Canadian manufacturing sales didn’t increase in November but they didn’t decrease either. Sales remained flat overall at $72.3 billion in November, but metal manufacturers and several of the industries important to them managed to buck the trend with impressive sales increases.

Sales of durable goods were up 1.8% for the month, led by a 2.7% monthly gain in fabricated metal products sales. This was the third consecutive monthly sales gain for the fabricated metal product industry rose and marked a new high, reaching $4.5 billion. The growth was broad-based, with higher sales in 7 of 9 fabricated metal industries, led by architectural and structural metals (+6.6%). On a yearly basis, sales were 20.6% higher in November.

There was also particularly strong uptick in the automotive sector, one of metalworking’s most important customers. Following three consecutive monthly decreases, sales in the motor vehicle industry rose 12.7% to $3.9 billion in November, as production in several assembly plants in Canada ramped up, which in turn led to higher capacity utilization rates amid supply constraints.

In addition, unemployment remains near a record low.

The Bank of Canada remains optimistic inflation will return to the 2% target by 2023. The annual rate of inflation remained considerably above that level in December, however, holding at 6.3%. The good news is that inflation is down from its peak of 8.1% in June.

The Bank of Canada does expect its aggressive policy of eight consecutive interest rate increases to slow down the Canadian economy as higher rates slow business investment and consumer spending. Stating there is “growing evidence the restrictive monetary policy is slowing activity,” it expects growth to be flat at best through the first half of 2023, stating there’s a 50-50 chance Canada will experience at least two consecutive quarters of negative growth (the common definition of recession).

Although the Bank of Canada expects the economy to plummet into recessionary territory in the first half it doesn’t foresee a significant recession.

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