Posthaste: This sector of Canada's economy is firmly in recession

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Canada's manufacturing sector is on track to contract for a fourth consecutive quarter. (Credit: John Mahoney / Postmedia)

The Bank of Canadaā€™s view that the worst is behind us was challenged recently by warning signs from two key sectors of the economy, say economists.

Canada may have dodged a recession (so far), but the same canā€™t be said for the manufacturing sector. Factory sales slumped to their lowest in two and half years in June, bringing them almost 6 per cent below their peak in May 2023.

Even if sales perk up in July this sector is still on track to contract for the fourth consecutive quarter, said Stephen Brown and Olivia Cross of Capital Economics.

Manufacturing capacity utilization remains lower than before the pandemic, ā€œso even if borrowing costs fall further, firms seem to have little incentive to invest, the economists said.

The message echoes the Bank of Canadaā€™s own business survey which found plans for investment spending are below average.

The bank said businesses are increasingly spending money on upkeep and repair rather than expansion or improving productivity because of high interest rates, weak demand and economic uncertainty.

Another survey by the Conference Board of Canada found that about 63 per cent of Canadian businesses are currently operating below their capacity.

ā€œUntil more businesses reach or exceed optimal capacity, there may not be a strong incentive for manufacturers to expand their facilities or add to existing machinery and equipment,ā€ it said.

There was more bad news in the construction sector.

Building permits fell 14 per cent in June from the month before, with non-residential permits dropping 18 per cent to their lowest level since the pandemic.

ā€œCommercial, industrial and institutional & government permit issuance are now all down markedly from their earlier post-pandemic highs,ā€ said Brown and Cross.

Both manufacturing and construction declines ā€œsuggest that business investment will continue to weaken and present downside risks to the Bankā€™s GDP forecast,ā€ they said.

Canadaā€™s ā€œfragileā€ economy remains vulnerable to several risks that could plunge it into recession, according to Moodyā€™s Analyticsā€™ latest assessment, and the risk of a weakening labour market is rising.

If interest rates remain higher for longer, businesses may cut staff, which in turn weakens consumer demand and triggers more layoffs, said the report.

And if thatā€™s not enough, businesses are bracing for billions of dollars in losses if the countryā€™s two national railways shut down this week.

More than 9,000 workers at Canadian National Railway Co. and Canadian Pacific Kansas City Ltd. could be either on strike or locked out if no labour agreement is reached by Thursday, disrupting the supply chain industries depend on.