03/7/12

Grim outlook for Canadian manufacturing


Abandoned Arrow Shirt factory, OntarioThe outlook for Canadian manufacturing, warns the CIBC, will remain grim as long as a strong dollar keeps labour costs high, “deepening the hollowing out of the industrial heartland and boosting regional income inequality in the years ahead,” says the Huffington Post.

The Canadian loonie looks good for shoppers who buy consumer and retail goods made outside Canada. Our import prices are actually 10% lower than they were a decade ago. Back in 2002, when the loonie was $0.62CAD to the $USD, our labour costs were lower, so it made Canada a good place in to make products. Now we’re not: we’re too expensive. Our labour costs are now 20-25% higher than those in the USA (see graph, below).

The factories have moved elsewhere and they’re not coming back any time in the foreseeable future. So you have to ask which is the greater advantage for Canadians: being able to buy cheaper goods from China or having good-paying jobs so you can afford better products?

Canadian labour costs risingThe CIBC report notes that, “Canada is no longer a cost-effective location for a host of non-resource-related manufacturing activities. Initially, shutdowns were seen in sectors like apparel and furniture that had earlier hung on in part due to an undervalued exchange rate. More recently, Canada has lagged in attracting or retaining facilities for autos and parts, rail cars, steel mills, and other goods where the competition is now more weighted to US producers… barring a big correction in the currency, or a sharp shift in relative wages, factory growth will subsequently stall.”

Ontario has been hardest hit, the report continues. “Real GDP growth in that province has now trailed the rest of the country for nine straight years—underperformance that has coincided with C$ appreciation. Had Ontario kept pace with the rest of the country, its economy would be almost 10% larger than it is today, making it much easier for the government to dig itself out of deficit.”

Only last month, the HuffPost reported that Canada lost industrial plants at twice the pace of the United States in 2011. The story adds,

Ontario led the decline in industrial plants, shedding 33 of them for a total of 7,853 jobs lost, the report stated. Quebec shed 23 plants, costing nearly 3,000 jobs. Western Canada and Atlantic Canada lost fewer than 2,000 industrial plant jobs each.
But the 14,000 jobs lost at shuttered plants don’t tell the full story. According to Statistics Canada, total employment in manufacturing declined by 50,000 from December, 2010, to December, 2011.
The IIR report suggests the pace of industrial job losses will be similar this year. There are already 76 plants scheduled to close in the next few months in the U.S., while Canada already has four closings scheduled, for job losses totaling 2,700.

At the bottom of the story is a slide show that documents the 10 hardest-hit manufacturing sectors, with the greatest job losses since before the 2008 recession.

Manufacturing isn’t the only sector hit. It’s the classic domino effect. Last month we saw a story on the grim outlook for the air cargo industry: “The immediate future doesn’t look at all rosy for the air cargo business.”

A report from TD Securities just after the recession began stated, “There’s no reason to expect anything good from the Canadian manufacturing shipments report on the 16th, with every single leading indicator that we know of in negative territory.” That picture has not improved significantly. A look at their forecasts for 2012 doesn’t show any improvement predicted. The once robust automobile sector remains flat: “…there is limited upside for new auto sales over the medium term. Perhaps the most difficult challenge facing automakers is the likely absence of any meaningful pentup demand in the Canadian market.” The housing market is at a crossroads: “Overall, we expect sales to record annual average declines of 2.4% and 3.5% in 2012 and 2013, respectively. Prices are poised to suffer a similar fate – annual average declines of 1.9% in 2012 and 3.6% in 2013.”

Furniture sales forecasts have been rewritten with lower expectations. Canadian retail sales in December – the best month of the year – were lower than expected (“There is also a direct connection between the retail shopping numbers and the Personal Consumption Expenditure (PCE) line item in gross domestic product (GDP). PCE accounts for 55% of Canada’s national output.”)

Overall, the economic future does not look rosy for Canada, and especially not for Ontario. Coupled with the Drummond Report on Ontario’s troubled economy and its recommendations for significant cuts to government spending, it looks like we’re in for a few lean years. It’s something for Collingwood Council to keep in mind when working through its next few budgets.

03/3/12

The Drummond Report: economic disaster or salvation?



“It’s not all doom and gloom,” quips Rick Mercer in this video. “Drummond predicts the province could still turn things around, if it acts now, and no one gets sick, needs a job, or educates their children, for the next… ever.”

The Drummond Report – from the Commission on the Reform of Ontario’s Public Services headed by economist Don Drummond – was released last week. It’s a sweeping, 529-page, brick-thick study of Ontario’s fiscal policies and structures, with 362 recommendations about how the province should run its public service. It reads like the findings of an inquest after a particularly gruesome series of industrial accidents. Perhaps it is.

If followed, those recommendations will have a huge impact on municipalities and taxpayers (Drummond says government spending must decrease 16.2% every year for every man, woman and child in this province). Adopting them is the only way, says the report’s author, to get the province out of its $16 billion deficit before we become North America’s Greece with a $30 billion deficit.

Drummond says we must accept all of his recommendations or face financial meltdown. All, not just some. We can’t pick from them like a smorgasbord, he says. But that’s just what Premier Dalton McGuinty has already done, with his recent announcements about what he won’t implement or cut.

