Manufacturing poised to recover after painful decade

During the past decade when the Canadian dollar was high, manufacturing’s share of Canadian GDP fell from 16 per cent to 12 per cent and the number of companies in the sector fell by 20 per cent.

But a new report from CIBC World Markets finds a leaner, more productive manufacturing sector has emerged from the turmoil of the last 10 years and is poised to take advantage of the falling loonie.

Most western economies, including the U.S., saw a similar decline in manufacturing, as factories moved to China and Southeast Asia.

But while U.S. manufacturing has rebounded by 20 per cent since hitting bottom in 2009, Canada’s industrial output is up just 10 per cent.

Canada was protected in the 1990s by a low dollar, according to the report’s authors,  CIBC deputy chief economist Benjamin Tal and economist Nick Exarhos. That made for a sharper, more painful adjustment in more recent years when the dollar was overvalued, they wrote.

Several Canadian industrial sectors are poised to take advantage of the loonie’s most recent fall – among them wood products, primary metals, machinery manufacturing and aerospace, the report said.

Missing from the list is food manufacturing, which has not taken advantage of the downturn to improve productivity in the same way.

"This industry went through a major restructuring," Tal said in an interview with CBC's The Lang & O'Leary Exchange. "But what I’m saying is, if it doesn’t kill you, it makes you stronger. The manufacturing sector is much smaller, leaner, but more productive."

"The long and painful adjustment is starting to pay off, with many industries better positioned to take advantage of the weaker dollar to regain positions in U.S. markets and to better integrate into global supply chain opportunities."

The report says the manufacturing sector’s recovery may be held back by lagging productivity, though in the past five years, Canadian productivity gains have soared.

Output per worker has not increased at the same pace as in the U.S. It rose by seven per cent per worker in the 2000s in Canada, compared with 25 per cent in the U.S.

Many of the manufacturers with the lowest productivity have reduced capacity.

Canadian manufacturing wages are roughly on a par with U.S. wages – about $37 an hour US here, compared to $36 US south of the border. That means Canadian salaries and productivity will seem more competitive as the value of our dollar falls.

Tal says businesses did not use the high dollar to invest in equipment as might have been desirable, but he’s confident the sector will now begin to invest.

“This investment will come because the capacity came down so dramatically,” he said.

The dollar went down by 10 per cent so we are starting to compete, but we know that it is still significantly more expensive than the U.S., especially in the auto sector.”