Key Takeaways:
Canada's manufacturing sector extended its recovery to a fourth month, adding to evidence the economy is rebounding from a weak first quarter.
The Bank of Canada's decision to hold rates steady for a sixth consecutive meeting came as data showed factory shipments rose 1.3% to a record C$78.09 billion in May, supporting the central bank's view that growth broadened in the second quarter.
"The rise in manufacturing sales and surge in new and unfilled orders confirms the sector remains in a cyclical upswing despite the US administration's punitive tariffs targeted at specific sectors such as steel and aluminum," said Thomas Ryan, North America economist at Capital Economics.
Sales volumes, which strip out price effects, increased 0.5% month-over-month and 2.8% from a year earlier, pointing to a tailwind for gross domestic product in May. Statistics Canada had previously estimated industry-level GDP edged up 0.1% in May, a second straight month of growth following a modest contraction in the first quarter. The central bank forecasts GDP expanded 2.5% in the second quarter.
The data suggest possible upside to the initial 0.1% growth estimate for May, according to Ryan. Combined with better-than-expected wholesale trade — which was flat against a forecast 0.7% decline — the manufacturing figures give the Bank of Canada room to maintain its pause on rates as it monitors trade negotiations with Washington and the re-escalation of conflict in the Middle East.
The monthly lift in manufacturing activity was led by transportation equipment and chemicals, more than offsetting weakness in electrical equipment, appliances and components. Motor vehicle sales jumped 11.8% in May, recovering from a 4.6% drop in April, and rose 9% year-over-year. Excluding the auto industry, sales overall were up 0.8% for the month.
Factory inventories climbed 0.5% to C$125.86 billion, the highest level on record and a fifth consecutive monthly increase. Unfilled orders surged 6.7% between April and May and 19.5% from a year earlier, while new orders rose 9.5% for the month and 26.1% from last year — signaling sustained demand despite trade headwinds.
Canadian wholesale trade was essentially unchanged in May at C$90.0 billion, following three consecutive months of gains. A drop in food and personal and household goods sectors balanced a lift in non-agricultural chemical and allied product industry sales. The flat result was stronger than Statistics Canada's advance estimate for a 0.7% slide, after upwardly revised growth of 1.4% in April.
The last time Canadian manufacturing sales posted four consecutive monthly increases was in the first half of 2023, when shipments rose 5.2% over the period before the sector entered a six-month contraction. The current run has lifted sales 6.8% since February, according to Statistics Canada data.
Bank of Canada Governor Tiff Macklem said in a speech that export growth has resumed and is expected to continue strengthening, and business investment is picking up. "Although the Canada-US-Mexico Agreement is now subject to annual reviews, more businesses report they are finding ways to navigate through the uncertainty," Macklem said.
The central bank expects inflation to ease gradually as global oil prices retreat from elevated levels and the economy to grow modestly near term, though officials point to still-heightened uncertainty as trade talks between Ottawa and Washington continue.
This article is for informational purposes only and does not constitute investment advice.
