Modest business growth forecast as manufacturing slows in June

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A drop in orders for new manufactured goods, coinciding with the suspension of production activity in the Alberta oilsands, has resulted in a slight drop in the RBC Canadian manufacturing Purchasing Managers’ Index (PMI) for June. The PMI dropped from 52.1 in May to 51.8 in June. The index has been above 50, indicative of growth, for the past four months. The Alberta oilsands slowdown is expected to result in negative GDP growth for the second quarter, according to RBC.

Ontario, with the largest manufacturing sector in the country, was hardest hit, with its index dropping from 55.1 in May to 53.6 in Junes. The pace of growth, as measured by output and employment, fell. However new business volumes grew slightly as a result of stronger domestic sales. RBC economist Craig Wright noted that currency weakness and stronger US demand “should drive further exports” though there is growing economic uncertainty in Canada and the US.

Nevertheless, a new Business Outlook Survey by the Bank of Canada forecasts “steady, modest” business momentum for the rest of 2016. Businesses are expecting only marginal sales growth over the next twelve months, with the outlook particularly gloomy among companies most affected by the oil slump. These companies are mainly concentrated in the West.

Outside of the commodity industries affected by the oil shock, businesses remain more optimistic, once again citing the weaker Canadian dollar and expected demand from the United States. That foreign demand will not be enough to offset domestic weakness for many companies, the survey found.

Investment in machinery and equipment will increase modestly in the next twelve months, with those companies linked to the energy sector curtailing investment spending. The survey revealed that even companies not directly tied to the energy sector had only modest investment plans for the coming year.

In general, firms said they planned to add jobs over the coming year, but companies in the energy supply chain will likely cut jobs. Firms in the service industries, on the other hand, including consumer and business services and real estate, will increase their workforces.

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