The Ontario economy’s manufacturing sector was particularly hard hit by the 2009 recession. One measure of whether it is rebounding is to see if there is substantial new investment going into Ontario manufacturing in terms of capital expenditures on construction, machinery and equipment. It does not look very good.
Take a look at some Statistics Canada numbers (Table 290005-Capital and Repair expenditures, by sector and province, annually) just for capital spending (am not including repairs) in manufacturing. Figure 1 plots total nominal capital expenditure from 1991 to 2013. There seem to be three phases. It grows rather robustly from 6.2 billion dollars in 1991 to reach 10.8 billion in 1998 and then starts to decline but nothing like the collapse after 2007. Then it goes from 10.8 billion dollars in 1998 to 9 billion in 2006, and picks up a bit in 2007 to reach 10 billion in 2007. Finally, it then collapses and stays flat and is at about 6 billion dollars in 2013. The fact that new capital spending remains moribund means a very slow recovery for manufacturing in Ontario’s future.
Take a look at what happens across the assorted manufacturing sub-sectors in Figure 2 when divided into the three phases visible in Figure 1. The period 1991 to 1998 saw capital expenditure growth in all the categories except petroleum and coal products. Some of the highest growth rates were in the wood products industry, fabricated metals and furniture products. The period from 1998 to 2007 saw a decline in quite a few sectors – wood products and paper as the forest sector crisis took its toll but also metals and machinery and electronics. As for the bright spots, there was a recovery in petroleum and coal products manufacturing showing there are some benefits to Ontario manufacturing from an energy sector boom. As well, a bit of growth in capital spending in furniture, food manufacturing and furniture. As for the period 2008 to 2013 – well is pretty much a decline across the board with the exception of tiny increases in paper manufacturing and food manufacturing and a more robust increase in electrical equipment and appliances. The biggest percentage declines were in wood products, transportation equipment and furniture manufacturing.
Two additional points I want to make. First, I am taken by how across the board the decline in new capital spending was for the period 2008 to 2013. No sector seems to have escaped with the exception of electrical equipment and appliances. Such a broad based collapse obviously does not bode well for Ontario’s industrial future. There seem to be only losers. Second, I am puzzled by the performance of the furniture manufacturing sub sector. I’m not surprised by its decline in the 2008 to 2013 period. I am surprised by its growth between 1991 and 2007 as I recall that the expectation was that the furniture manufacturing industry was going to be hard hit by the Canada-U.S. Free Trade Agreement. They obviously responded by investing and upping their game.
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.
Posted by: Kathleen | March 17, 2014 at 08:53 AM
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.
Posted by: Bob Smith | March 17, 2014 at 01:05 PM
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).
Posted by: Kathleen | March 18, 2014 at 09:04 AM
Kathleen,
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).
Posted by: Bob Smith | March 19, 2014 at 07:43 AM
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.
Posted by: Mick Marrs | March 20, 2014 at 06:12 PM