Canadian manufacturers began the year with a strong performance, as January shipments rose 3.7% to $44.7 billion, new orders jumped 2.9% and inventories fell 0.2%, the first decline since September.

The gain in shipments reported Tuesday by Statistics Canada beat expectations, pushing economists to additional hikes to interest rates are on the way.

BMO Nesbitt Burns says 3.7% advance in shipments is well above consensus expectations of a 0.6% increase. “A sharp snapback in auto production from soft levels led the charge, although even ex-auto shipments posted a solid 1.6% gain. While some of this increase reflected a rise in petroleum prices, a total of 13 of 21 industries reported gains in the month.”

New orders almost kept pace with the rise in shipments, gaining 2.9%. “However, this merely reversed a similar decline in the prior month, and orders growth is trailing shipments by about 2 percentage points on a year-over-year basis,” says BMO. “Accordingly, the backlog of unfilled orders continues to decline steadily, dropping 3.3% in January, the fifth consecutive monthly decline. A large chunk of unfilled orders is typically in the aerospace industry, and the ongoing woes in that sector account for much of the steady decline in the backlog of orders.”

RBC notes that, while new orders increased 2.9%, January inventories slipped 0.2% and this together with the sharp increase in shipments pulled the inventory-to-shipments ratio down sharply to 1.41 from 1.47 the month before. “Today’s manufacturing survey data adds to the long list of recent upside surprises in Canadian economic data, which includes, but is not limited to, housing and employment. It also lends credence to the fact that Canadian domestic demand remains strong amidst the recent softening in the U.S. economy and it continues to support further tightening by the Bank of Canada in their effort to remove the amount of monetary stimulus currently in place,” it says.

CIBC World Markets says that the huge shipments reading improves the January GDP outlook, with factory sector strength helping to overcome anticipated consumer sector weakness.

“The surge in Canadian factory activity at the start of 2003 echoes a strong showing by U.S. manufacturing in January. However, with auto sales retreating and Q2 assembly schedules chopped, the strength is unlikely to continue,” concludes BMO. “Still, this result will bolster the Q1 growth picture, and reinforce the Bank of Canada’s view that policy needs further tightening.”