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Oil & gas services, non-electrical machinery, mineral extraction, electronic products and wholesale trade will continue to rank among the fastest-expanding industries in Canada over the next two years, according to a new report from the BMO Financial Group Economics Department.

The sectoral outlook report, entitled Prospects for Canadian Industries: 2006-2007, states that the industry growth composition of the Canadian economy will show little change this year and next, as the generally upbeat economic conditions that prevailed in 2005 continue.

“Strong global demand and high prices for key commodities, as well as an increase in business investment and growing international trade, will again be dominant factors driving certain industries ahead of the rest,” stated Earl Sweet, Assistant Chief Economist, BMO Financial Group.

Leading the way in 2006-2007 will be oil & gas services, which will continue to benefit from the stimulus of high commodity prices to cash flows in the sector, more intensive exploitation of existing fields, and exploration for and development of new reserves. 

“The boom in oil sands developments will significantly boost activity in non-residential construction and peripheral industries such as equipment rental and leasing,” noted Sweet.

Among other sectors, metal mining and refining in Canada should continue to expand at a brisk pace.  “Healthy global economic growth should keep markets for metals tight, bolstering demand and prices,” said Sweet.

Production of machinery and equipment should also show strong gains in the next two years, with the usual strengthening of business investment in the mature stage of the cycle spurring growth in demand.  Meanwhile, the ongoing vital need to boost productivity will further add strong emphasis on investment in technology-intensive equipment, including electronic products and computers.

Growing international trade (especially in natural resources), the strength in business investment, and buoyant consumer spending will keep the wholesale industry growing at a fast pace.  These same factors are also generating relatively strong market conditions for the transport and warehousing industry.

The rollout of new services, along with increased penetration of other services that have yet to reach maturation, should power the communications and information services sector, more than offsetting a relative decline in traditional services.

Sweet noted that while the overall Canadian economy appears to be successfully weathering the impact of the higher Canadian dollar and stronger energy prices, some industries – primarily in the manufacturing sector – are suffering from adjustment pains.  “Further adjustments of this sort are expected to be a drag on the performance of such industries as pulp and paper, fabricated metal products, and fishing,” he said. 

Despite generally positive business conditions, other sectors will also experience slowdowns.  For instance, a projected slowdown in North American house building – a major driver of economic activity over the past several years, will  restrain output in several industries, including construction, building materials, wood products, plastic products, and furniture. 

Firmly entrenched globalization trends will maintain intense restructuring pressure on labour-intensive industries such as textiles, clothing and leather, the output of which is projected to decline further amid stiff competition from countries such as China.

Also, the troubles at the traditional Big Three automotive giants will cloud the outlook for the Canadian auto sector, both on the assembly and parts sides.  Although the bulk of recently announced capacity closures will take place in 2008, output in the sector is expected to slow prior to that date.

Top-Ten Performers During 2006-2007

Average annual per cent change in real output

The full report is available at bmo.com/economic.

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