Canadian “Big Ticket” Manufacturing Scores Big

Tuesday, April 18th, 2006
By Inya Ivkovic, MA for Profit Confidential

At least for the past three years, Canada has become a G7 nation to look up to. The country has been operating with budget surpluses, fiscally sound current account, strong investment in various sectors, etc. And, as of late, manufacturing of machinery and equipment has joined the party.

According to the Bank of Canada, the industry has had the strongest winter quarter in the past seven years. And, although capacity pressures and labor shortages eased somewhat, the near- term outlook remained positive. This is particularly the case in Canada’s two western provinces, Alberta and British Columbia.

Partly responsible for the appreciation in the machinery/equipment industry are Canadian companies that emerged from the tough consolidation times much slimmer and trimmer. Also responsible is the appreciation of the Canadian dollar, which rose 26% in the past three years in comparison to the greenback.

I can already hear the voices saying that strong Canadian dollar is not necessarily good for businesses. It is true, while the stronger Canadian currency is good for sales revenues, the column on the balance sheet summarizing costs of doing business may not look so good. Thankfully, Canadian companies have extensive expertise in hedging their currency and minimizing the effects of higher costs of raw materials, technologies and labor.

Note that Canadian central bank based its positive outlook for big ticket manufacturing on interviews with the management of over a hundred companies. The majority of interviewees said that demand and labor shortages are now more manageable, although still going strong.

As a result, about a third of those surveyed expect lower sales, while 36% expect higher sales in spring than during winter months. If we agree with the golden middle, sales are very likely to continue trending up, only at a much slower rate than in the winter quarter.

Furthermore, job creation is not showing signs of a slowdown. For example, more than half of the survey participants plan to add more employees to their payrolls compared to winter months. By the same token, about 42% of the interviewed companies plan to hire about the same number of new employees.

Our next question is how this data ties into Canada’s overall economic outlook? Manufacturing numbers are an important gauge of how hot a country’s economy is. Posting historically high averages in industrial manufacturing could translate into higher interest rates for Canadians, since interest rates are a traditional means of stalling runaway trains.

Of course, Canada’s economy is strong, but not nearly as hot as China’s, for example. This is why analysts expect the Bank of Canada to raise overnight lending rate another 25 basis points on April 25th, up to four percent, and then to hold pat for a while.

In any event, investing in Canadian businesses still sounds like a way to go. And, other G7 nations could learn a thing or two from Canada about how to run a country’s financial books.

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