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Canadian manufacturers will drive the economic recovery next year, picking up the slack left by debt-strapped consumers despite the loonie staying at or near parity, the country's main industrial lobby says in a new report.

The currency - which traded above its U.S. counterpart for the second consecutive day on Wednesday after breaking through that threshold for the first time in seven weeks - will continue to "hover near parity" next year, Canadian Manufacturers & Exporters said in a forecast to be released later this week.

But while a strong loonie makes Canadian goods more expensive to foreign customers, it also gives Canadian companies better purchasing power in other countries. The report paints a picture of an export sector poised for double-digit growth after spending much of 2010 recovering from the brutal 2008-09 recession, which sapped demand from the country's No. 1 market and cost thousands of manufacturing jobs.

At the same time, higher borrowing costs, reduced consumer incentives and the fading impact of government stimulus will crimp the domestic spending that powered the rebound this year, the CME said. It predicts the overall economy will grow by 1.5 to 2 per cent next year, after a 2.8-per-cent expansion in 2010 - which would mark the best performance in five years.





Despite the predicted slowdown, "the companies that have survived are in a pretty good position to grow," Jay Myers, president and chief executive officer of CME, said in an interview. "A lot of their weaker competitors are out of business, first of all, and we're seeing a lot of companies expand internationally, both through export sales and through investment. … In 2011, I think we'll actually see some of the benefits of these investments in new technologies and new markets begin to pay off."

Manufacturers such as Bill Hammond are among those who have forged new strategies to cope with current economic realities. The CEO of Hammond Power Solutions Inc., a Guelph, Ont.-based manufacturer of electrical transformers, said about 60 per cent of his business is still with the United States, but he is working to tap into Europe, Asia - particularly India - and, eventually, Latin American nations such as Brazil and Argentina, mainly through acquisitions.

"This is part of our longer-term strategy to diversify ourselves away from North America and to make us more of a global company," Mr. Hammond said in an interview earlier this month. "There's certainly higher risks involved in doing an acquisition abroad and growing that business. We're a conservative company and we want to be careful, but I do believe a lot of our growth opportunities lie outside of North America going forward.''

Some observers disagree with the CME's assessment. Bank of Canada Governor Mark Carney estimated in October that Canada's economy likely grew 3 per cent this past year and predicted it will expand 2.3 per cent in 2011. Last week, the International Monetary Fund echoed that evaluation.

Even with companies taking advantage of the high loonie to buy state-of-the-art machinery and equipment from overseas, the anticipated drop in consumer spending will mean import volumes won't outpace exports in 2011 as they did this year, Mr. Myers said.

Nonetheless, according to Mr. Myers' forecasts, export volumes will rise 10 per cent above last year's levels, with imports rising 9 per cent. That compares with a 6.8-per-cent increase for exports in 2010, which was dwarfed by a 12-per-cent gain for imports.









The biggest threat to the export projections, CME said, would be an unanticipated surge in the loonie, to well past parity. Other risks include a sharp rise in interest rates, trade protectionism in international markets, and financial turmoil linked to sovereign-debt problems.

"It's going to be touch and go here, with a lot of things that could go wrong," Mr. Myers said.

Barring negative shocks, CME predicts that Canadian manufacturers' production will increase by 5 per cent next year after rising 5.7 per cent this year, the first growth for the factory sector in five years.

Much of its optimism on that front is rooted in signs that business investment, another key ingredient that policy makers have said will be essential to the turnaround in the coming year and to long-term competitiveness, is already gathering steam.

"The manufacturing side is not going to be driven just by exports, but I think by stronger investment activity by businesses in Canada, too," Mr. Myers said. "If you look at oil sands alone, the combined investment going into oil sands last year was higher than the amount of total government investment in infrastructure. So it's a very, very important part of the recovery." Manufacturing is also expected to make a ``disproportionate" contribution to economic growth and jobs in Ontario, the country's beleaguered factory hub, over the next two years, according to a study released Wednesday by the public-private Ontario Manufacturing Council.

That would be a significant development, since Ontario and Quebec have together lost more than 75,000 factory jobs in the past year, as the currency, the U.S. slowdown and stiff competition from Asian companies gutted profit margins.

Although Canada continues to send about three-quarters of its exports to the United States, and Canadian manufacturers export about half of what they produce, many of those who survived the downturn are forging into new markets to cut their reliance on North American buyers.

CME figures show that annual exports to Japan and Europe rose last year by 10 and 15 per cent, respectively, compared with a 4.5-per-cent gain for exports to the United States. Exports to countries other than the U.S., Europe or Japan soared more than 30 per cent, CME said.