Canada economy - The new rustbelt - The puzzling weakness

From the print edition: The Americas |
IF YOU visit south-western Ontario and the Niagara peninsula you will see scenes of industrial decay. Steel mills, vehicle-parts factories and food processors sit abandoned, their car parks studded with tufts of grass. The region has the look of a rustbelt, and that has Canadians worried.

Manufacturing took a beating in the late 2000s and early 2010s, when high oil prices drove up the value of the Canadian dollar, making factories less competitive. But Canada should now be recovering from that bout of Dutch disease. The “loonie”, as Canadians call their currency, has been dropping along with oil prices. On August 25th it fell to its lowest level in a decade against the American dollar. That, plus the strong economy in the United States, the market for three-quarters of Canada’s exports, should have... scraped off much of the rust.

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So far it has not. Factory sales rose 1.2% in June, but were 3.1% below their level of a year earlier. The failure of manufacturing to respond to the tonic of a weaker currency is one reason why the economy probably contracted during the first half of 2015.

Now Canadians are starting to suspect that much of what they lost may never come back. In 2000 manufacturing accounted for 18% of GDP, not much lower than the share in Germany; by 2013 that had dropped to 10%, about the level in Britain and the United States. Factory employment has fallen by about 500,000 since 2005, to 1.7m. In the decade to 2012, some 20,000 factories shut down.

One big problem is that Canada mostly makes components, not final products. That leaves manufacturers vulnerable when their customers move. Car-parts makers used to be well-placed for deliveries to carmakers in Michigan, but many of their customers have moved south.

Another reason the loonie’s decline did not help more is that the currencies of competitor countries have also fallen. And industry has been hurt by the rising cost of inputs, often priced in American dollars, and by higher electricity prices, especially in Ontario. Canada’s high wages are another burden.

The candidates in Canada’s national election, to be held on October 19th, have so far had little to say about manufacturing’s listlessness. In part, that may be because there is not much that government can do. Harmonising regulations and easing border crossings with the United States would help. Some companies are helping themselves by investing heavily in new machinery and technology, hoping to make higher-value-added products. Manufacturing in Canada will not disappear. Neither, sadly, will the rust.

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