Evidence of meeting #71 for Finance in the 41st Parliament, 2nd session. (The original version is on Parliament’s site, as are the minutes.) The winning word was manufacturing.
A video is available from Parliament.
NDP
Nathan Cullen NDP Skeena—Bulkley Valley, BC
We've seen some recent auto investments, but before they start hiring in thousands of workers....
Senior Vice-President and Chief Economist, RBC Financial Group
Yes. The other side is that there is also 85% of manufacturing that is not the auto sector, and that's the area where en masse I think 15 of the 16 industries we look at are running below pre-crisis levels in terms of capacity utilization. In terms of when such utilization levels show up, I would argue that we've already seen some evidence of that. We saw it through last year, with manufacturing shipments up just over 5.5% after being flat in the previous year.
Then manufacturing relative to size of GDP, to speak to your comment on the restructuring, has continued to move lower, from about 16% of the economy to around 11% from 2002 to today. One thing that took place through that period, besides the global recession that we had, was the trend appreciation of the Canadian dollar. Now, as we move forward, a stronger U.S. is the bigger story. The volume matters more than the price, but the currency is moving in the right direction as well. I think that's why we'll see a bounce in manufacturing as we go forward. It has already begun.
NDP
Nathan Cullen NDP Skeena—Bulkley Valley, BC
But your outlook is not to see a bounce back to, say, 2006 levels.
NDP
Senior Vice-President and Chief Economist, RBC Financial Group
No, I think there's a cyclical story and a structural story.
Senior Vice-President and Chief Economist, RBC Financial Group
We have a cyclical bounce and a secular decline for manufacturing.
Senior Vice-President and Chief Economist, RBC Financial Group
And a secular decline.
Prof. Steven Ambler
As well, there has been a secular decline in the share of manufacturing and total output, but there is a big distinction between the share of output and employment. This is, I think, true across all industrialized economies. It is just a fact of life that manufacturing is enjoying productivity increases, so you can produce the same amount of stuff with fewer people. Whether or not manufacturing output comes back, it's certainly the case that employment is not going to come back. The case is the same for Canada as for the U.S., as for the U.K.—overall.
Prof. Jean-Thomas Bernard
I wanted to mention that the pulp and paper industry in Canada, which used to be a huge industry, is still decreasing. It will not bounce back in the near future, because there is a structural shift towards other ways to transmit information.
Now, there has been a huge revival of the manufacturing sector in the U.S., but I don't expect this to happen, at least not to the same extent, in Canada, because the revival in the U.S. is basically due to the fact that they have access to really cheap gas through shale gas. This has created a huge revival for the chemical industry. I don't expect something like this will go on in Canada.
Research Fellow, C.D. Howe Institute, As an Individual
One other thing is that I wouldn't expect as strong a response now as before 2008, because one way manufacturing survived and adapted to the high dollar over the last decade was that they oriented away from U.S. export markets and towards supplying energy industries out west. That demand is not going to be as strong, obviously. We still have a great deal of exposure to U.S. exports, but not as much as before. So the bounce back that you're going to get in manufacturing won't be as strong as in the nineties, for example.
NDP
Nathan Cullen NDP Skeena—Bulkley Valley, BC
My very crude understanding of this has traditionally been that what is good for the resource sector, especially the oil sector—being able to sell oil at a higher loonie and having strong global production—when it offsets, when prices for energy drop and when the loonie also drops, it is rebalanced out within the Canadian economy, historically. I emphasize the crude aspect of my analysis.
Yet when you talk to me about the structural changes—the secular decline—plus the fact that a great deal of manufacturing in Canada was also wedded to the resource sector, if those investments come off and there is a structural decline within manufacturing, that rebalancing in the economy.... It's not as if you lose jobs in the oil patch and then pick them back up in Ontario and Quebec, as maybe you would have 20 or 25 years ago.
Research Fellow, C.D. Howe Institute, As an Individual
I really resist the idea that resources and manufacturing are in opposition to each other in this country.
NDP
Nathan Cullen NDP Skeena—Bulkley Valley, BC
It's not that they're in opposition, but that the factors in play for both of them sometimes have opposite effects. A higher loonie has an effect on the resource sector—
Research Fellow, C.D. Howe Institute, As an Individual
Remember too that our manufacturing sector has changed over the last decade quite significantly. Clothing is gone. The forestry-based industries—lumber, pulp and paper—are not coming back to anywhere near the level they used to be. There have been structural shifts.
What has replaced them is.... More than half of manufacturing now is resource-based—the big petroleum refiners, the chemicals, the primary metals—or the capital goods. There has been quite a shift in the manufacturing industry, so that much more it moves in line with the resource sector.
Research Fellow, C.D. Howe Institute, As an Individual
Or important parts of it move in line.
Of course, there's still a very important auto industry, and industries that benefit from the lower dollar and the pick-up in the U.S. economy. It's just not as big a part of our manufacturing industry as it used to be.
Conservative
The Chair Conservative James Rajotte
I want to follow up on a question Mr. Cullen raised.
Are any of you concerned that the manufacturers did not take advantage of the higher dollar to update their machinery and equipment at a time when they should have been doing that? They may now have the benefits of the lower dollar in terms of exports, but obviously, in terms of buying machinery and equipment from the U.S., it's more expensive.
Senior Vice-President and Chief Economist, RBC Financial Group
Last week I believe, Statistics Canada released the latest numbers for labour productivity in Canada, and over the last five years, Canadian productivity is actually above the U.S. productivity numbers. That's with one year of zero.
In 2014, labour productivity was up 2.5%. We've been looking for, and hoping for, that rebound in productivity for some time. There's a lot we don't know about what drives productivity, but generally what you find is both an absolute and a relative rise in investment. The absolute but also the relative size of the economy is usually a good precursor for a pick-up in productivity.
When you look at the post-crisis-period investment, growth in Canada is right up there next to the U.S. within the G-7. So I think we did undertake a fairly sizable investment over the period, which is perhaps finally starting to show some dividends in terms of productivity. With the currency, that labour cost number is a competitive challenge. It's still a challenge, but it is less than it was only a short while ago.
Research Fellow, C.D. Howe Institute, As an Individual
I agree with that, and would add that I think your perception is based on what happened before 2008. There was a reluctance to invest because a lot of industries were basically going out of business, in clothing, paper, and so on. Then, of course, there was the big recession in 2008-09. Nobody was going to invest in Canadian manufacturing in the middle of that chaos. But since 2009, investment has increased every year in manufacturing. It's almost back to its pre-recession level. It's related to the restructuring that's been going on in the industry and the fact that the growth has been in resources and in the capital goods industries.
But I entirely agree that there's been a lack of appreciation of how much restructuring manufacturing has gone through, and the fact that productivity is doing well compared to American manufacturing. We need to update our narrative on this.