Canada Manufacturing: Loonie's Decade-Long Soar Means Factories Won't Be Coming Back, CIBC Says

Manufacturing Canada Cibc Report

First Posted: 02/28/2012 12:32 pm Updated: 02/28/2012 12:32 pm

The outlook is grim for Canadian manufacturing, as a strong loonie is expected to keep labour costs high, deepening the hollowing out of the industrial heartland and boosting regional income inequality in the years ahead.

In a briefing note to investors on Tuesday, CIBC World Markets predicted that a robust Canadian dollar would drive more factory jobs south of the border, as the U.S. and Mexico continue to be seen as more “cost-effective” places to manufacture everything from automobiles to rail cars.

“[B]eyond the one-time recovery from cyclically depressed demand, the factory sector’s growth prospects look to be seriously impaired by the structural hit from a strong Canadian dollar,” economists Avery Shenfeld and Warren Lovely maintained. “Notwithstanding recent gains in manufacturing, plants will continue to be lost to international competitors.”

In their analysis, the economists detail how the rebound in the loonie has transformed the economic landscape since it dipped to an all-time monthly low of 62 cents against the U.S. dollar a decade ago, before moving to parity and beyond in recent years.

The effect on Canada’s non-resource-related manufacturing sector has been significant, as the U.S., taking advantage of a more competitive exchange rate, has managed to maintain its factory sector footprint, while Canada’s manufacturing capacity has withered away, the economists said.

See also: Canadian Factories Closing At Twice The Rate Of U.S.

“Lower corporate tax rates in Canada have simply not been enough of a drawing card to alter that trend,” Shenfeld and Lovely maintain, forecasting more trouble in the coming years as the U.S. steps up efforts to attract business.

“Canada’s tax advantage is threatened by a [U.S.] pledge to slash corporate income tax rates and signs that some provinces could delay (or partially reverse) business tax cuts,” they write.

The decline in manufacturing has been profoundly felt in the automotive sector, where they calculate that Canada’s once robust $20-billion trade surplus has transformed into a $12-billion deficit -- a shift that has wreaked havoc on Ontario and Quebec.

In Ontario, for instance, the economists note that real GDP growth has lagged the rest of Canada for nine consecutive years, a gap that has made it much more difficult for the government to beat back its now substantial deficit.

The outlook is much rosier for Canada’s resource-rich provinces, where GDP growth over the next five years is expected to best that of Ontario and Quebec by at least one per cent as commodity prices remain strong.

More freely flowing investment dollars will concentrate future productivity gains, lucrative job opportunities and labour force growth in Alberta, Saskatchewan and B.C., where the economists predict that resource royalties will make “government sector restraint […] considerably less punitive.”

“Canadian dollar appreciation may have largely run its course, but the adjustment process isn’t over,” the economists conclude. “As economic, fiscal and political power consolidates in Western Canada, regional income inequality will soar and inter-provincial tensions will rise.”

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  • 5 Signs Canada's Workers Are In For A Rough 2012

    Photo: CP/Andrew Vaughan

  • Good Jobs Few And Far Between

    When it comes to evaluating Canadian job growth, the employment numbers are just part of what worries Benjamin Tal, deputy chief economist at CIBC World Markets. "It's not only the quantity, but also the quality of employment that's falling in Canada," says Tal. "A lot of the jobs that are being created are low-quality, especially part-time jobs and low-paying jobs." Though -- unlike the U.S. -- Canada has regained all the jobs lost in the recession, he says that an absence of good-paying jobs is the "main reason" why wages have stagnated. Adjusted for inflation, personal after-tax income is now rising at the slowest rate since 1995. Meanwhile, the skills mismatch in many jurisdictions has left employers short on skilled labour despite still-high unemployment levels in other regions. "If you lose a job, you don't have the skill set to go an find a job elsewhere that companies want and need," says Tal. (Alamy photo)

  • Globalization

    When Caterpillar decided to stop assembling locomotives in its Electro-Motive facility in London, Ont., it was a poignant reminder of how globalization is giving deep-pocketed, transnational corporations the ultimate trump card in bargaining with workers: a cheaper alternative. According to Mike Moffatt, a labour expert at the University of Western Ontario's Ivey School of Business, because of automation and an increase in imports from lower wage jurisdictions like China and Mexico, Canadian workers are competing for fewer manufacturing jobs. "That's given firms real power to negotiate down wages," says Moffatt, who points to the <a href="" target="_hplink">Rio Tinto lockout in Quebec</a> as another illustration of the might afforded to companies with global reach. Since locking out workers at its aluminum smelter in Saguenay-Lac-Saint-Jean on December 31, the Anglo-Australian mining giant has used non-union workers to operate the facility at one-third capacity. With no plans to return to the bargaining table, the company recently announced it is restarting two suspended lines, and is expecting to return to full capacity in May. As Tal maintains, "In this environment, the bargaining power of labour is diminishing."

  • Austerity Agenda

    Just as the power has shifted toward private-sector employers, Michael Lynk, a labour law expert at the University of Western Ontario, says there is a sense that governments are becoming emboldened amid the post-recession climate of austerity that has swept from Toronto's City Hall to Parliament Hill. "There's increasingly an attitude of take-it-or-or leave-it by [private sector] employers, but we may begin to see that with public sector bargaining as well, where they basically say, 'You have to meet our bargaining objectives this round, and we're going to be prepared to endure a short or lengthy lockout to prove our point," he says. Though global economic instability recently prompted federal Finance Minister Jim Flaherty to pull back on his earlier commitment to deep cost-cutting in the upcoming budget, government departments are expecting spending to be slashed by between five and 10 per cent, a goal that will be met at least in part at the expense of public service jobs and benefits. The Canadian Centre for Policy Alternatives recently estimated that the <a href="" target="_hplink">federal government's budget cuts could push unemployment up half a percentage point, to 8 per cent</a>. (CP photo)

  • Pension Problems

    From <a href="" target="_hplink">Dalhousie University</a> to <a href="" target="_hplink">Air Canada</a>, employers no longer able -- or willing -- to fund costly pension plans are mounting attempts to roll back retirement benefits, stoking labour unrest and a growing sense of financial insecurity among workers. As Dalhouse University labour economist Lars Osberg explains, the financial crisis took a huge bite out of the value of corporate pension portfolios and the interest rate required to generate the stream of returns to make these programs sustainable. All of which explains why experts anticipate a deepening of the trend away from inflation-protected, gold-plated defined-benefit pension plans, shifting responsibility for retirement savings from employers to workers.

  • Decline Of Unions

    The power in numbers that enabled Big Labour to negotiate better wages and benefits in the aftermath of the Second World War is a distant memory today, as the <a href="" target="_hplink">erosion of unions continues to whittle away the strength of collective bargaining</a>. This is particularly true in the private sector, where unionization sits at 16 per cent of employees, less than a quarter of public sector unionization. "I think you will see more disputes with unions having to compromise more than in the past," says Tal. "I really don't see that they have the upper hand at this point." Given the yawning gap between private and public sector unionization, Lynk warns that pressure on public sector unions could mount as it has in the U.S. in recent months. "The argument they've been floating is, 'Why should public sector workers have jobs for life, good pensions, and decent wages? They're eating up your taxes,'" he says. "I wouldn't be surprised if we're not [starting] to see the beginnings of that kind of argument here in Canada."