"Wrong." On Friday, Canada's most prominent economist weighed in. And with the Bank's research to back him up, Bank of Canada Governor Mark Carney told us that advocates of the so-called Dutch Disease theory have it wrong. The high price of oil isn't killing the Canadian economy, nor is the high price of the Canadian dollar.
Carney's view, though, is unlikely to settle the issue. In fact, with a Pequiste government in Quebec, with Central Canada's manufacturing still hurting, expect to hear more -- not less -- about one region exploiting another.
A bit of data is a good thing in a heated debate. Consider Statistics Canada latest (seasonally adjusted) monthly manufacturing sales numbers covering June 2012 sales. And when you do, ask yourself a simple question: does the data support Dutch Disease -- or are we seeing a case of a Central Canadian Cold?
If the high value of the loonie really makes it impossible to sell Canadian goods, then it should be tough to sell them in every sector and in every part of the country, whether they were sold from a refinery in Sarnia or a factory in Saskatoon. But what if manufacturing in different regions is growing at very different speeds? If that's the case, it's logical to conclude that other forces are driving those outcomes, not the high Canadian dollar.
The pre-recession peak for Canadian manufacturing was in the late summer of 2007. To make an apples-to-apples comparison, compare June 2012 sales to June 2007 sales, adjusted for inflation. (Statistics Canada source data drawn from CANSIM Table 304-0015 and CANSIM TABLE 383-0011.)
Notice that there's a clear split. When it comes to the sale of factory-produced goods, half of Canada's provinces are still selling millions or even billions of dollars less per month:
• Prince Edward Island - 78% of 2007 manufactured goods sales level
• British Columbia - 82%
• Quebec - 87%
• Manitoba - 88%
• Ontario- 88%
The other five provinces are doing better. Some are doing substantially better:
• Alberta - 102% of 2007 manufactured goods sales level
• Nova Scotia - 105%
• Newfoundland and Labrador - 105%
• New Brunswick - 111%
• Saskatchewan - 130%
While half of Canada's provinces are struggling to regain lost ground, the other half has more than recovered from their manufacturing dip. In fact, Saskatchewan is doing so well that it is poised to overtake my home province of Manitoba in monthly factory sales, even though Saskatchewan has fewer people and a limited history as a centre for manufacturing.
Just as it's simplistic to blame Ontario's factory woes on Alberta's oil, it'd be equally simplistic to pin the positive outcome in five provinces on any single factor. But Statistics Canada data suggests a few obvious explanations.
Alberta and Saskatchewan both saw significant increases in manufacturing labour productivity in the last decade. Over the same period, Ontario's manufacturing sector productivity basically flat-lined. In manufacturing, not coincidentally, Saskatchewan has lower labor costs per-unit than several of its provincial competitors.
Skeptics will say that three of the provinces (Alberta, Saskatchewan, Newfoundland and Labrador) are on the winner's list because of oil and other resources, so they must be thriving because of those commodities.
The truth is much more interesting. Potash and oil are important factors, but much of the manufacturing recovery in all three oily provinces has been in duller sectors like food processing, building products and metal fabrication. Many firms that are doing well are producing goods that have appeal to a range of domestic and international markets.
The laggards tend to be concentrated in sectors that are captive to U.S. markets. As Carney noted in his speech, Canada's commodities boom helped boost some manufacturing as well. You can be sure that, say, an Edmonton factory that makes building materials wouldn't be planning an expansion if there wasn't new demand for housing in Fort McMurray.
Even a cursory glance at the evidence suggests that younger, more flexible, less unionized manufacturing clusters outside of Central Canada are better equipped to compete. There's also clear cause to support Ottawa's push to secure trade deal access to new export markets in Europe and Asia. The provinces with the most business-friendly approach to their commodity sectors are also seeing solid spinoff benefits in manufacturing, even in the face of a higher dollar and a weak global economy.
Despite Carney's words, expect to hear about the Dutch Disease for years to come -- in union press releases and in Pequiste speeches. But given the data, rather than blame others, perhaps it's time for all of us in Central Canada to stop bashing the economies of the New West. Maybe it's time to start learning from them instead.