The Huffington Post Canada

Daniel Tencer

Posted: 11/02/2015 11:34 am EST Updated: 11/03/2015 11:00 am EST

Despite economists’ declarations that Canada emerged from recession in the third quarter, two new reports out Monday indicate more trouble on the horizon in the fourth quarter.

The Royal Bank of Canada’s purchasing managers’ index (PMI) hit its lowest level on record in October, pulled down by softening demand outside Canada and continuing cutbacks in the oil industry.

“Heightened global economic uncertainty and ongoing energy price weakness continues to weigh on the Canadian manufacturing sector,” RBC chief economist Craig Wright said.

Source: RBC

The index — which launched in 2010 and therefore doesn’t cover the 2008-09 financial crisis — came in at 48 in October, its lowest reading on record. Any number below 50 suggests manufacturing is shrinking.

The RBC PMI is considered a “leading indicator,” meaning that — unlike stats about unemployment or inflation — it can tell you where the economy is headed.

A measure of U.S. manufacturing activity, released Monday, shows manufacturing is doing better, but only slightly, stateside. The ISM's manufacturing index came in at 50.1 in October, down from 50.2 in September, suggesting U.S. manufacturing is barely growing.

Canadian Investors Bailing On Canada

Another leading indicator is capital investment. On that note, Bank of America Merrill Lynch had bad news for Canada Monday, with an analysis showing money is flowing out of Canada at the fastest rate of any country in the developed world.

It’s the result of a collapse in oil investment, coupled with … nothing else. That is, nothing is replacing the lost oil investment money, and investors are taking their money elsewhere.

"This is Canadian investors that are pushing money abroad," Credit Suisse foreign exchange strategist Alvise Marino told Bloomberg.

"The policy in Canada the last 10 years has greatly favored investments in energy. Now the drop in oil prices made all that investment unprofitable."

This marks a breathtaking reversal from last year. In the space of 12 months, Canada went from having an inflow of money equivalent to 4.2 per cent of its economy annually, to an outflow of money equivalent to 7.9 per cent of the economy, according to BofA/Merrill Lynch.

UPDATE 11/3/2015: A Bank of Montreal economist is disputing the numbers put forward by BofA Merrill Lynch.

"While there’s little debate the balance has deteriorated sharply over the past year, it has not been anywhere near as bad as the article states," Benjamin Reitzes wrote in a client note Tuesday.

Reitzes says the outflow of money is at 3.4 per cent of GDP currently, not 4.2 per cent as BofA had calculated. And a year earlier, it had already been negative, with money flowing out of Canada at a rate of 1.1 per cent of GDP.

"There’s no sugar-coating the deterioration, but it comes as no surprise given the drop in oil prices," Reitzes wrote.

Original story continues below.

The outflow of money means the loonie is likely to fall further as demand for the currency continues to weaken. But that’s a positive for the economy as a whole. RBC’s Wright says he expects that a falling dollar will still rescue Canadian manufacturing this year.

“A strengthening U.S. economy and weaker Canadian dollar will fuel demand for Canada’s exports, resulting in a shift to positive growth territory,” he said.

— With a file from The Canadian Press

Money flooding out of Canada at fastest pace in developed world

Demand for the Canadian dollar continues to decline. The currency already is down 11 per cent this year.

Waterloo Region Record  Nov 02, 2015  

Money is flooding out of Canada at the fastest pace in the developed world as the nation's decade-long oil boom comes to an end and little else looks ready to take the industry's place as an economic driver.

Canada's basic balance — a measure of national accounts that spans everything from trade to financial-market flows — swung from a surplus of 4.2 per cent of gross domestic product to a deficit of 7.9 per cent in the 12 months ending in June, according to analysis from Kamal Sharma, a foreign-exchange strategist at Bank of America Merrill Lynch. That's the fastest one-year deterioration among 10 major developed nations.

More recent data on where companies and mutual-fund investors are putting their money show the trend extended into the second half of the year, suggesting demand for the Canadian dollar and the country's assets is still ebbing. The currency is already down 11 per cent this year, after touching an 11-year low against the U.S. dollar in September.

"This is Canadian investors that are pushing money abroad," said Alvise Marino, a foreign-exchange strategist at Credit Suisse Group AG in New York. "The policy in Canada the last 10 years has greatly favoured investments in energy. Now the drop in oil prices made all that investment unprofitable."

Crude oil, among the nation's biggest exports, has collapsed to about half its 2014 peak. The slump has derailed projects this year in Canada's oilsands — one of the world's most expensive crude-producing regions. Royal Dutch Shell's decision to put its Carmon Creek drilling project on ice last week lengthened that list to 18, according to ARC Financial Corp.

Canadian companies, meanwhile, have been looking abroad for acquisitions. On Monday, Royal Bank of Canada was expected to close its $5.4 billion purchase of Los Angeles-based City National Corp., its biggest-ever takeover. It's part of a net outflow of $73 billion this year for mergers and acquisitions, both completed and announced, according to Credit Suisse data.

Nine of the 10 best-performing companies on the country's benchmark stock index in the past two years have favoured buying growth abroad rather than expanding at home.

Individuals are following suit. While international appetite for Canadian financial securities has held steady this year, domestic mutual-fund investors have pulled money from Canada-focused funds and plowed it into global choices for six straight months, the longest streak in two years, according to Investment Funds Institute of Canada data compiled by Bank of Montreal.

What it all means is the Canadian dollar has to get cheaper to make Canadian businesses outside of the oil industry competitive enough with foreign peers to make them worth investing in, according to Benjamin Reitzes, an economist at Bank of Montreal.

The median forecast among strategists surveyed by Bloomberg has the loonie weakening to $1.34 per U.S. dollar by the first three months of next year from about $1.31 now. The country's economy is expected to lag behind the U.S., its largest trading partner, for the next two years, according to the median estimate of a separate Bloomberg poll.

While manufacturing and service exports have improved thanks to the Canadian dollar's depreciation, they remain below levels from before the financial crisis, according to Royal Bank foreign-exchange strategist Elsa Lignos. That suggests the country still hasn't won back the economic capacity it lost, she wrote in an Oct. 29 note.

The country is expected to post its 12th straight merchandise trade deficit this week, according to every economist in a Bloomberg survey.

Given that the loonie was at parity with the U.S. dollar as recently as 2013, overseas companies discussing putting money into Canada may be waiting to see that the currency stays weak before investing again, according to BMO's Reitzes.

"Maybe a year from now you don't have that conversation because it's been there for a year and you have confidence it's going to stay there, so you buy that plant or make a new plant in Canada," he said. "It takes time for that currency impact to be felt."