It’s a classic example of good news/bad news. Good news: Canada’s manufacturing export volumes have risen 12% since 2012. Bad news: it hasn’t had much impact on GDP or employment.
Those were the findings of a new CIBC report, Waiting for the Export Multiplier
. “Canada's manufacturing exporters have responded better than advertised to global demand and currency movements over the past few years,” said CIBC Deputy Chief Economist Benjamin Tal, who authored the report. “The real disconnect is the inability of manufacturers to translate those export gains into GDP and employment gains.”
Since the beginning of the loonie’s slide from parity in 2012, export volumes for dollar-sensitive industries such as aircraft, plastic, and pharmaceutical products have experienced quicker rises in export volume compared to less currency-dependent industries. Paradoxically, though, those dollar-sensitive industries have underperformed in terms of GDP and employment growth.
“This abnormal behavior suggests that despite currency-induced relative improvement in labor costs, labor-intensive industries cannot be the chief catalyst of manufacturing growth in the near term,” Tal said. “Capital-intensive industries must step up to the plate.”
Easier said than done, it seems. Following a significant drop during the recession, the report says, Canada’s capital-intensive industries are still 10% below pre-recession levels, and also lag behind labor-intensive sectors in performance. Labor productivity has risen by an annual average of 2.6% since 2006. “[T]hat's more than double the productivity gain seen in Canadian manufacturing,” Tal noted.
Decreases in energy prices aren’t providing much relief to capital-dependent industries, either. “At the margin, that can help but those margins are very narrow,” Tal explained. “Energy accounts for a small 2.5% of total cost—down from 2.9% at the beginning of the decade.”
The fact that export performance isn’t pulling up other real economic indicators in the Canadian manufacturing sector, according to him, might indicate the limited ability of labor-intensive industries to carry the torch.
“The shift to more capital-intensive activity will be constrained by the increased cost of capital equipment,” he said. “The rotation is coming, but it might take even longer than currently expected.”
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