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What’s happened to Canada’s manufacturing sector? Kellogg’s recent decision to close its plant in London ripped another 500 factory jobs away from Ontario. That follows Heinz’s move to shutter its plant in Leamington, which is near Windsor. The 100-year-old plant, and its 740 employees, was the largest employer in the area. The announcement from Heinz comes on the heels of plant closures by Caterpillar, CCL Industries, and Novartis. Added up, and Ontario, home to what’s left of Canada’s industrial heartland, has shed 33,000 manufacturing jobs in the last year.
While the recent plant closures have grabbed headlines, it’s only a fraction of the jobs lost over the last decade. Once the top employer in Ontario, the manufacturing sector is now a shadow of its former self.
Since 2002, Ontario’s manufacturing sector has shrunk by nearly 30 percent—or more than 300,000 jobs. The story is similar when you look at real manufacturing output, which is down almost 20 percent over the same time.
Look back to the 1990s, or indeed most of the post-war period, and manufacturing could be counted on as an engine of economic growth for the province. Today, the opposite is true. The shrinking sector is a drag on growth and part of the reason Ontario’s economy has been a laggard versus other provinces over the last decade.
It’s unfamiliar territory for Ontario, historically the principle cheque writer of equalization payments to the poorer provinces in the Confederation. Not so anymore. The income-per-capita in what was once Canada’s most affluent province is now well below the national average. Ontario’s economic standing among other province’s, similarly, is also on the decline. The province’s share of Canadian GDP is down by roughly 5 percentage points in the past ten years.
It’s not a coincidence that manufacturing employment in Ontario peaked in 2002, just as a free falling Canadian dollar was plunging to nearly 60 cents against the U.S. greenback. Backed by that exchange rate, everyone from auto assemblers to food processors enjoyed a commanding cost advantage over competing plants south of the border.
Since then, the Canadian dollar has soared along with the rising price of oil. While the loonie has long moved to the rhythms of commodity prices, in the last decade it’s danced in lock step with oil prices, which have marched from $20 a barrel to the triple-digit range. These days the loonie is trading more than 50 percent higher than it was during the last peak in manufacturing employment in Ontario.
In the context of exchange-adjusted labour costs rising by more than 50 percent, there’s really no mystery behind why so many manufacturing plants are closing in Ontario. Offsetting such a dramatic swing in exchange-adjusted wage costs would take a boom in productivity that, frankly, just isn’t in the cards.
What’s worse, productivity in the manufacturing sector is actually languishing. In theory, a higher Canadian dollar should make it easier for plants to import machinery and equipment that will enhance productivity. The theory, however, assumes that plants will continue to run. In practice, a soaring loonie is spurring international manufacturers to look for greener pastures elsewhere. Instead of spending money in Canada to improve factory productivity, decisions are being made in the opposite direction, which is resulting in disinvestment.
The numbers speak for themselves. In the last decade, the manufacturing sector’s share of business investment is down by nearly half, falling from 14 percent to as little as 8 percent. Without capital spending on new plants and equipment, productivity growth is going nowhere. That, in turn, only exacerbates the competitive disadvantage that a high Canadian dollar puts on wage costs.
Where to from here? With the loonie trading in the 95-cent range against the greenback, who’s choosing to invest in boosting the productivity of an uncompetitive manufacturing sector?
Consensus is forming that 2014 will be the economic turning point for the United States and that is, traditionally, good news for Canada. But is it?
Most rosy is the forecast by UBS that U.S. GDP will grow by about 3 per cent in 2014 and in 2015 then beyond. The IMF has also just raised its U.S. forecast.
“There has been good action taken by Congress to eliminate the fear about the budget and to reduce the sequestration. We see the Fed having taken some very well-communicated action concerning the tapering of the program, and those are good signs — in addition to which we see some good numbers: Growth is picking up and unemployment is going down,” head of the IMF Christine Lagarde said this week. “So all of that gives us a much stronger outlook for 2014, which brings us to raising our forecast.”
Interestingly, if the United States grows by 3 percent that will virtually match China’s growth, in absolute dollars. (Lest we forget the math. A 3 percent rate in the U.S. is based on a nominal GDP of US$17-trillion and China’s equally rosy forecast of 7.5 percent is based on a nominal GDP of less than US$8-trillion.)
