There are ways to help restore Canada’s troubled manufacturing sector
Canada’s manufacturing sector is not doing well. The recently announced RBC Canadian Purchasing Manager’s Index (PMI)—a measure of business conditions in the manufacturing sector—fell in December 2015 to 47.5 from 48.6 in November. Any reading below 50 indicates that the sector is contracting. Moreover, the December value was the lowest reading for the index since 2010.
The contraction of the manufacturing sector is especially ill-timed, since it accompanies an ongoing collapse in oil prices.
The benchmark North American oil price, the West Texas Index, dropped from a high of around US$103 per barrel in the second quarter of 2014 to below US$45 per barrel in January 2015. It’s now around US$34 per barrel. The relative decrease has been even larger for Canada’s heavy crude oil, which is a major Canadian export to the United States.
The dramatic decline in the price of oil is naturally causing a substantial slowdown in investments in the Canadian oil patch, which itself is contributing to the contraction of the manufacturing sector, as demand for steel tubing and pipes, earth-moving equipment, drilling machines and the like decreases.
Lower oil prices also contribute to a decline in the value of the Canadian dollar, as they worsen Canada’s terms-of-trade or the average price of exports relative to the average price of imports. The Canadian dollar is currently trading at slightly below US$0.71, its lowest value in more than a decade. The declining value of the Loonie should, in theory, boost the volume of Canadian exports, including manufactured exports.
In fact, while export orders have ticked up recently, the growth has been insufficient to offset the decrease in domestic demand. The main reason for the relatively slow increase in exports, notwithstanding the weak Canadian dollar, is the ongoing slow recovery of the U.S. economy, which accounts for around 80 per cent of Canadian manufacturing exports. As well, the currencies of export competitors, notably Mexico and China, have also declined relative to the U.S. dollar, thereby blunting the cost advantage that Canadian manufacturing exporters would otherwise enjoy in the U.S. market.
So what are Canadian public- and private-sector decision-makers to do about the confluence of negative events impacting Canada’s manufacturing sector?
The infrastructure program that was part of the Liberal government’s election platform should provide at least a temporary lift to the manufacturing sector; however, in the longer-run, the restoration of growth in the sector will likely require a reallocation of resources away from the relatively heavy emphasis on supplying inputs to energy, mining and forestry, and towards technology-intensive activities such as “smart cars,” miniaturized medical devices, biologics and the like.
The reallocation of financial and human capital resources will not be easy or quick. Furthermore, an acceleration of real economic growth of the world economy is critical to any long-term recovery of Canada’s manufacturing sector. Nevertheless, specific public- and private-sector policy initiatives can help promote the restoration of an economically vibrant manufacturing sector.
Potentially helpful public policies include the reduction of regulatory impediments to innovation, stronger intellectual property protection, particularly for biopharmaceuticals, and improvements to the educational system, especially in the training of STEM (Science, Technology, Engineering and Mathematics) undergraduate and graduate students.