INDU Committee Report

In March 2009, the Subcommittee on Canadian Industrial Sectors (hereinafter the “Subcommittee”) of the House of Commons Standing Committee on Industry, Science and Technology (hereinafter the “Committee”) began its study of “the crisis faced by certain industrial sectors in Canada, such as aerospace, energy, forestry, high-tech and manufacturing.” The study embraced all of the industries cited in this mandate and went further to include other important and struggling industries, such as minerals and metal products, chemicals and chemical products, and railway equipment suppliers.

This study covers much of the same economic terrain as did the Committee’s report in 2007, entitled Manufacturing: Moving Forward — Rising to the Challenge, but its scope has been broadened beyond manufacturing activities to include upstream operations in the forestry, mining and energy sectors. The economic context today is also much different than it was back in 2007. Between 2003 and 2007, the worldwide “commodities boom” produced huge price spikes in a number of primary commodities, most notably in energy prices, and a rapid and large appreciation in the value of the Canadian dollar. As a consequence of the latter, many Canadian manufacturers became considerably less competitive with their foreign rivals. Today, the global economic recession is the principal challenge and agent of change in terms of the business practices adopted by Canadian manufacturers, as well as by many forestry, mining and energy operations. The common economic thread among these industries is that they are highly focused on export sales and, therefore, must battle vigorously in very competitive global markets. Their managers’ business acumen is being put to the test, probably the greatest test that they, as a group, have ever faced.

The global economic recession is obviously a cyclical event. It will come to an end and an economic recovery will follow. The timing of any recovery is always an important matter, but expert opinion has converged on the proposition that this recovery will be predicated on the stabilization of the global financial system. Canada has little role to play here; it is essentially hostage to the actions that have or will be taken by decision-makers of international and foreign country institutions. In the interim, Canadian fiscal and monetary policies are focused on stimulating aggregate spending, both consumer and government components, and shoring up credit conditions, with the forging of industry-specific policies and programs (i.e., for the automotive sector, the forestry sector) to handle the most acute economic hardships.

A second important issue surrounds the questions: What type of recovery will follow? And will Canadian industry be ready and well equipped to take advantage of this recovery when it arrives? In answer to the first question, although most economic forecasts differ on the timing and strength of the forthcoming recovery in Canada, they all seem to agree that most “emerging economies”, such as China, India and Southeast Asia, will resume their high growth rates that they had experienced before the global recession hit. For the Canadian manufacturing sector, this scenario might mean a return to “commodities boom” conditions as experienced between 2003 and 2007 that included an appreciation of the Canadian dollar to approximately parity with the U.S. dollar and a loss in competitiveness. In answer to the second question, given a return to “commodities boom”-like conditions, it remains an open question of whether or not the Government of Canada’s temporary tax measure of an accelerated capital cost allowance (CCA) on manufacturing and processing machinery and equipment (M&E) will stimulate sufficient investment in M&E to raise labour productivity levels across the manufacturing sector. This tax measure was put in place for a limited period to enable the manufacturing sector to more effectively compete with rivals when the Canadian dollar reached parity with the U.S. dollar.

The Committee’s report first summarizes the salient facts of the two external shocks that recently hit the Canadian economy: the worldwide “commodities boom” and the global economic recession. The inclusion of the first shock is intended to be more than an update on its manufacturing report of 2007, as the Committee believes that it might provide a window on the economic forces that will continue to shape Canada’s manufacturing sector with the forthcoming economic recovery. The second shock, on the other hand, will provide the latest details on the likely depth and duration of the current recession and on credit conditions in Canada.

The Committee will next address the economic circumstances of the manufacturing sector as a whole, being careful to distinguish between the different impacts of the two external economic shocks. The Committee will then focus on the economic circumstances, challenges (both structural and cyclical), industry responses of specific sectors — the ones mentioned above.