The turning point has come due to the energy boom in the U.S., the housing recovery, the health of its manufacturing sector and productivity rates, banking stability, job growth, low consumer debts and an improved fiscal situation due to the spending cuts imposed by sequestration.
Canada, unfortunately, has some headwinds that, until addressed, will likely decouple Canada’s growth from its neighbour’s in the short and medium term.
Here they are, not necessarily in order of importance:
— Canada lives beyond its means as an economy, with trade and export deficits, despite the benefits of high commodity prices in the past few years.
— Canada’s productivity lags U.S. rates considerably, representing a negative metric that makes export growth difficult. The reasons are varied and include the fact that the Canadian economy is balkanized into political spheres of influence, variant tax and labour laws, non-tariff barriers internally and disparate worker credentials because it lacks a national trade agency to insure the fair flow of workers, goods and services or an over-arching Inter-provincial Commerce Commission. There is no free trade within Canada.
— Canada’s dollar is headed to as low as 88 cents U.S. this year, according to some projections, which is a symptom of problems but also, ironically, somewhat helpful in exports if sustained but not helpful concerning the following issue.
— Canada’s federal and Western provinces are pitch-perfect when it comes to debt levels, spending and investment. Their Triple A or high AA credit ratings reflect that.
But Eastern Canada, on the other hand, is a problem, a clearly defined have-not part of the country with high unemployment rates, high underemployment rates and spendthrift provinces led by Ontario which has the biggest debt of any sub-national government globally. In 2003-4, debts were C$140-billion and in 2013-14 are expected to reach $260-billion and heading higher.
So this means that as the Canadian dollar falls, repayments to foreigners increase as does the need for the Bank of Canada to begin increasing interest rates. The only solution is to bite the bullet, something that vote-hungry politicians have failed to address in the past.
In light of that realization, Goldman Sachs and others are shorting the Canadian dollar.
— Consumer debt is Canada is worrisomely high. The housing bubble in Ontario, condo craziness, has forced prices for all real estate upwards, and increased borrowing, with the result that Canadians now have switched places with the Americans as holders of the highest consumer debt. (Americans were forced to shed their borrowing after the 2008 meltdown but Canadians continued the tradition.)
(This debt overhang will slow consumer spending in Canada, but the newly lower debt levels south of the border are expected to enhance U.S. growth in the next few years.)
— Canada’s cornerstone exports are facing declines. Natural gas is being replaced by U.S. shale gas production. Crude oil, Canada’s most valuable export, is expected to drop in price $20 a barrel due to increasing supplies: the U.S. shale oil boom, Canada’s increasing production, a relaxation of the embargo against Iran if it fulfills its pledges on the nuclear portfolio and Mexico’s invitation to foreign oil companies to help increase production for its moribund national oil giant.
The one bright spot would be approval, finally, of the Keystone Pipeline, with its 800,000 barrels a day of exports. Another would be the Northern Gateway proposal to the B.C. coast.
But both are political footballs for different reasons and may not happen for years, if ever.
The Iranian diplomatic deal, if successful, could enhance world peace but would unleash much oil onto the market. The embargo has limited exports from 2.5 million barrels per day to one million.
The other important export driver in Canada is Ontario’s auto industry but this year the province was overtaken, in terms of production, by the state of Michigan for the first time in a decade. And Ward’s Automotive forecasts a steady decline in Ontario production.
On a positive note, most of Canada’s problems are soluble if electorates, and their public servants, agree to old-fashioned belt-tightening.
Most importantly, Canada has to stop signing free trade agreements with countries that don’t offer reciprocity in terms of export or investment opportunities, such as China and/or the European Union, and forge a Canadian Free Trade Agreement among its provinces and territories. And the US-Canada bi-national issues should be fixed and talks about a development partnership in the North should become policy.
But those are long-term solutions that have eluded Ottawa for generations.
In the meantime, just curbing the excessive growth and overheads of the entire Canadian public sector, and creating a healthy, fair market at home for the Canadian private sector, are bottom-line essentials that any nation-state must enact in order to protect and grow.
OTTAWA – Wait until next year.
It’s a familiar refrain for sports teams, but the premise is getting old for Canadians awaiting the return of an economy that can be counted on for jobs, solid incomes and financial security.
As far back as 2010, the Bank of Canada held out the prospect of better times in the year ahead. But unexpected events — whether it was a tsunami in Japan, a debt crisis in Europe, or political shenanigans in Washington — always took the shine off the optimism.
