UPDATE 2-Canada May factory sales seen boosting growth

* Motor vehicles, parts account for most of gain

* Data show recovery on track but pace is slowing

* Rate hike expected on July 20
(Add analysts, details)

OTTAWA, July 15 (BestGrowthStock) – Growing demand for cars spurred
solid gains in Canadian manufacturing sales in May, adding to
the impression of a steady but gradual economic recovery in
Canada that contrasts with the United States, where patchy data
paint a more dreary picture.

Factory shipments rose 0.4 percent from April, twice the
rate expected, while new and unfilled orders also increased at
healthy clips, a Statistics Canada report showed on Thursday.

Manufacturing sales have risen for eight straight months
but are still well below pre-recession levels, according to
revised figures showing sales rose 0.4 percent in April versus
a previous estimate of 0.2 percent.

Markets had expected an overall sales increase of 0.2
percent in May even though trade figures released this week
suggested a bigger jump in manufacturing exports.

Most of the details in the report showed the sector,
hammered by weak U.S. demand for Canadian exports, continues to
crawl back after massive layoffs and plant closures during the
recession.

The 0.4 percent increase in volume terms was also an
encouraging sign for economists, who had begun to suspect a
sharp second-quarter slowdown after the economy stalled in
April and posted a trade deficit in May.

“The reported 0.4 percent rise in the volume of sales is
encouraging and provides some reason for optimism that May
gross domestic product will rebound from unchanged activity in
April,” said Paul Ferley, assistant chief economist at Royal
Bank of Canada.

Downbeat U.S. data on industrial production and producer
prices on Thursday provided more evidence that the recovery
there is on shakier ground than in Canada.

Still, the outlook for Canadian manufacturers is far from
rosy and gains in the second half of this year are likely to be
modest.

“The pace of U.S. recovery slows in the second half of
2010, the rebound of Canada’s exports and manufacturing
shipments will ease,” said Grant Bishop, economist at TD
Securities.

“The medium-term competitiveness of the manufacturing
sector and its ability to diversify beyond the U.S. market will
depend on investments and innovations within the sector,” he
said.

Nearly half of the 21 manufacturing industries reported
gains in May but most of the overall increase came from the
auto sector. Sales in the motor vehicle industry jumped 4.6
percent, while motor vehicles parts rose 2.8 percent.

When motor vehicles and parts are stripped out, sales edged
down 0.1 percent as lower oil prices dampened sales of
nondurable goods.

New orders for factory goods jumped 2.5 percent in May,
unfilled orders rose 1.3 percent and inventories were drawn
down to their lowest level in nearly two years, decreasing 0.7
percent.

Despite the likelihood of a more sluggish pace of economic
growth, manufacturers are bracing for higher interest rates as
unemployment falls and inflation rates near the Bank of
Canada’s 2 percent target.

The Bank of Canada is widely expected to raise its key
overnight rate for a second time in two months next Tuesday to
0.75 percent from 0.5 percent. More hikes will certainly follow
but the timing of those is less certain.

“External developments related to concerns about sovereign
debt in Europe remain a risk to keeping the Bank of Canada on
the sidelines though at the moment our view is that recent
domestic data will dominate resulting in the central bank
continuing to tighten gradually,” Ferley said.
(Reporting by Louise Egan. Editing by Peter Galloway)

UPDATE 2-Canada May factory sales seen boosting growth