The benefits of the multiplier effect are nowhere to be seen
due to the disconnect between export performance and economic
impact
TORONTO, Sept. 28, 2016 /CNW/ - Canada's manufacturing exports have risen 12
per cent in volume since 2012, but that hasn't made much of an
impact on GDP or employment yet, finds a new report by CIBC Capital
Markets.
"Canada's manufacturing
exporters have responded better than advertised to global demand
and currency movements over the past few years," says Benjamin Tal, Deputy Chief Economist, CIBC, who
authored the report, Waiting for the Export Multiplier. "The
real disconnect is the inability of manufacturers to translate
those export gains into GDP and employment gains."
Since 2012, when the loonie began its descent from parity,
dollar-sensitive industries, such as aircraft, plastic, and
pharmaceutical and medicinal products, saw export volumes rise
notably faster than industries that are less sensitive to currency
fluctuations. However, it has been the dollar-sensitive industries
that have underperformed when it comes to GDP and unemployment
growth.
"This abnormal behaviour suggests that despite currency-induced
relative improvement in labour costs, labour-intensive industries
cannot be the chief catalyst of manufacturing growth in the near
term," Mr. Tal says. "Capital-intensive industries must step up to
the plate."
After falling significantly during the recession,
capital-intensive manufacturers in Canada are still 10 per cent below
pre-recession levels, and also lag the performance of
labour-intensive sectors, the report says. Compared to the U.S.,
Canadian capital-intensive manufacturers are also severely
underperforming – production south of the border is now 12 per cent
above pre-recession levels.
Meanwhile, labour-intensive manufacturers in the U.S. and
Canada have remained roughly in
line with one another, but U.S. labour productivity has gained some
ground, the report says.
Despite recent softening, labour productivity has risen by an
annual average of 2.6 per cent since 2006 – that's more than double
the productivity gain seen in Canadian manufacturing," Mr. Tal
notes.
The main benefit of the lower dollar should be lowering the
relative cost of labour while the cost of capital equipment has
been rising, but Mr. Tal says that companies aren't responding by
substituting capital equipment for labour as one would expect.
While capital costs have been rising, energy prices have been on
the decline for Canadian manufacturers, but that hasn't helped many
industries either. "At the margin, that can help but those margins
are very narrow," Mr. Tal explains. "Energy accounts for a small
2.5 per cent of total cost—down from 2.9 per cent at the beginning
of the decade."
Mr. Tal says the disconnect between export performance and other
real economic indicators in the Canadian manufacturing sector might
reflect the limited ability of labour-intensive industries to carry
the torch.
"The shift to more capital-intensive activity will be
constrained by the increased cost of capital equipment," he says.
"The rotation is coming, but it might take even longer than
currently expected."
About CIBC
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clients and three major business units – Retail and Business
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SOURCE Canadian Imperial Bank of Commerce