MNI POLICY: Canada Inventory Buildup is Recovery Weak Point

By Greg Quinn

     OTTAWA (MNI) - Canadian companies are piling up unsold goods at some of the

highest rates in decades, a troubling development for an economy supposed to be

powering through global trade wars.

     The ratio of wholesale inventories to sales reached the highest since 1995

in May, Statistics Canada reported Monday. The figure shows how long it would

take those companies to clear out unsold goods at the current rate of sales. The

ratio climbed as the dollar value of inventories gained for a ninth straight

month while sales fell the most in more than three years.

     The wholesale figures followed last week's report on manufacturing where

the inventory-to-sales ratio of 1.51 remained within a sliver of the highest

since 2009. That was around the time of Canada's last recession.

     The buildup casts some doubt on a Canadian economy expected to bounce back

after a soft patch around the start of 2019. While most reports since April have

shown broad-based improvement, it's unclear if companies are putting more goods

in warehouses because they expect stronger sales or because they are struggling

to move out the products they have.

     Bank of Canada Senior Deputy Governor Carolyn Wilkins raised the issue in a

May 30 economic progress speech saying "to the extent that this buildup is

unplanned, it may dampen production in some sectors later this year." Her

opening statement on July 10 explaining a decision to leave the policy interest

rate at 1.75% didn't make the same kind of mention of stockpiles.

     Bank of Canada spokesman Alex Paterson in an email declined to comment on

the report, saying the central bank doesn't provide running commentary on such

figures.

     --SECOND-HALF SLOWDOWN

     Most economists and the central bank already predict the economy will slow

in the second half of this year. Trade disputes with the U.S. and China are

cutting into exports and business investment, and the strongest part of a

recovery in crude oil after last year's setbacks will fade. The BOC is expected

to remain on hold this year with domestic spending overcoming the drag from

trade.

     Wholesale inventories have climbed 9.1% over the 12 months through May,

while sales have gained 1.2%. The industry breakdown gives mixed clues on

whether companies are struggling with demand from domestic or foreign customers.

     Automobile and parts inventories are up less than average over the last

year with a 5.7% increase. Production of cars in Canada was rattled by President

Donald Trump's threats of 25% tariffs, while domestic retail sales of cars have

slipped as Canadians cope with record debt burdens.

     Metal service center inventories rose 15.9%, perhaps reflecting U.S.

tariffs on Canadian steel and aluminum that have since been removed. Stockpiles

of machinery and equipment, seen by some economists as a benchmark of business

investment, rose 11.8%.

     The wholesale inventory-to-sales ratio was 1.43 in May, up from 1.39 in

April. The same ratio for manufacturing was 1.51 in May, versus April's peak of

1.52 and a reading of 1.42 a year earlier.

--MNI Ottawa Bureau; +1 613-314-9647; email: greg.quinn@marketnews.com

[TOPICS: MACDS$,M$C$$$,MT$$$$]