A low dollar was supposed to restore the fortunes of the Canadian manufacturing sector, but it’s not working out that way.

The latest gauge of Canadian manufacturing shows purchasing managers less confident of business conditions in January than they’ve been in two years.

The RBC Canadian purchasing managers index dropped to 51 for the month. Any measure above 50 indicates an expansion in the sector, but the figure is down substantially from 53.9 in December and 55.3 in November and October.

This despite a loonie that fell through the 80-cent mark last month, making Canadian goods increasingly competitive and lower energy prices which should help reduce costs for manufacturers. Today the Canadian dollar is trading at 79.44 cents US.

Royal Bank says the latest survey of Canadian purchasing managers found output and new business grew at much slower rates in January than in the previous month and that employment numbers dropped for the first time since early 2014.

Bad news on GDP

Last Friday, there was further evidence that manufacturers had not yet revived from a long period of high costs and a high dollar.

Statistics Canada reported that GDP in Canada declined 0.2 per cent in November, with factory output down by 1.9 per cent.

The oil sector was hit hard, but there also downturns among makers of everything from machinery and equipment to plastics and rubber.

Demand from the U.S., which is still on track for steady growth in 2015, was supposed to brighten the picture for Canadian factories and go part way to offset the impact of falling oil prices.

However the impact over the last year has been inconsistent and some analysts say it could be some time before manufacturing here rebuilds sufficiently to take advantage of U.S. demand.

Mixed effects of dollar's fall

The very rapid fall in the Canadian dollar is actually creating a lot of business uncertainty and discouraging capital investment, says Mike Holden, director of policy and economics with the Canadian Manufacturers and Exporters.

But there is a critical need for reinvestment in the sector, Holden said in an interview with CBC's The Exchange with Amanda Lang.

"In the long term, if the dollar were to stay where it is you may see some reinvestment in Canada away from [Mexico and other low-cost jurisdictions], but it ultimately, it’s going to be productivity improvements and access to the workers that manufacturers need that’s going to drive reinvestment," he said.

Holden said the downturn the factory outlook reflects the lack of capital spending by the oilpatch, which buys about $11 billion in equipment annually from Canadian factories. 

It also reflects the mixed effects of the low dollar.

"Manufacturing is a global business, so while you might see some benefit on the export side, there’s also the issue of how much it costs to import goods that we need to manufacture," Holden said.

Chinese manufacturing shrinks

 Two reports released Monday show Chinese manufacturing was shrinking in January, which could affect demand for Canadian commodities.

The HSBC's purchasing managers' index released Monday edged up to 49.7, the second month it has been below 50, indicating a contraction in the manufacturing sector in China.

The official China Federation of Logistics and Purchasing's report, which is done by the Chinese government, also found factory activity was at 28-month low.

Demand for manufactured goods from China is slumping as economies in Asia, Europe and Japan grow more slowly and there is pressure on the Chinese government to take more measures to stimulate economic activity.

 HSBC's Chief China Economist Qu Hongbin said "demand in the manufacturing sector remains weak and more aggressive monetary and fiscal easing measures will be needed to prevent another sharp slowdown in growth."