Canadian manufacturing activity should increase in the coming quarter, but it will be at a very modest pace, analysts said yesterday.

Statistics Canada said Thursday its latest survey of business conditions indicated that manufacturers’ cautious first-quarter optimism is tempered by uncertainty about their prospects for the second quarter.

In a report, Nesbitt Burns Inc. chief economist Sherry Cooper said the pace among Canadian manufacturers contrasts sharply with that in the U.S., where factories are kicking rapidly back into gear. “While a cooling of the once red-hot loonie will help, Canada’s industrial mix will not,” Cooper said.

“Canadian manufacturers are much less upbeat on the near-term outlook than their U.S. counterparts, likely reflecting the lingering impact of last year’s C$-surge and the heavy weighting of the auto industry in Canada. Even as the U.S. ISM index remains at a 20-year high of over 60, our Business Conditions Index slipped to 50.3 in Q2, just barely above the key 50 mark. The BCI is based on StatCan’s quarterly survey of manufacturers, and it slipped for the first time in a year,” Cooper said.

StatsCan said Canadian manufacturers expressed their uncertainty about the outlook for the second quarter of 2004, although they still remain positive on net regarding production. The business conditions survey taken during the first quarter of this year showed that while a net 8% of Canadian manufacturers were still upbeat in their outlook for production, this number is down from 13% in the previous quarter.

Ivana Rupcic , economist with RBC Financial Group, said of greater concern, however, was the sharp drop off in sentiment about the outlook for new orders; the balance of opinion dropped to -2% from +13% in the previous quarter. “Another concern was related to inventory levels,” Rupcic said in a report.

“The percentage of manufacturers who feel their current level of inventories is too high rose from 9% up to 17%. On the bright side, the percentage of employers who think employment will decrease over the next three months fell from 17% to 15%.”

In another report, StatsCab said industrial product prices rose 0.5% in March, just shy of the 0.6% gain anticipated, and following a 1.9% increase in February. Since the value of the Canadian dollar was roughly unchanged from February’s level, this had no overall impact on prices. On a year-over-year basis however, there was an impact. Excluding the rise in the dollar, industrial prices would have risen 1.6% instead of falling1.4%.