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

The Bank of Canada’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 can’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, “so even if borrowing costs fall further, firms seem to have little incentive to invest, the economists said.

The message echoes the Bank of Canada’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.

“Until 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,” 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.

“Commercial, industrial and institutional & government permit issuance are now all down markedly from their earlier post-pandemic highs,” said Brown and Cross.

Both manufacturing and construction declines “suggest that business investment will continue to weaken and present downside risks to the Bank’s GDP forecast,” they said.

Canada’s “fragile” economy remains vulnerable to several risks that could plunge it into recession, according to Moody’s Analytics’ 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 that’s not enough, businesses are bracing for billions of dollars in losses if the country’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.

“The economic harm will extend well beyond the $1 billion of goods that are transported by rail each day,” Goldy Hyder, chief executive of the Business Council of Canada, told Bloomberg.

“It will lead to billions more in lost revenue from goods that won’t be sold, lost wages of workers who won’t be able to do their jobs and the potential for lost contracts from international shippers and consumers.”

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Power-hungry data centres that run AI and cryptocurrency mining are now gobbling up two per cent of global electricity use and their footprint is growing, says research by the International Monetary Fund.

To put that number in perspective, creating one bitcoin requires roughly the same amount of electricity as an average person in Ghana or Pakistan would consume in three years.

A question posed to AI program ChatGPT takes 10 times the electricity needed for a Google search.

The IMF calculates that electricity use of both data centres and crypto mining could climb to 3.5 per cent of the global total within three years. That would be as much as Japan, the world’s fifth largest electricity user, is using now.

“The climate impact of these activities — irrespective of their social and economic benefits — is cause for concern,” said the IMF.

Estimates put their carbon emissions at 1.2 per cent of the world’s total by 2027.

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McLister on mortgages

Want to learn more about mortgages? Mortgage strategist Robert McLister’s Financial Post column can help navigate the complex sector, from the latest trends to financing opportunities you won’t want to miss. Plus check his mortgage rate page for Canada’s lowest national mortgage rates, updated daily.

Today’s Posthaste was written by Pamela Heaven, with additional reporting from Financial Post staff, The Canadian Press and Bloomberg.

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