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Oil & gas services will rank as the fastest-expanding industry in Canada for the 2006-2007 period, according to a new report from the BMO Financial Group Economics Department.

The Sectoral Outlook report states that the performance of the various industries will be differentiated by several factors.  “Canadian industries are being affected by their relative sensitivities to high commodity prices, robust business investment, declining residential construction, slower growth in consumer markets, the strong dollar and increasing competition in manufacturing,” said Earl Sweet, Assistant Chief Economist, BMO Financial Group. 

“With the key drivers of economic growth in North America shifting from consumer spending and residential construction to business investment, we anticipate significant divergences in performance among industries.  For example, oil & gas services will continue with the strong growth seen over the last two years, while manufacturers of motor vehicles and wood products, which until recently showed brisk growth, are projected to see declining output during 2006-2007.”

Of those industries projected to maintain prior strength, oil & gas services will lead the way.  “Oil & gas services are being driven by massive investments in energy resource and infrastructure development,” noted Sweet.  “While down from their earlier exaggerated highs, prices for oil and natural gas are projected to remain relatively elevated during the next two years. This will ensure that development of Canada's conventional and non-conventional oil and gas fields continues at a brisk pace.”

Manufacturers of electronic products (such as communications equipment and computers), as well as machinery and equipment, are benefiting from a sustained strong expansion of business investment.  “Outlays in electronics, machinery and equipment are being stimulated by strong balance sheets, high capacity utilization in several industries, and the need to enhance productivity in an increasingly competitive global environment,” said Sweet.

Although manufacturers of aerospace equipment face intense global competition, they are currently leveraging fleet expansions and modernization by the restructuring airline industry and strong demand growth in Asia.

Activity in the retail sector is benefiting from a confident consumer, expansion of specialty and discount operations, and increasing services provided to customers.  Wholesalers are expected to continue to experience strong growth, stimulated by buoyant markets for many commodities, growing international trade, a healthy retail sector, and the strength in business investment in machinery and equipment. Investment is also driving a healthy expansion of the rental & leasing industry.

The miscellaneous manufacturing segment – comprising a wide range of items such as toys, sporting equipment, jewellery, medical equipment, offices supplies, and signs – recorded strong growth in 2006.  “Activity in miscellaneous manufacturing has been spurred by a confident consumer and strengthening investment,” stated Sweet.  “While growth is projected to moderate in 2007, such manufacturers are expected to put in a relatively strong two-year showing. “

While the overall Canadian economy appears to be weathering the impact of the higher Canadian dollar and stronger energy prices, some industries – primarily in the manufacturing sector – are feeling severe adjustment pains. “Further structural adjustments in the manufacturing sector during the next couple of years are expected to be a drag on the performance of such industries as pulp and paper, furniture, clothing, textiles, and motor vehicles,” said Sweet. 

Output of textiles, clothing and leather will continue to recede due to intense international competition. As well, tobacco manufacturing experienced a huge drop in output as falling domestic sales spurred the closing of a large manufacturing plant in Guelph, ON.

Meanwhile, residential real estate markets are softening following several very strong years. “We are starting to see weakening market conditions for home-builders and manufacturers of building materials, wood products, plastic products, and furniture,” stated Sweet.

The motor vehicle sector has declined in 2006 amid production cutbacks and restructuring at the Big-Three producers. “Although Canadian auto production will fare relatively better than that in the United States, the falling market share for North American made vehicles will cloud the near-term outlook as excess capacity is eliminated,” according to Sweet. 

Top-Ten Performers During 2006-2007

Average output growth (per cent)

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

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