The U.S. economy may be back in growth mode, and exchange rates may have turned favourable, but Mark Zimny isn't seeing much of an impact on his export sales.
Mr. Zimny's Oakville, Ont.-based firm, Promation Engineering Ltd., makes automation equipment and robotic systems used by other manufacturers, many of them in the United States. His shipments across the border have started to recover after taking a dive during the recession, but not by much. "The U.S. market is calling us back," he said, but the improvement is "very gradual and very cautious."
One reason for the tepid rebound, Mr. Zimny said, is that it is tough to win back clients who went elsewhere when the Canadian dollar was high. "If you have been replaced by a competitor, it takes time to redevelop the relationship," he said. "It is almost like getting a new customer."
The summer of 2015 has shown a surge in exports, rising 5.5 per cent in June and 2.3 per cent in July. Of particular interest, June's exports to the United States rose 7.1 per cent, while in July, exports rose 4.0 per cent if you exclude energy products.
The people running Canada's factories say that despite an encouraging summer for manufacturing exports, things are far from back to the old normal. And with an increasingly economy-focused election looming, they say the next government will have its work cut out to cure what ails the sector.
In this Thursday's Globe and Mail Leaders' Debate on the economy, there's a good chance Conservative Leader Stephen Harper will highlight not only the strong export rebound that emerged over the summer, but also the 20-per-cent growth in quarterly non-energy exports since the end of 2012, as evidence that his government's policies to support a manufacturing recovery are working. Yet his opponents will point to the loss of a startling 400,000 manufacturing jobs since he took office in early 2006 – virtually none of which have come back even as exports have recovered.
It is a crucial issue for Canada's economy, because roughly half of Canada's manufacturing output is exported. And manufactured goods make up about three-quarters of all non-energy goods exports.
This was supposed to be the year when those exports led the economy to brighter days, as a robust U.S. economic recovery and a weak, export-competitive Canadian dollar lit a fire under non-energy demand. Instead, in the first five months of 2015, non-energy exports slipped 3 per cent from their 2014 year-end levels.
After a huge drop in the Canadian dollar in the first quarter of 2015, economists predicted a corresponding spike in exports. That didn't happen, at least not right away. Using a model linking exports, real exchange rate and US GDP, CIBC World Markets suggests peak impact of a big drop in the Loonie won't be felt for six quarters.
Then, suddenly, it all turned around in June, when Canadian merchandise exports surged 5.5 per cent, including a 6-per-cent jump in non-energy exports. To prove that was no fluke, non-energy exports rose another 4 per cent in July.
But both the statistical data and the word from manufacturers themselves indicate that the turnaround is wildly uneven. Some sectors are cashing in on the currency and the rebuilding U.S. economy, while others remain mired in what the Bank of Canada has called "longer-term structural declines." As a result of business lost to foreign competition and the shuttering of plants and entire companies in the Great Recession, many industries have neither the customers nor the capacity to bounce back to their pre-recession export levels.
Meanwhile, the effects of slumping commodity prices have not been confined to resource producers. Manufacturers who provide goods to the resource sector are feeling a very hard pinch.
Winnipeg-based Acrylon Plastics Inc. has been hit by a drop of between 30 per cent and 50 per cent in the U.S. agriculture equipment market, says executive chairman Craig McIntosh.
"It's a pretty dramatic drop and it's across the board," said Mr. McIntosh, whose company makes plastic parts for Deere & Co., Case New Holland and other makers.
The drop of nearly 20 per cent in the Canadian dollar against its U.S. counterpart, which makes Canadian products considerably less expensive for U.S. customers, should help many exporters and at least ease the pain for others. But economists note that the boost hasn't lived up to expectations – evidence that there are deeper challenges for manufacturing exporters that a cheap currency alone can't fix.
"Historically, a 20-per-cent depreciation in the Canadian dollar over the past year would have boosted non-energy exports by roughly 10 per cent by now. Instead, the performance has been a roughly 5-per-cent gain," said Toronto-Dominion Bank economist Brian DePratto in a report this month. "Competitive forces and a changing global landscape have both delayed and restrained the cyclical rebound."
A breakdown of Canada's biggest non-energy export sectors shows industries identified by the Bank of Canada as historically more highly sensitive to fluctuations in the Canadian dollar have grown their exports substantially faster than non-currency-sensitive sectors.
