The Canadian Press - ONLINE EDITION

New indicators point to a better second half of 2014 for Canadian economy

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TORONTO - A fresh manufacturing report in Canada and surprisingly strong employment numbers from the United States offer a hint of encouragement to Canada's economic prospects entering the second half of 2014.

While not all the data is in, the first half of the year produced a hiccup for the economy — although bad weather was an extenuating factor — after a strong finish to 2013.

With a first-quarter growth rate of 1.2 per cent and an anticipated two per cent rate in the second, both are well below what had been forecast by the Bank of Canada at the beginning of the year.

But analysts are pointing to the second half of 2014 to put the economy back on track, mostly because the U.S. economy looks poised to kick into the best stretch of expansion since the 2008-09 recession.

"There are signs of improvement," said Nathan Janzen, an economist with the Royal Bank, commenting on his bank's manufacturing purchasing manager's index for June, which shot up to 53.5 following consecutive contractions in April and May.

"There is some signs of improvement in the external background, especially the U.S. About 50 per cent of Canadian manufacturing sales are exported and the bulk of that is going to the United States."

The June PMI suggested Canadian manufacturers experienced the best conditions for growth in half a year, RBC said.

The report was uniformly solid with stronger output and new orders providing the biggest boost. As well, new export orders inched up, while the backlogs of work and the quantity of purchase indexes also rose.

The most encouraging indicators came from the United States, which appears poised to leave behind its disastrous first quarter, when its economy shrank by 2.9 per cent.

More evidence of the strong turnaround underway appeared Wednesday with payroll processor ADP reporting private employers in the U.S. added 281,000 jobs last month.

CIBC economist Andrew Grantham said the surprisingly strong number supports the view that the American economy is picking up steam and that growth will likely stay strong in the third and fourth quarters as well.

That is good news for the Canadian economy. The Bank of Canada has long been awaiting a so-called "rotation" in the economy from one driven by housing and consumer spending to one that is led by increased foreign demand for Canadian exports and business investment to meet the higher demand.

Grantham said the early signs of such an economy are appearing, if faintly. "What we expect to see is exports picking up in the second half of this year and, with that happening, business investment will be a strong indicator maybe next year," he said.

The latest National Bank provincial forecast advances the theme, projecting that better export prospects will "rekindle" employment and business investment in Canada's two most populous provinces. The bank sees Ontario's economy growing by 2.1 per cent this year and 2.4 per cent in 2015, with Quebec's advancing by 1.9 and 1.7 per cent in the same years.

The fly in the ointment is the Canadian dollar, which continues to firm on currency markets. The loonie rose above 94 cents US briefly Wednesday after having fallen as low as 88 cents in March.

Still, Grantham said he did not believe the dollar appreciation would have a major impact on exporters unless it continued to gather strength and returned to or near parity with the U.S. currency.

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