“If you were looking for a theme song for the Canadian economy, it would either be ‘With a Little Help from my Friends,’ or, alternatively, Led Zeppelin’s ‘The Song Remains the Same,’ ” says Craig Alexander, TD Bank’s chief economist.
He says we’re still waiting for a hand-off from consumer-driven growth.
“We are going to eventually get this rotation toward exports and business investment and away from real estate and consumer spending. We said that would happen in 2013. It didn’t happen. Now we’re saying it is going to start next year,” Alexander said.
TD, like the Bank of Canada and a consensus of economists, is estimating growth will rebound to about 2.3 per cent in 2014. That would follow two years of sub-par growth at 1.7 per cent in 2012 and an estimated 1.7 per cent growth this year.
The improvement foreseen for 2014 is not much of a bump and won’t lead to massive job creation and steep income growth. But the difference between 1.7 per cent and 2.3 per cent is important.
The Bank of Canada believes economy has the “potential” to grow about two per cent. At 1.7 per cent, the economy has underachieved its potential whereas, at 2.3 per cent, the economy can eliminate slack and head toward full recovery.
The central bank thinks 2015 will see the gap close further with 2.6 per cent growth, enabling the economy to return to health by the middle or the end of that year.
The other important distinction is the composition of growth.
According to the central bank and others, 2014 will be the year the economy finally enters the zone of what Bank of Canada governor Stephen Poloz calls self-generating, self-sustaining “natural growth.”
That is critical because Canada, for the past three years, has experienced a kind of un-natural recovery.
Yes, it has recouped all it lost during the recession in terms of output and jobs, but a persistently low inflation reading and continuing slack in production capacity suggest something has not been quite right.
Growth was achieved primarily at first because federal and provincial governments pumped tens of billions of dollars into the economy — all of it borrowed.
The Bank of Canada — as well as its U.S. counterpart — has also kept interest rates at or near rock bottom, encouraging businesses and households to borrow money and spend.
Snatch away the stimulus measures and Canada, some say, would most likely still be in recession.
CIBC chief economist Avery Shenfeld there was nothing fundamentally amiss about Canada’s domestic economy before 2008 when the world’s financial system was dealt a severe blow by a meltdown in the U.S. real estate, which spread to banking and other industries.
While Canada’s economy initially emerged from the 2008-9 global recession in relatively good shape, it has limped along more recently amid weakened demand for many of the country’s major exports.
“Part of the reason Canada hasn’t seen the lift in capital business spending is because the rest of the world has disappointed us,” Shenfeld said.
“Interest rates have been low, financing has been available, but unless you are sure the product demand is going to be there, it’s hard to trigger a boom in capital spending. So a brighter global economy could see a return in capital spending in the resource in sector, which is part of that rotation that’s been missing.”
That’s where a little help from our friends, particularly the United States where 75 per cent of exports end up, will go along way to curing Canada’s ills, say analysts.
Optimism for 2014 is tied to how quickly the U.S. recovers and how much that boosts Canadian exports. The Royal Bank is among the most optimistic, pencilling in a 2.6 per cent expansion next year, and 2.7 the year after that, which will more quickly close the output gap and get the Bank of Canada to raise interest rates in 2015.
Exporters will also benefit from a swooning loonie, analysts say, because, by comparison, the U.S. economy will outperform Canada’s. The loonie has already lost about six per cent in value in the past year and now hovers around 94 cents US. By many estimates, it could be at least as low as 90 cents by the end of 2014.
With all these factors in Canada’s favour, it’s a wonder the economy won’t do better. But the Bank of Canada has noted that exporters haven’t kept pace, given the rebound in the United States, so they won’t likely benefit as much in 2014 as they have historically.
Part of the reason, says governor Poloz, is that the country lost about 9,000 exporting companies in the aftermath of the 2008-09 recession.
Alexander, TD’s chief economist, lists other factors: an increase in the number of right-to-work states in the U.S. that have brought down labour costs; a shale oil and gas revolution; and low gas prices that have decreased energy input costs for a lot of U.S. manufacturers.
“And we’ve had really strong productivity growth in the U.S.,” Alexander added. “So U.S. manufacturing is far more competitive than it was before and that makes it much tougher for Canadian exporters.”
The consensus view assumes that the modest pick up in exports, which will lead to companies investing in machinery and equipment in order to become more competitive exporters, won’t be counterbalanced by a retrenchment in the household sector and in housing.
