Bank of Canada needs to ‘flip the script’ as weak economic data builds up

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Weak manufacturing sales are adding to the evidence that Canada’s third-quarter gross domestic product will come in well under the central bank’s expectations, likely amplifying calls for policymakers to get more aggressive on rate cuts.

Manufacturing sales fell 1.3 per cent in August from July to their lowest level since January 2022, mostly due to a decline in metals, petroleum and coal, according to Statistics Canada data released Wednesday. On a year-over-year basis, sales dropped 4.4 per cent.

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The falling sales and volumes, coupled with a drop in inventories, indicate “manufacturing GDP weakened, as StatsCan suggested was the case in its commentary alongside the preliminary estimate that GDP was unchanged in August,” Stephen Brown, assistant chief North America economist at Capital Economics Ltd., said in a note.

GDP rose by 0.2 per cent on a month-over-month basis in July, but a flat early estimate for August, released on Sept. 27, probably means that third-quarter growth will lag the Bank of Canada’s 2.8 per cent forecast.

Most economists at major financial institutions now expect third-quarter annualized GDP to come in at one per cent to 1.5 per cent. Brown is estimating a 1.2 per cent growth rate.

“The persistent struggles of the Canadian economy mean it’s time for the Bank of Canada to flip the script,” Royce Mendes, managing director and head of macro strategy at the Fédération des caisses Desjardins du Québec, said in an analysis Wednesday.

He expects third-quarter GDP growth of 1.3 per cent.

“That’s particularly appalling given that the working-age population has grown 3.5 per cent over that same period,” he said, adding that growth over the past two years has expanded at an annualized pace of “just” one per cent.

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“Policymakers can and should turn their attention to the deteriorating economic situation,” Mendes said.

The weak manufacturing data only added to the narrative, with slowing local and global economic activity and demand helping to push down the value of metals sales by 6.4 per cent as well as the volume of sales.

“Weaker domestic and international demand for metals due to lower construction and manufacturing activities have pulled the prices of many primary metals lower in the past few months,” Statistics Canada said.

Sales of refined petroleum products also felt the chilling effects of global growth concerns, particularly in China, and fell 5.8 per cent in August month over month. Year over year, coal and petroleum product sales were down 7.9 per cent, Statistics Canada said.

These two sectors were the biggest drag on the data, but Brown said “developments were generally poor across the board, with sales of machinery, computer and electronic products and electrical equipment all falling by between two per cent and four per cent, which is another sign that business investment probably fell last quarter.”

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Month-over-month vehicle sales also “sharply” fell by 5.8 per cent in August, although Brown noted aerospace sales provided “one bright spot” as sales rose 7.3 per cent month over month.

He said the S&P global manufacturing purchasing managers’ index (PMI) for Canada remains depressed, which is another sign of the anemic manufacturing environment.

The PMI, which measures economic trends in the manufacturing and services space, came in at a bit more than 50 for September. A reading above 50 indicates expansion, while a reading 50 below indicates contraction.

Brown said the PMI showed that new orders fell by 2.3 per cent last month.

“It seems likely that manufacturers will continue to struggle over the rest of the year,” he said.

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