Greater capacity in manufacturing and services needed to recover ground lost to emerging market countries

TORONTO, May 28, 2018 /CNW/ - Canada is falling further behind in the race to supply world markets, and if it doesn't get in the game soon, its dollar could drop to nearly 70 cents US in the next decade, finds a new report from CIBC Capital Markets.

"Let's face it, since the turn of the millennium, other than in the post-recession bounce-back, Canada has been an also-ran in the race for global and US markets," say CIBC Capital Markets economists Avery Shenfeld and Royce Mendes in the report. "What's been lacking are ribbon-cutting ceremonies at the new facilities—factories, labs and office towers—needed to expand export capacity."

Growth in Canadian exports and industrial capacity has gone missing in all but a few sectors since the late 1990s, leading to the question: can the country compete as a location for such facilities today, the report notes.

While there has been much self-congratulation in Canada about a few success, Canada's share of U.S. goods imports has dropped from nearly 20% at the turn of the millennium to only 13% today, the report finds. In autos, for example, Canadian assembly plants are producing a million fewer units, with the sector's share of private sector employment tumbling by the equivalent of 100,000 jobs.

Other weaker elements have been a "hodge-podge of manufacturing sectors which have in many cases seen Canadian activity supplanted in the US market by Mexico or other low-cost competitors," the report states. "Simply put, export volumes have grown at a snail's pace as plants shut their doors in Canada and opened elsewhere."

Meanwhile, some of the same emerging market countries that are challenging Canada in manufacturing are "also banging down the doors in services" where Canada's share of the U.S. import market has eroded more than all other developed economies, the report says.

"If we don't make progress in tilting the playing field back to Canada, there is always the market's invisible hand to do the work for us. A poor current account will, over time, tend to push the Canadian dollar weaker against others.

"It would be better if Canada had other advantages to support export growth, rather than rely on a weak loonie that makes us less able to spend abroad," the report says. "But if that's not forthcoming, the Canadian dollar will bear the burden of adjustment, spurred by a weak current account," dropping its value to 60 cents US in the 2020s.

So, what are potential remedies? Targeted support for training and education, particularly in tech-related services, along with a "thinning of the regulatory books, faster government project approvals, lower corporate taxes and improved business infrastructure" would be helpful, the report says.

With Canada now tapping the brakes on debt-financed consumption for financial stability reasons, the country needs exports and related capital spending to help fill the gap, the report adds. "Such a shift to a more balanced economy would also tend to raise productivity, leaving more scope for higher real wages."

The complete CIBC Capital Markets report is available here.

About CIBC

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SOURCE CIBC - Economic Research

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