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Wishful Thinking Won't Save Canada's Economy

While Canada's energy businesses are booming, the country's manufacturing sector is dying a slow death. Unfortunately, anytime someone pipes up about this, Western Canadian policymakers demand a quick end to the debate. But if we don't address the issue now, we'll face a much larger employment problem in the future.

The notion that Canada is developing an unbalanced economy, with Western energy businesses booming as central Canada's manufacturing base slowly dies, is one that many people in the West don't want to hear.

Certainly the politicians don't want to hear it. Just look at the reaction to then-Ontario Premier Dalton McGuinty's suggestion that an oil-fuelled Canadian dollar is hurting Ontario's factories. McGuinty had to walk back his comments, lest he create a civil war.

Academics from the West don't like this line of thinking either.

Case in point: Andrew Leach, the Enbridge Professor of Energy Policy at the University of Alberta. (Yes, his title includes the word Enbridge.)

My piece was based on this chart from BMO chief economist Douglas Porter, showing Canada's trade balance on energy consistently improving while everything else relentlessly sinks.

Leach responded with two charts of his own, in a piece declaring that "Canada's manufacturing sector is stronger than you think."

Here is the first chart, showing the value of exports in manufacturing and in energy (my apologies to Canadian Business and Leach for borrowing these from his column):

Leach writes, "As you can see from the graph above, manufactured goods -- including cars and car parts, aerospace, machinery and equipment, and electronics -- still represent more of what we sell to the rest of the world than anything else."

Yes, they do. But look at the trends those lines show. Manufacturing has been in a slow decline since 2000. It has somewhat stabilized recently, but at levels well below 2000. Energy, in the meantime, has been growing in value. If the trends continue, energy exports will surpass manufacturing exports in value in a decade or so.

Which is alarming, since there are about six times as many Canadians employed in manufacturing as there are in energy -- 225,000 people in energy, compared to 1.5 million in manufacturing. And that's down from 1.9 million manufacturing jobs in 2006. Canada has been losing about three per cent of its manufacturing jobs per year, on average.

Here is Leach's second chart. It shows the value of imports of manufacturing, energy and other things.

Leach writes: "While we're selling more manufactured goods to the rest of the world than we did in 2009 (though still less than we did at the turn of the century) we're buying a lot more from the rest of the world than we ever have."

Yes, that's true. But what this chart shows, when combined with the previous chart, is that Canada is producing less and less of the manufactured goods the country consumes. While the value of manufacturing imports has jumped by a quarter since 2000, manufacturing has been shedding jobs.

The significant increase in demand for manufactured goods in Canada has created zero net new jobs for Canadians.

How does this make Canada's manufacturing sector "stronger than I think"? This sector is dying a slow death.

Even Leach's own wording implies an understanding that manufacturing is in decline: "Rest assured, we still know how to sell about $18 billion per month of things to the world which are not oil and gas." (Emphasis mine.)

Yes, and the leaking glass is still half full. Problem solved!

Unfortunately, it seems anytime someone pipes up about this problem, Western Canadian policymakers come out for blood, demanding a quick end to the debate.

But if we don't address this problem now, we will face a much larger employment problem in the future. Taking the most optimistic view possible, then washing our hands of the issue, will solve nothing.

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