I’m not sure if that’s McGuinty’s way of telling us he doesn’t have the backbone to implement unpopular recommendations, or he’s just dancing one last song with political popularity while the ship sinks, or that we should buckle up because the light at the end of the tunnel is an oncoming train called The Deficit. But maybe, he’s actually wiser than we normally give him credit for being.

In a few short weeks, the report has spawned a small, but intense industry of commentators who have weighed in on the pros and cons of Drummond’s recommendations. Rex Murphy, for example, penned this scathing comment in the National Post:

With the exception of the writings of the prophets Jeremiah and Isaiah at their bleakest, flavoured with a touch of H.P. Lovecraft on the days when that lightless mind was wrestling with a migraine, the recent meditations of Don Drummond on Ontario’s fiscal situation set the standard for prose that vibrates with gloom and foreboding.

To be fair, the chances of any National Post writer making even the most remotely backhanded compliment about anything even vaguely Liberal is akin to my chances of winning the lottery, so we have to take his comments in the conservative spirit in which they were written: a self-righteous, anti-Liberal, “I told you so.”

And as expected, the Toronto Star weighed in against it, albeit from another side. Thomas Walkom wrote:

That the rich will fare best under Drummond is true by definition.
The well-to-do depend less on government programs than the poor and middle class. That is a fact. Drummond’s call for government to roll back the Ontario Child Benefit will hurt poor families who receive the subsidy. It will not affect the rich who do not.
Nor are the wealthy being asked to chip in through higher progressive taxes. Drummond did advocate that some taxes, including those on property and gasoline, be hiked. He even wants a special tax (he calls it a user fee) levied on rural parents who bus their children to school.
But these kinds of regressive taxes hit the poor and middle class proportionally harder than the rich. A surtax on high-income earners could correct that bias. But Premier Dalton McGuinty specifically told Drummond to stay away from such remedies.
Add to this the real world of politics, a world in which some groups have clout and others do not.

AMO – the Association of Municipalities of Ontario – has weighed in with an early comment, noting:

AMO is anxious about the potential for altering the upload agreement and the Ontario Municipal Partnership Fund. The Commission is recommending to delay planned uploads of provincial costs from the municipal property tax base by two years.

Translation: Dalton McGuinty’s Liberals promised to reverse the downloading of services and expenses onto municipalities perpetuated by Premier Mike Harris. McGuinty has been undoing it, albeit slowly. He reiterated his promise to continue the uploading at the annual AMO convention, in 2011, and again at the ROMA/OGRA convention in 2012. He promised to have it all reversed by 2018. Drummond suggests pushing that to 2021, which means additional years of expenses to Ontario’s municipalities (you, the taxpayers will pay either way).

AMO credited Drummond with several worthwhile recommendations in the areas of social programs and housing, health care, infrastructure, real estate, electricity, full-cost pricing for water and wastewater treatment services, the justice system, and improving the arbitration system. However, why these recommendations are worthy and others are not is not explained

AMO executives may not want to stray too far into critical commentary because it could alienate the organization from the government, and that would backfire on municipalities. Still, even if it is preliminary, the response noted above is annoyingly vague. I hope to see a much more comprehensive analysis from AMO in the near future, one that looks more closely at what the recommendations mean to municipalities.

Exhaustive as it may appear to some, the report has gaping holes in it. One area, for example, is in the labour arbitration process. Municipalities are frequently burdened with high salary agreements through arbitration. But the executive summary in the report says, “The interest arbitration system has come under increasing scrutiny and attack. We do not find the system to be broken, though it can be improved.” To any municipality trying to wrestle with the escalating costs of, say, their fire service, that statement is a mere nod and a wink to a seriously broken and very expensive process. School boards face the same issue with local teachers’ unions.

Like Walkom pointed out, the provincial tax structure was overlooked and most of the recommendations will have the greatest effect on those with the lowest incomes. One example is full-day kindergarten (which the right-wing QMI media’s writer, Christina Blizzard, caustically calls “free baby sitting”). Working parents who struggle to make ends meet depend on all-day kindergarten to enable them both to stay in the workforce. It’s not a handout.

Drummond’s recommended cuts could slash another 250,000 jobs from the provincial workforce and reduce the provincial economy by billions of dollars. McGuinty may be right by not leaping into these waters without carefully looking at what’s lurking in their depths first.

To the right who view every government program with suspicion, Drummond didn’t go far enough and the cuts should be made regardless of their impact on lower-income and working-class families. To the left, Drummond’s recommendations are a recipe for disaster that will decimate our workforce, our economy and cripple our already struggling labour force with additional costs. These are simplistic views. We’re in a mess and we need to fix it, but Drummond’s report is not the sole answer. It’s a start and some of what he recommends will be necessary, but not all. So Dalton may be right to proceed with caution and not simply dive in without some serious thought to what has to be done.

Here’s an idea Drummond didn’t offer, but I put forward for your consideration. Once upon a time, the province used to charge licencing fees for vehicles based on their number of cylinders. That was dropped, inexplicably. Why not return to that system and put the extra revenue directly into infrastructure spending? Or perhaps base the license fee on the vehicle’s gas mileage ratio? It would serve the double duty of discouraging sales of gas guzzlers, which will only help our environment.