Many indicators are pointing to a stabilization and even modest improvement in Canada’s troubled factory sector after more than a decade of stagnation and decline, a turnaround that if sustained could bolster Ontario’s economy.
Empty bottles on factory conveyor belt. Manufacturers have become more efficient, one economist says. — Image by Thinkstock
On Tuesday, the Royal Bank reported its manufacturing purchasing manager’s index (PMI) rose to 53.3 in March, up from 52.9 per cent in February, and the second gain in as many months.
The index hit a nine-month low of 51.7 in January, but remained above 50.0 — indicating expansion in the sector.
The bank found the strengthening pace of improvement in business confidence over the past two months “encouraging,” as it mirrors solid numbers in other indicators in both Canada and the U.S.
“Other components of the survey, which are not included in the overall PMI measure, indicated generally strengthening activity,” said RBC. “The new export orders index rose ... even more encouraging, the backlog of work index shot up to 52.9 in March from 50.8 in February,” the steepest increase since August 2011.
This follows Statistics Canada’s report Monday showing the sector advanced by a robust one per cent in January, after December’s falloff.
The improvement in the hard numbers comes as another bank, the CIBC, issued a rare positive long-term outlook for manufacturing — predicting that the long deterioration in the sector that employs about 1.7 million Canadians may be over.
CIBC deputy chief economist Benjamin Tal says events are finally moving in the right direction for Canada’s factories, which produce everything from autos and parts, to machinery, wood products, primary metals, aerospace equipment, plastics and clothing, to computer and electronic components.
“I think the bleeding is over. We still have competitive pressures, but what I’m saying is that the industry is in position to take advantage of the stronger U.S. economy and the fact that the dollar has depreciated by 10 per cent is also significant.”
A key reason Tal sees better days for the sector is that many industries came out of the 2008-09 recession leaner and stronger than they went in — in part because many of the weak sisters have just disappeared. About 20 per cent of companies that were around six years ago are no longer.
As well, survivors have used the period to get more efficient. Productivity has risen by nine per cent in five years between 2009 and 2013, compared with only about seven per cent for the entire decade of the 2000s.
That means Canadian manufacturers will be putting out more product with fewer workers, so don’t expect a surge in jobs from the sector, says Tal. Manufacturing has lost almost one million workers since the high-water mark in the late 1990s, and dropped an additional 42,000 jobs from December 2012 to December 2013.
Still, Tal points out that the needle is finally pointing in the right direction, which means the current job levels — many high-paying — are likely to at least be sustainable.
Tal forecasts that the industries with the best chance of a robust bounce-back in the next few years will be wood products, followed by primary metal, machinery, aerospace, and computer and electronic suppliers
At the bottom of the list is petroleum and coal, where productivity improvements have lagged other Canadian manufacturing industries.
The good news, however, must be kept in perspective. The sector is still 10 per cent behind pre-slump highs, and in the past 10 years, it has gone from 16 per cent of the economy to 12 per cent today. Tal says it’s unlikely to return to the previous heady days.