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Canadian factories beat expectations, continue to rebound from harsh winter

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OTTAWA - Canada's troubled factory sector continued on the road to recovery, with a post-recession high of $50.9 billion in seasonally adjusted sales in March that built on an unusually strong result the previous month.

Economists had expected a slight decline after February's robust 1.4 per cent expansion, which was revised a tick higher.

But sales rose 0.4 per cent in value terms and an even healthier 0.5 per cent in volumes in March, with food, machinery, and plastics and rubber product industries leading the way.

Still, economists note that the recent expansion — the sixth in seven months — only partly makes up for previous downturns in terms of volumes of output, which is directly tied to economic growth.

The recent rebound is unlikely to add significantly to gross domestic growth in the first quarter, which ended March 31, economists said.

"The persistent underlying weakness in manufacturing sales volumes still suggests that hopes for a pick-up in overall economic growth remain overly optimistic," explained David Madani, chief economist with Capital Economics.

"Given the high export-intensity of the manufacturing sector, it still seems that the export-led recovery is a long way off."

That pessimistic view is not shared by all analysts, or the Bank of Canada, which is counting on the building momentum in the U.S. economy, along with the lower loonie, to increase demand for Canadian products south of the border.

Still, as far as the first quarter is concerned, March's modest gain does not change the overall picture of a 1.5 to 2.0 per cent growth rate to the start of 2014 that has been held back by more severe than usual winter conditions in Canada and especially the U.S.

TD Bank economist Jonathan Bendiner said Canada's manufacturing sector can expect to benefit from the U.S. recovery going forward, although not as much as it might have in past recoveries.

"Competitive challenges do remain for the sector," he pointed out in a note to clients. "The recent Bank of Canada Monetary Policy Report highlighted how a loss of U.S. market share by non-commodity Canadian exporters has contributed to the recent disconnect between rising foreign demand and non-commodity export performance. The bank's base case projections continue to assume that 'non-commodity exports will grow at a somewhat slower pace than foreign demand.' "

There was more cautionary news in the Statistics Canada report. While actual sales rose, the pipeline going forward appeared to have run out of steam.

Unfilled orders fell 0.8 per cent, and new orders plummeted 19.9 per cent, although both were coming off massive increases the month before.

Statistics Canada said the new orders generally "returned to normal levels after a jump in February."

Overall, sales were up in 11 of 21 industries, representing approximately two-thirds of the manufacturing sector.

Increases were largely offset by declines in the paper and petroleum and coal products industries.

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