Report: Dollar Decline Hurting Canadian Manufacturing

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January 17, 2008

Report: Dollar Decline Hurting Canadian Manufacturing

The Canadian economy is “firing on all cylinders except one,” with manufacturing in the midst of a year-long recession, according to a new Manufacturers Alliance/MAPI report, available at www.mapi.net.

In "Review of the Canadian Economy, 2007-2008," Jeremy A. Leonard, MAPI economic consultant, writes that the Canadian economy is growing at or above potential, and labor markets are as tight as they have been in a generation. However, manufacturing is suffering from the rapidly strengthening Canadian dollar and slower-than-expected growth in the U.S.

Real gross domestic product grew by 2.9 percent at an annualized rate in the third quarter 2007 but is expected to decelerate to the 2-percent range before regaining momentum in the latter part of 2008.

Leonard forecasts GDP growth of 2.3 percent in 2008. The strong Canada-U.S. exchange rate continues to take its toll on exports, but strong domestic demand has taken up the slack. The manufacturing sector has been in recession over the past year.

GDP has declined in four of the past six quarters, translating into a 0.4 percent year-over-year decline through the third quarter of 2007. The main pockets of weakness are in the large, export-intensive durable goods industries, with the notable exception of aerospace.

In a forecast of selected economic indicators for 2008, the report indicates that nonresidential investment is expected to grow by 6.1 percent, imports will increase by 6 percent, and pretax corporate profits and real disposable income are each predicted to grow by 4.4 percent. The forecast for industrial production growth, however, is flat.

The unemployment rate has slid to a 33-year low of 5.8 percent. There are considerable differences across provinces, though, with the industrial heartland of Ontario and Quebec suffering and the resource-intensive West booming.

Manufacturing employment has declined by 12.4 percent over the last three years, but the pace of job loss decelerated somewhat in 2007.

“Considering the many risks buffering the North American economy, Canada is in a fairly enviable position,” Leonard said. “But manufacturers will have to redouble their efforts to cut costs and boost productivity because the strong dollar will be a fact of life for quite a while.”

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