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OTTAWA — Canadian manufacturers appear to be increasingly alone in their alarm over the damaging effects of the soaring currency and the faltering U.S. economy, as policy makers look to the wider picture and see cause for optimism.
The anxiety level rose a few notches last month after the Canadian dollar pushed beyond par with the U.S. dollar, exacerbating worries about the U.S. housing slowdown. The currency has since continued its meteoric rise and on Monday hit a 47-year high of more than $1.04 (U.S.).
A fourth-quarter survey of manufacturers showed just how glum the sector was becoming. The number of firms reporting impediments to production jumped to 36 per cent from 28 per cent in the third quarter. Those expecting a drop in production grew to 23 per cent from 15 per cent and those seeing a fall in new orders rose to 22 per cent from 19 per cent.
The sector has shed 71,000 jobs in the past year. And by most accounts, things are only going to get worse.
“I think the real impact is going to be seen over the next six months,” said Jayson Myers, president of the Canadian Manufacturers and Exporters Association.
“Maybe the dollar is just the symptom here of the weakness of the U.S. dollar and the weakness of the U.S. economy. That is going to have a far more negative impact on expectations than perhaps even the dollar itself,” he said.
Canadian manufacturers are the canary in the coal mine, getting the first whiff of any bad news from the U.S. economy because that is the main market for their goods. The sector accounts for roughly 70 per cent of total exports.
“It's going to be much more difficult to adjust to a high dollar if your customers are not buying as much of your product,” said Mr. Myers.
Yet, as the troubles deepen in the sector, which is the single largest contributor to gross domestic product and the country's second-largest employer, nobody at the central bank or federal government seems particularly alarmed.
Prime Minister Stephen Harper promised to “stand up” for manufacturers, which the government lumped together with other “traditional” industries like forestry and fishing in a speech this month. But his ministers have largely tried to sell the strong Canadian dollar as a good-news story.
“The Canadian economy continues to show considerable resilience and strength, even in the face of falling demand in the auto sector in the United States,” Industry Minister Jim Prentice said last week in Parliament, responding to opposition demands the government throw manufacturers a lifeline.
Finance Minister Jim Flaherty said the stronger dollar allowed companies to reinvest in their business. “With the higher Canadian currency, we are seeing significant increases in the amount of machinery and equipment being purchased because it is more available, more affordable to Canadian manufacturers,” he said.
Bank of Canada Governor David Dodge has so far resisted calls to cut interest rates, a key demand of manufacturers and their supporters.
Why? For one, some argue manufacturing is no longer as vital to the Canadian economy as it once was. Alberta is a case in point, where the fast-growing oil economy is doing more than its share of propping up the national economy.
Commodities like oil and metals are now driving the export sector and global demand is no longer led by the United States but by large emerging countries like China and India.
“The umbilical cord that has always connected the Canadian economy to the much larger American market is being severed,” said Jeff Rubin, chief economist at CIBC World Markets.
Also, if you zoom out from Ontario and Quebec, the two central provinces where most manufacturing is based, the picture is much less dismal. Unemployment is at a 33-year low on strong growth in construction and services, offsetting job losses in the trade and manufacturing sectors.
“The once critical manufacturing nexus that connected the two economies is becoming increasingly marginalized in Canada, as it is in the U.S. as well ... the losses in manufacturing are being readily offset in today's economy,” he said.
Even if the U.S. Federal Reserve cuts rates this week, Mr. Dodge may shy away from a similar move.
The central bank governor is concerned that the Canadian dollar's rise could dampen growth but he cannot easily cut rates because the rest of the domestic economy is ablaze, he has argued.
Manufacturers, however, think Mr. Dodge has overestimated the strength of the Canadian economy and underestimated the weakness of the U.S. economy.
“I think we will see the U.S. slip into recession next year. To me, it's not will we see it?, but how bad is it going to get?” said Mr. Myers.
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