Jayson Myers, president and CEO of Canadian Manufacturers & Exporters, a leading group representing the industry, said moves by the Harper Conservatives to support manufacturers have been significant, most notably its cuts to corporate tax rates and its support of the auto industry during the recession. He also pointed to the Accelerated Capital Cost Allowance, first introduced by Mr. Harper's government in 2007, which allows companies to write off the entire cost of new machinery and equipment against their taxable income in just three years; under previous tax rules, it took more than a decade. The Conservatives scaled back the ACCA in this year's budget – it will now take five years for firms to write off substantially all of their investment – but it extended the program for 10 years, which Mr. Myers called "extremely important for companies looking to make long-term investments."
But the statistical evidence suggests the ACCA hasn't been nearly the incentive for new capacity and technology upgrades that many had hoped it would be. Business investment in industrial machinery and equipment has been on a downward drift for most of the past four years in real (inflation-adjusted) terms, and sank to an 11-year low in the second quarter.
Economists and industry insiders agree that whichever party forms the next government, it will need to make bigger strides to foster investment, and help Canada's manufacturers become more innovative and competitive.
In an open letter to all parties last month, Mr. Myers urged the leaders to provide more support for research and development – including the creation of a national advanced-manufacturing R&D "hub," and the restoration of R&D tax relief that the Harper government trimmed in past budgets.
"They are cutting it back so much that it is not as helpful as it used to be," said Steve Nolan, vice-president of sales and operations at Toronto-based transformer maker Plitron Manufacturing Inc.
Mr. Nolan added that going forward, the best government supports will be those that help companies invest in automation and capital equipment.
Mr. Myers also advocates the formation of an "Investment Promotion Agency" to pursue and facilitate investments in Canadian manufacturing. He said a potential foreign investor faces myriad provincial and federal departments and regulatory agencies to navigate, making the process confusing, time-consuming and costly. He said the Tories and NDP have both voiced their support for the idea.
Brian Hedges, chief executive officer of Mississauga, Ont.-based Russel Metals Inc., a large metal processing and distribution company, has a more inward-looking way to extend a big-government hand to the country's manufacturers: Adopt a "Buy Canada" policy for the substantial infrastructure-investment programs that all three parties are proposing.
"Things that are built with [money from] the public cash registers, I think give the jobs to Canadian companies." Mr. Hedges said.
Bill Hammond, chief executive at Guelph, Ont.-based transformer maker Hammond Power Solutions Inc., suggested if Ottawa is going to make a meaningful contribution to getting manufacturing exports back on course, the first step needed is a change in attitude: "A federal government that gets actively engaged in supporting Canadian manufacturing at all times, and not just before and during an election."
Russel Metals Hamilton plant takes coiled rolls of steel and cuts them down into plates for which then can be turned into products, including heavy machinery.
Glenn Lowson/The Globe and Mail
While the expanding U.S. economy is giving an expected boost some some manufacturing sectors, others may have suffered too much decline to effectively recover
In April, 2014 – months before the bottom fell out of prices for Canada's oil exports – the Bank of Canada published a research paper assessing which non-energy export sectors would benefit most from a U.S. economic recovery, and which were most sensitive to a declining Canadian currency. As the central bank has pointed out, these sectors have, indeed, been thriving over the past year, even as exports overall struggled.
As of the end of July (the latest data available), total merchandise exports were down 0.2 per cent from a year earlier. But among the segments of non-energy exports identified as highly currency-sensitive, the median gain was a brisk 14 per cent. Several exchange-rate-sensitive sectors, such as aircraft and parts, pharmaceuticals, medium and heavy trucks, and cleaning goods and supplies, have surged more than 40 per cent. And every currency-sensitive sector showed growth of more than 6 per cent.
Meanwhile, sectors expected to best benefit from an accelerating U.S. economy – including industrial machinery and equipment, computers, electronics, fabricated metals, and building and packaging materials, among others – have also outperformed the overall export market. Their median year-over-year growth was a healthy 7 per cent.
A big problem, though, is that two-thirds of the non-energy export sectors, representing nearly half of the country's non-energy exports by value, have lagged the pace of the U.S. recovery since the Great Recession – due mainly to what the Bank of Canada calls "long-term structural factors."
As a result of heavy competition and loss of market share to fast-growing, lower-cost foreign exporters, permanent shutdowns of production capacity, and technological changes that have resulted in what looks like a long-term and likely permanent decline in demand for some industries (for example, newsprint), about half of Canada's non-energy sectors look to have lost their ability to rebound along with the U.S. economy, at least to the degree that they could have counted on in the past. ( David Parkinson)