It's a tale worthy of Marvel. Just as the oil-slathered edifice of the Canadian economy tilts dangerously toward collapse, our superfit superheroine races in her Reeboks to the rescue. With her sidekicks Cheap Gas and Weak Loonie, Captain Kathleen Wynne vows to save the country.
"Ontario's economy can be a buffer," says the Premier of Canada's once-dominant province. "We have a diverse economy and it can be a buffer, in a time like this, against some of that volatility."
For a decade, Captain Kathleen's peaceable kingdom had been so pummelled by a soaring petrodollar that it was humbled into taking equalization handouts. But no hard feelings, Alberta. Your pain is Ontario's gain and Captain Kath is Canada's new economic superhero.
But can her province really save us? Ontario may lead the country in economic growth this year. But it can't match the beef-fed growth that Alberta produced for a decade and which ensured that Canada survived a global recession with a few bloody scratches instead of in traction.
Unfortunately for Ontario and the country, an 80-cent Canadian dollar can no longer fuel the kind of economic boom it once guaranteed. The structure of the economy has changed in the past decade and manufacturing – once Ontario's engine – is a shell of its former self.
Though a low dollar drove an export boom in the 1990s, it also discouraged the kind of productivity-enhancing investments that might have saved manufacturers when the loonie rose toward parity. The result has been a dramatic decline in manufacturing capacity.
At 83.8 per cent, the capacity utilization rate in Canada's manufacturing sector already stands above its historical average. The rate fell to 69.5 per cent during the recession in 2009. But a good chunk of the "improvement" since then is due less to expanding output than the fact that plant closings mean overall capacity has declined. What's left is running at nearly full tilt.
A lower exchange rate means Canadian manufacturers earn more on exports to the U.S. But it also makes importing the machinery needed to expand capacity more costly. With no guarantee of a long-term decline in the loonie, the case for expansion here becomes harder to make.
The exchange rate is hardly the only variable that drives long-term investment decisions. Productivity levels and government incentives count. A recent Bank of Canada study that tracked the investment decisions of 15 large Canadian-based forest and auto parts corporations, between 2000 and 2013, found that they increasingly chose to serve foreign markets by expanding operations in the United States and Mexico.
That, the study concluded, "can partly explain why [Canadian] exports failed to rebound [after the recession] as strongly as their historical correlation with foreign demand would suggest."
Canadian auto parts exports held 27 per cent of the U.S. market in 2002. By 2012, their share was down to 14 per cent. The big Canadian-based parts makers – Magna, Linamar and Martinrea – have chosen to expand in the U.S. and Mexico instead of at home.
What is true for Canadian-owned manufacturers is also true for foreign ones. The big automakers have largely bypassed Canada as they plow billions into plants in the United States and Mexico. The latter countries are now producing more far cars than before the recession. Not Canada.
You can blame our previously at-parity petrodollar, but it's really more of a chicken or egg equation. Canadian manufacturers lived the high life as the dollar hit a record low of 62 cents in 2002. But the exchange rate masked a horrendous productivity gap that made Canadian plants unable to compete without the crutch of an undervalued currency.
Businesses here should have taken advantage of a strong loonie to invest in machinery to boost productivity. By and large, they didn't. Nor did they use a strong dollar to close the Canada-U.S. gap in investment in information and communications technology, or ICT – the central nervous system of a modern economy. We're still at barely half the U.S. ICT level per worker. With the loonie trending downward now, it's not likely Canada will be catching up any time soon.
A sliding currency can provide a sugar high and Ontario will be feeling its effects in 2015. That's welcome news for a hardpressed province. But without fixing the fundamentals to make Ontario's economy durably competitive, Captain Kath can't save us for long.
Konrad Yakabuski