Thank you again for inviting us here.
My name is Michael Burt, and I have my colleague here, Valerie Poulin. We're with the Conference Board of Canada. For anyone who's unaware, we're an independent, non-profit think-tank based here in Ottawa. We do research in a variety of areas, including public policy and economic forecasting and analysis, which is the group we work in. I'm responsible for our Canadian industrial outlook service, and among other things we produce semi-annual reports on 16 of Canada's key sectors, including wood and paper products, aerospace, high-tech, and oil and gas.
I'll first give an overview of what's been going on in the manufacturing sector, and then I'll focus on four key sectors that were mentioned in the invitation we received.
Manufacturing is presently facing a variety of challenges, and as a result we've seen manufacturing's role in the Canadian economy decline in recent years. Some of these challenges have been structural and some have been cyclical.
On the structural side of things, we've had a strong Canadian dollar in recent years. It has affected industries in a variety of ways, most importantly in terms of their input and their output prices. Some industries have benefited from the stronger dollar, and many have had negative consequences as a result. We're also seeing increasing competition from emerging markets. Perhaps most telling has been the emergence of China on the world's stage, as a result of their entering into the WTO in 2001. We're also seeing increasing competition from other markets around the world.
Finally, technological changes have been a major factor affecting the performance of the industry. For example, we're seeing a transition in telecommunications away from wired services toward wireless services. This is leading to the rise of new companies and the demise of some older ones. Another technological change has been the emergence of electronic media. Consumers are increasingly consuming their information by electronic means, and this has meant a decline in demand for paper products.
On the cyclical side, the current global recession is affecting the industry. Autos and housing-related goods have been perhaps most affected. For example, the collapse in auto demand has spread throughout the supply chain and is affecting a variety of industries, everything from plastics to metals to chemicals.
However, I don't want to say that the outlook for manufacturing in Canada is uniformly poor. We expect to see growth in a variety of manufacturing sectors, and they fall primarily into three categories. First are those that are primarily domestically focused. Food manufacturing is a good example of this. It's the largest employer of manufacturing workers in Canada and is often overlooked, but we expect it to have a positive outlook going forward. Another source of growth for the manufacturing sector is industries tied to our primary goods industries, such as machinery and primary metal products. They will benefit from increased commodity prices in the coming years.
Finally, technology-intensive or skill-intensive industries will fare better. They will see less competition from emerging markets than some other industries. A good example of this is aerospace.
As a result of all of these challenges, the character of our manufacturing sector is changing. We're seeing services account for a larger share of the value of what manufacturers are producing. A good example of this is Research in Motion. It is primarily a telecommunications equipment manufacturer, but a large portion of its revenue comes from the service agreements associated with using its devices.
Another big change is that the skill requirements for our manufacturing work force is increasing. We're becoming more skill intensive, and this means manufacturers are increasingly competing with other segments of the economy for workers. Finally, we're seeing the disappearance of low-value-added, labour-intensive industries here in Canada.
I want to focus on the four industries that were highlighted for us. First is forestry, and we divide it into two segments: paper, and wood products. On the paper side, the industry is facing some significant structural challenges. We're seeing increased competition from emerging markets--low-cost producers in South America and Asia. We're also seeing a structural decline in demand for many paper products.
The demand for wood products is primarily determined by North American construction of residential buildings. The collapse of the U.S. housing market, and now a slowdown in housing activity here in Canada, has had negative repercussions for the wood products industry.
We do expect housing residential construction activity to begin to improve next year, but it's going to be a slow recovery. We don't expect demand for wood products to reach its previous peak at any time in the foreseeable future.
Both segments are facing challenges, so we need to start asking whether we are making the best use of our forest resources. Basically, are there other ways we can use the fibre in our forest? Whether it's for energy production or feedstock for the chemicals industry, there are possibilities.
We need to ask whether we are producing what is in demand in new emerging markets. For example, they don't generally build wood-framed housing in China, so rather than two-by-fours, should we be making products that are in demand in that market?
Turning to energy, there are basically two key challenges here, one short-term and one long-term. In the short term, we have had the rapid drop in energy prices in the last year. This has challenged profitability, and it has reduced investment activity in the oil and gas sector.
Longer term, the main problem is decline in productivity in conventional oil and gas wells in Canada. We do expect energy prices to recover fairly quickly over the next few years. In fact oil prices, as many of you are probably aware, are already up significantly from the low they reached earlier this year. This will lead to the resumption of the oil sands projects, in 2010-11, that were delayed recently. But cost pressures and declining conventional production will continue to be an issue for this sector.
Turning to high-tech, the manufacturing component of high-tech is experiencing a significant contraction right now. But the services side, which is much larger, is actually still growing, albeit at a much slower pace.
On manufacturing activity, basically we've seen a large decline in global demand, both from consumers and businesses, for IT-related goods. Our domestic manufacturers have been affected by that. Of course we also have the recent bankruptcy of Nortel, which is complicating the domestic situation for our high-tech manufacturing industry. The one bright spot is in demand for wireless communications equipment; that seems to be holding up a bit better right now.
With respect to IT services like telecommunications and computer services, we do expect them to grow this year but at a much reduced pace as a result of the current recession.
Finally, aerospace was one of the components of the broad manufacturing sector that was doing very well going into the recession. They were probably one of the best performers in manufacturing. They have full order books. In fact the order books for our aerospace manufacturers are backlogged with orders for about two years right now. We're actually seeing production continuing to increase. The most recent data we have is for January. We reached a record level of production in our aerospace manufacturing industry in January of this year.
With that said, we have started to see some layoff announcements in recent weeks. That's been primarily in the business jet portion of the industry. That's because demand for business jets is very sensitive to corporate profitability, which has plummeted as a resulted of the global recession. That's been one of the areas that have been affected first.
The demand for commercial and military jets is holding up a little better. The backlog of orders will help to support the industry through the current recession, although we are seeing some delay of receipt of some of the aircraft that have been ordered.
The outlook for aerospace demand is fairly good. One of the key reasons for this is our outlook for stronger energy prices going forward. Fuel accounts for roughly one-quarter to one-third of the operating cost of the average airline, so there's a real incentive when oil prices are high for airlines to try to get a cost savings on their fuel bills.
Thank you.