Ontario economy struggles as manufacturing and exports slump

If productivity is key to prosperity, Ontario is in trouble.

Ontario's manufacturing-led economy has slipped into a productivity funk, caused by slumping exports and lost market share in the United States, concludes a new study being released Monday by the Ottawa-based Centre for the Study of Living Standards.

Productivity grew just 0.5 per cent a year between 2000 and 2012, the second lowest in the country during that period, with Alberta in last place. That compares to productivity growth of nearly 2 per cent a year for Ontario from 1987 to 2000.

"Given the relative size of Ontario's economy, the province's weak productivity growth has largely been responsible for Canada's overall poor productivity performance," according to the 187-page study, prepared for Ontario's Ministry of Finance.

The main cause is weak demand for what Ontario produces, with the problem concentrated in the manufacturing and financial services. Labour productivity in manufacturing fell to an average of 2.8 per cent a year between 2000 and 2012, down from 3.6 per cent a year between 1987 and 2000.

Among the main causes of lower productivity growth in manufacturing are slower export sales, the Great Recession in the United States, the sharp runup in the value of the Canadian dollar in the early 2000s and lost market share in the United States to countries such as China, Mexico and South Korea.

The report estimates that roughly half of Ontario's lost cost competitiveness was due to a higher dollar, which has fallen to 81 cents (U.S.) from more than $1 in mid-2011.

U.S. imports from Canada grew at a rate of 2.9 per cent a year between 2000 and 2012. Imports from China grew nearly 13 per cent a year over the same period.

By 2012, China had surpassed Canada as a source of imports for the U.S. – $425-billion a year versus $324-billion.

The report concludes that getting productivity rising again will depend heavily on factors "beyond the government's control," including demand for its exports.

"There is no silver bullet that the Ontario government could take to supercharge productivity growth," said the report by economist Andrew Sharpe, executive director of the Centre for the Study of Living Standards.

But the business sector must also do better in producing high-quality goods and services that the world wants. "Responsibility for business sector productivity performance ultimately lies with businesses," the report said.

And yet the report identifies several strategies that would help boost productivity, including redirecting labour and capital to more productive sectors, providing incentives for companies to invest, spreading technological advances to smaller companies, investing in public infrastructure and improving education and skills training.