The Engine Poloz Hopes Will Drive Canada's Recovery Is Misfiring

  • Factory employment has biggest 2-month decline since recession
  • Capital spending by manfacturers seen falling 11% this year

What is going on with Canada’s manufacturing?

One of the bigger economic disappointments over the past couple of years has been the Canadian factory sector’s inability to catch fire on the back of a tumbling currency, and offset damage from the oil shock. As the dollar rebounded in the last few months, manufacturing began to pare even the measly gains it had been making.

Factories eliminated 48,300 jobs in March and April, the biggest two-month decline since the 2008-09 recession. Statistics Canada reported Tuesday factory owners plan to cut capital spending by 11 percent this year, the biggest drop since 2009.

If nothing else, the data highlights that any resurgence in manufacturing -- a sector decimated by the currency’s sharp appreciation last decade and competition from China and Mexico -- will be a gradual process, if it happens at all. Factory employment in Canada was 1.68 million in April, probably the lowest since the 1960s. The sector now represents 9.3 percent of total employment, down from about 20 percent in the early 1970s.

“It’s a cautionary note that a weak currency is a necessary but not sufficient condition,” Avery Shenfeld, chief economist at CIBC World Markets, said in a telephone interview. “Global growth is still soft and the manufacturing sector is still exposed to that weakness.”

Erik Hertzberg/Bloomberg

The health of manufacturing is key to how quickly Canada can rebound from the oil shock, with policy makers counting on gains in non-energy exports to return the economy to full capacity. The Bank of Canada estimates international trade will add 1.3 percentage points to the nation’s growth rate this year, which would be its biggest contribution since the 1990s.

Governor Stephen Poloz has warned however that much will depend on global demand, particularly from the U.S., and that has been far from stellar. Canadian exports to the U.S. are plunging at a pace not seen since the last recession as the American economic recovery stalled in the first quarter.

Another problem has been the collapse in oil-related investment, which may have been a more important market for Canadian manufacturers than initially thought. Alberta’s factory owners are responsible for about one quarter of the job losses over the past two months and all of them over the past year.

“The weakness in manufacturing is largely an Alberta story, driven in part by the oil shock,” said Jean-Francois Perrault, chief economist at Bank of Nova Scotia.

Ontario’s economy added 13,300 factory jobs over the past year, even after cuts in March and April. Still, for a province considered the backbone of Canada’s manufacturing sector, Ontario’s record isn’t particularly inspiring: just 20,000 factory workers above record lows and still nowhere near pre-recession levels.

Maybe expectations should be muted. Doug Porter, chief economist at Bank of Montreal, says manufacturing as a share of the economy has been in long-term decline in most developed economies, and the weaker currency may have merely slowed that decline.

“You need almost everything to go right to lead to job gains,” Porter said. “Not everything has gone right in the past three months or so.”

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