A leading international economic watchdog has slashed its growth forecasts for Canada, even as the country’s resurgent manufacturers delivered fresh evidence that the economy has pulled out of its 2015 first-half skid.

In the quarterly update of its global outlook, the Organization for Economic Co-operation and Development cut its forecast for Canadian gross domestic product growth to 1.1 per cent this year, down from 1.5 per cent in its June outlook. For 2016, it reduced its GDP growth projection to 2.1 per cent from 2.3 per cent.

The OECD report underlines Canada’s underperformance this year relative to other major world economies, even as its neighbour and biggest trading partner, the United States, continues to gain momentum. The OECD upgraded its projection for U.S. GDP growth this year to 2.4 per cent, up from 2 per cent in its June report. Among the G7 major industrialized countries, Canada’s forecast 2015 growth is in the middle of the pack, ahead of Japan (0.6 per cent), Italy (0.7 per cent) and France (1.0 per cent). But Canada’s slowdown this year is the worst in G7, and the cut in its OECD forecast is the largest in the group.

For overall world GDP, the OECD now expects growth of 3 per cent this year, down slightly from 3.1 per cent in its June forecast. Despite all the turmoil and concern surrounding China’s economy and financial markets over the summer, the OECD trimmed its growth forecast for China this year by just 0.1 percentage points, to 6.7 per cent. But it said a slowdown in emerging-market economies, as a result of the slump in global commodity prices, was the main factor in the reduced world outlook.

The commodity slump, most significantly in oil, is the key factor that has separated Canada from its G7 peers this year. The OECD’s quarterly update is largely catching up to the reality of Canada’s small first-half contraction, which had already caused private-sector forecasters and the Bank of Canada to cut their 2015 expectations. The OECD’s new forecast for this year matches the pace that the Bank of Canada projected in its most recent outlook, in mid-July, although its 2.1-per-cent projection for 2016 is below the central bank’s July forecast of 2.3 per cent.

But Canada’s statistical indicators since June have consistently illustrated a solid upturn in non-energy sectors, especially in manufacturing and exports, fuelling confidence that the economy has turned a key corner. That view gained further strength Wednesday, as Statistics Canada reported that manufacturing sales rose 1.7 per cent on a seasonally adjusted basis in July versus June, fuelled mostly by rising sales volumes. The statistical agency also revised upward its June and May manufacturing figures, to gains of 1.5 per cent and 0.7 per cent, respectively – marking the biggest three-month growth spurt in a year.

The momentum in manufacturing, together with similarly encouraging June and July trade numbers, have fuelled optimism that the country’s export-intensive manufacturers have shaken off the cobwebs of the first few months of the year and are finally taking their long-awaited lead in Canada’s on-again, off-again economic recovery. Economists now suggest Canadian GDP expanded by about 0.3 per cent in July alone and is on track for annualized third-quarter growth nearing 2.5 per cent. That would mark a sharp turnaround from the declines of 0.8 per cent and 0.5 per cent in the first and second quarters of the year and would be far ahead of the Bank of Canada’s forecast of 1.5 per cent.

“The U.S. resurgence, coupled with a more competitive Canadian dollar, seems to be helping Canadian exporters of manufacturing goods,” National Bank economist Krishen Rangasamy said in a research note.

Canada’s big auto sector was a key driver of the manufacturing sales growth in July, although economists cautioned that its statistical gains came with a sizable asterisk. Seasonally adjusted sales of motor vehicles jumped 5.6 per cent in the month while auto parts sales surged 12.1 per cent, despite industry statistics suggesting that auto production actually fell in the month.

Economists said the outsized gains were largely a function of the statistical adjustments Statscan makes to account for historically normal seasonal fluctuations, as auto plants typically take about two weeks of downtime in July for usual summer maintenance. This year the auto makers took less downtime than usual, meaning the statistical adjustment overstated the seasonal effects. (Indeed, on a non-adjusted basis, vehicle sales were down 28 per cent in the month – though that was still better than the typical 40 per cent seen in past Julys.)

Still, economists suggested that despite this seasonal anomaly, the auto sector looks poised for a stronger second half after the industry was held back by lengthy retooling shutdowns in the first half of the year.

Even with the solid three-month manufacturing growth, sales remain below their 2014 peak. But growing new orders and unfilled orders – up 10.2 per cent and 2.7 per cent in July – suggest the sector’s recent momentum should continue in the second half of the year.

“Going forward, the outlook for the manufacturing sector remains quite bright,” economist Dina Ignjatovic of Toronto-Dominion Bank said in a research note. “Increasing strength in the U.S. economy, combined with a further depreciation of the loonie to 73 U.S. cents, should translate into increased demand for Canadian-made goods.”

Published Wednesday, Sep. 16, 2015 1:10PM EDT
Last updated Wednesday, Sep. 16, 2015 11:56PM EDT