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The boom in mineral fuels investment is expected to propel oil & gas services to the top of the industry growth rankings in Canada during the 2005-2006 period, according to a report released today by the BMO Financial Group Economics Department.

Prospects for Canada’s Industries: 2005-2006 examines nearly 50 industries and assesses their outlook for growth over the next two years.  The report finds that the fastest-growing industries will be either those benefiting from special factors, such as the high prices for some commodities, or those that typically do well in the mature stage of the business cycle.

“High oil & gas prices will continue to fire up exploration for and development of new reserves in Canada, keeping companies providing services to the oil and gas industry very busy,” said Earl Sweet, Assistant Chief Economist, BMO Financial Group.

“Strong global economic growth – and, in particular, the rapid pace of industrialization in Asia, Russia, and Brazil – has also strengthened the markets for coal, industrial metals, and chemicals, for which demand and production should continue at a brisk pace during the next two years,” noted Sweet.

In terms of the impact of the business cycle, the usual strengthening of investment in the mature stage of the business cycle is spurring growth in the demand for and production of machinery and equipment.  “Rising rates of capacity utilization in North America and strong corporate profits are leading business to expand and modernize productive capacity,” said Sweet.  “Production of machinery in Canada began to accelerate in 2004 and should continue to show brisk gains.

“Strong business investment, combined with buoyant consumer spending and continued robust trade in natural resources, should sustain above-average growth in wholesale trade and transportation services,” added Sweet. These factors are also generating solid market conditions for manufacturers of railroad equipment, plastic products and fabricated metals.

The list of top performers also features several industries that are expected to rebound from prolonged and steep downturns.  “Demand for aerospace equipment should finally begin to turn upwards, responding to sustained growth in the defence-related segment, strengthening financial conditions of some commercial airlines, and fleet modernization and rationalization,” said Sweet. 

The report also points to a similar picture for manufacturers of electronic equipment.  “After three years of massive cuts and the wearing down of excessive inventories, global orders for communications and information equipment are beginning to rise,” stated Sweet.  “Improved financial conditions of communications and information service providers and the need to stay competitive in fast evolving markets are stimulating investment in infrastructure and new services.”

At the other end of the scale, the report identifies several industries which will have particularly slow growth or even actual output declines during the next two years.  Among them will be forestry, where activity is expected to be dampened by a projected slowdown in new housing construction, resource limitations and rationalization of sawmill capacity, especially in Eastern Canada.  Textile, clothing, and leather manufacturers will continue to face secular decline, further losing business to imports from low-labour-cost countries.  In agriculture, reduced crop plantings in response to growing global inventories of wheat and oilseeds, softening prices and rising export competition should cap outcomes, following very strong growth during the past couple of years.

North American macroeconomic conditions should be generally supportive to industry performance. Economic growth in the United States is projected to average 3.6 per cent during the 2005-2006 interval, a little above its longer-term trend.  In Canada, real GDP growth is expected to accelerate to an average of 3.2 per cent during the next two years. “While likely volatile over the period, we expect the average value of the Canadian dollar in 2005 and 2006 to remain close to its current level of 81 US cents,” said Sweet.  As growth strengthens and excess capacity is used up, the Bank of Canada is expected to resume its gradual raising of interest rates – likely by this autumn. “The overnight rate is projected to climb half a percentage point to 3 per cent by the end of this year and a further percentage point to 4 per cent by the end of 2006.”

Fastest Growing Industries during 2005-2006
Average annual % change in real output

The full BMO Financial Group Sectoral Outlook Report, Prospects for Canada’s Industries: 2005-2006, is available at www.bmo.com/economic.

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