Taking the contrary view, as does David Madani, the chief analyst at Capital Economics, leads one to the conclusion that 2014 won’t be any different from 2012 and 2013 in terms of aggregate economic growth — even if the composition is healthier.
With the housing market overbuilt and household debt at record levels — 164 per cent of annual aftertax income — Madani expects a bad year for the construction industry and a slowdown in consumer spending, which makes up the majority of the economy.
“So you have a situation where weakness in housing and slower household consumption growth is now offsetting the improvement in exports and perhaps business investment,” Madani says.
Rather than improving, Madani thinks the economy will deteriorate further to 1.5 per cent growth, which may cause the Bank of Canada to cut interest rates further and even push Finance Minister Jim Flaherty off his austerity drive — although he admits that’s a long shot.
Madani’s advice. Wait till next year and, by next year, he means 2015 or even 2016. By then there will have been a correction in housing and global demand may be strong enough to make more of a difference to Canada.
By David Ljunggren
OTTAWA (Reuters) – The Canadian economy showed unexpected strength in October, growing for the fourth month in a row and boosting market hopes that the country might finally be shaking off the worst of the great recession.
Statistics Canada said on Monday the economy had grown by 0.3 percent from September. Analysts had forecast a 0.2 percent advance after September’s 0.3 percent increase.
Although Canada regained most of the jobs it lost since 2008 and 2009, growth has been largely sluggish, prompting the Bank of Canada to make clear it will not raise its key interest rate until it sees signs of a firm recovery.
The economy has posted growth every month this year apart from June.
The output of goods-producing industries grew by 0.4 percent in October on higher manufacturing while service industries output climbed by 0.3 percent as almost all major industrial sectors registered growth.
“Canada’s economy is showing sustained strength for the first time since the early days of the recovery,” said BMO Capital Markets economist Sal Guatieri.
The Bank of Canada has said annualized GDP growth in the fourth quarter will be 2.3 percent, down from 2.7 percent in the third. Guatieri, though, said October’s data suggested fourth quarter growth could be around 2.6 percent.
“Importantly, this would mark the first quarter since early 2011 that GDP has posted successive increases above two percent – that is, above potential,” he said in a note to clients.
Manufacturing output grew by 1.3 percent in October while wholesale trade and retail trade advanced by 1.4 percent and 0.3 percent respectively. Construction, as well as mining, quarrying and oil and gas extraction, were unchanged.
The economy grew by 2.7 percent from October 2012, up from September’s 2.4 percent year-on-year advance.
Peter Buchanan of CIBC World Markets said the 0.3 percent increases in both October and September “suggest a fairly decent start for the economy to the fourth quarter.”
The data helped push the Canadian dollar higher and by 9.40 am (1440 GMT) it was at C$1.0601 to the U.S. dollar, or 94.33 U.S. cents, up from Friday’s close of C$1.0648 to the greenback, or 93.91 U.S. cents.
The Bank of Canada is worried about the risks posed by the persistently low inflation, which in November was just 0.9 percent, well below the central bank’s target of 2 percent.
The Bank has kept its key overnight interest rate unchanged at 1 percent since September 2010, citing in part the inflation rate and the underperforming economy.
A Reuters poll of primary dealers late last month showed that most did not expect the bank to raise rates until the second quarter of 2015.
(Reporting by David Ljunggren; Editing by Nick Zieminski)
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- Bank of Canada governor bullish on prospects for sustained growth (vancouversun.com)
- Harper government says consumers to come first as fight with big business looms (o.canada.com)
- Canadians Aware Interest Rates Will Rise, says Poloz (theepochtimes.com)
- Bank of Canada sees more confidence in economy (cp24.com)
- Stephen Poloz: Canada close to ‘tipping point’ for business investment (business.financialpost.com)
- Public sector, youth hit hardest as Canadian jobless rate rises (thestar.com)
- How can you get an economy INTO a liquidity trap? (worthwhile.typepad.com)
- Examining Harper’s record and spotting a fake economic recovery (andrewchernoff.wordpress.com)
- A Better Look at Household Balance Sheets (canadaecon.wordpress.com)
- Condo.ca: Global Economies Begin to Stir, Toronto Housing Markets Stronger Than Expected, With Condo Sales Leading the Gains (virtual-strategy.com)
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