The Canadian manufacturing sector is on the road to recovery according to a new report from TD Economics.

“Output is already above year-ago levels and factories have largely worked off their inventory overhang, which suggests that future shipments will come from new production. Meanwhile, new and unfilled orders are starting to rise, hinting at further growth in output in the months ahead,” says TD.

It also notes that this has filtered down to employees, with new job creation the result of higher output. “The expectation of stronger demand has encouraged firms to add to payrolls, with net job creation by manufacturers in the first three months of this year almost offsetting the employment losses recorded in 2001.”

Next to return will be profits, TD suggests. “Canadian shareholders don’t need to be told that last year’s downturn in manufacturing took a big bite out of corporate profits. However, there is light at the end of the tunnel. Higher sales volumes will lead to a better profit performance this year. Corporate earnings will also be boosted by modestly higher selling prices, which will reflect firmer demand and fewer markdowns to move unwanted inventories.”

However, it notes that price increases will remain subdued, as many firms will continue to struggle with limited pricing power. “Nevertheless, the expected increase in sales volumes and slightly higher prices should allow manufacturing profits to stage a moderate recovery this year.”