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I wonder to what extent the capital expenditure growth rates are negatively correlated with the exchange rate. I would expect higher growth rates when the dollar is relatively low, making imports of capital goods cheaper.

Might I suggest a partial explanation for the two trends you see (i.e., a decline in new capital spending and an increase in spending on electrical equipment and appliances)- provincial energy policy.

The two, wholly predictable, results of the Ontario government's green energy policies have been (i) increased spending on "green" energy equipment (often solar panels from China) and (ii) increased electricity prices by replacing relatively cheap power (coal, nuclear - OPG's nuclear plants often have to run at less than full capacity when there is too much "green" power available, which also has the adverse effect of shortening the lifespan of those plants) with highly subsidized, and expensive, power (wind, solar, etc.),undercutting manufacturing in other sectors.

I mean the exact opposite - positive correlation! Lower Canadian dollar makes imports more expensive. To the extent that capital investments involve buying foreign parts and equipment, capital expenditures should fall when the dollar is low. Here we see the opposite. The CAD fell back during the period 1991 through 2002, when it bottomed at around 0.64. A steady appreciation took place between 2004 and 2011 - we should have seen some increased capital investment in the period 2004 through 2007. It looks like capital investment is more closely linked to business confidence for exports. Recent pull backs in the CAD could be seen as a positive sign for Ontario manufacturing as it could mean exports become cheaper at a time when the US GDP has started to expand.

It looks very much as if the obvious explanation fits: Ontario manufacturing was hit with a double whammy in the period 2007 to present, with an increasing Canadian dollar (making exports more expensive) plus the Great Recession where our largest trading partner suffered catastrophic declines in GDP (US Recession began in 2007).

@Bob Smith: you really want to hang your explanation on the Ontario Green Energy Act that was passed in 2009? The decline in new captial spending is clearly linked to 2007, which coincides nicely with start of the US Great Recession. The dip in 2012 could be interpreted as a further loss of confidence stemming from the Euro Zone debt crisis. The CAD then began to fall around March 2013, just at the point where business confidence may have been returning to Ontario manufacturers (which would increase the costs of capital investments).


Well, there's no doubt that the Green Energy Act is responsible for the vast increase in investment in electricity generation equipment since 2008 - that's the principal purpose for that legislation. The merits on investing billions in high cost electricity generating capacity, of course, are open to question.

More to the point, I didn't "hang my hat" solely on the Green Energy Act as the sole policy driving up electricity prices (and undermining the manufacturing sector) I criticized provincial government energy policy, of which the Green Energy Act is only one (albeit one particularly misguided) element. It is very clear that the increase in electricity prices pre-date the Green Energy Act. Certainly, in 2008 I remember hearing pulp and paper producers, already reeling over the impact of low prices and a high dollar, complaining about the added hit of electricity prices in their energy intensive industry. The shutting down of (cheap) coal plants was, of course, part of the Liberal's 2003 election platform, and while that promise was only partially implemented pre-2008, no one making an investment would proceed on the basis that the government wouldn't introduce one of its center-piece policies.

Is government energy policy the sole reason for the collapse of the Ontario manufacturing sector? Obviously not, there's lots of blame to go around, But if you think the fact that a manufacturer in Ontario pays electricity prices that are more than twice those faced by manufacturers in, say, Illinois or Quebec has nothing to do with the decline of manufacturing in Ontario, well, you're kidding yourself. (It doesn't help, of course, that Ontario often sells it's "surplus", albeit heavily subsidized, electricity to neighboring jurisdictions for a fraction of what it charges Ontario consumers).

What would compel a manufacturer to setup shop in Ontario as opposed to the some USA or Mexican state? I think it has a lot to do with relative prices of factors of production and market. I can't accept that currency has a material impact on production location decisions, perhaps it does on financial flows but not on production decisions or otherwise no one would be producing in Europe or Japan today. Taxes too can be handled as long as they are reasonable. For me its still about consistent and reliable access to energy, transportation, resources, workforce and market, therefore everything to do with governance.

Perhaps Ontario should open up its purse strings for more financial inducements.

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