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Improvements Evident In Canadian Manufacturing

James Boston
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Improvements Evident In Canadian Manufacturing

The Royal Bank of Canada sponsored Purchasing Managers Index (PMI) has just been published in final format for the month of October. This month’s reading for the Canadian manufacturing sector has come in at 55.3 in comparison to the 53.5 recorded in September and a market consensus estimate for 53.0 today.

The shine appears to have begun wearing away from the Canadian economy in recent months as evidenced by last week’s monthly GDP figure, which came in negative for the first time in six months. The reading of -0.1% relating to the month of August took markets very much by surprise. Canada which largely escaped the worst of the global economic crises due to the commodity based nature of it’s economy is now suffering as a result of the retracements in the commodity markets. The persistent decline in oil prices that began in June of this year has taken over 20% of the value of crude. This now renders many Canadian oil extraction projects financially unviable, borderline at best. More to the point the depressed value of oil is causing a postponement of investment into the sector as the risk return profile decreases in attractiveness.

The problem for Canada is that the success of it’s economy in recent years has not only been driven by elevated commodity prices but this situation has produced a false sense of security around the economy, this has become an issue to the point that other sectors have suffered underinvestment and are consequently not in the top condition that would be required to sustain the Canadian economy in the absence of commodity inputs. Canada’s ability to weather the economic weakness brought on by the deterioration of it’s primary source of growth now depends on it’s ability to sustain trade with it’s major trading partner, the US. Fortunately, for Canada the growth in the US has led to an increase in cross border trade, whether this lasts long enough for either commodity prices to recover or for Canada to stimulate other areas of it’s economy remains to be seen.

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