THE BLOG
12/30/2013 05:43 pm ET Updated Mar 01, 2014

The Future Looks Bleak for Ontario's Manufacturing Sector

What's happened to Canada's manufacturing sector? Kellogg's recent decision to close its plant in London ripped another 500 factory jobs away from Ontario. That follows Heinz's move to shutter its plant in Leamington, which is near Windsor. The 100-year-old plant, and its 740 employees, was the largest employer in the area. The announcement from Heinz comes on the heels of plant closures by Caterpillar, CCL Industries, and Novartis. Added up, and Ontario, home to what's left of Canada's industrial heartland, has shed 33,000 manufacturing jobs in the last year.

While the recent plant closures have grabbed headlines, it's only a fraction of the jobs lost over the last decade. Once the top employer in Ontario, the manufacturing sector is now a shadow of its former self.

Since 2002, Ontario's manufacturing sector has shrunk by nearly 30 percent--or more than 300,000 jobs. The story is similar when you look at real manufacturing output, which is down almost 20 percent over the same time.

Look back to the 1990s, or indeed most of the post-war period, and manufacturing could be counted on as an engine of economic growth for the province. Today, the opposite is true. The shrinking sector is a drag on growth and part of the reason Ontario's economy has been a laggard versus other provinces over the last decade.

It's unfamiliar territory for Ontario, historically the principle cheque writer of equalization payments to the poorer provinces in the Confederation. Not so anymore. The income-per-capita in what was once Canada's most affluent province is now well below the national average. Ontario's economic standing among other province's, similarly, is also on the decline. The province's share of Canadian GDP is down by roughly 5 percentage points in the past ten years.

It's not a coincidence that manufacturing employment in Ontario peaked in 2002, just as a free falling Canadian dollar was plunging to nearly 60 cents against the U.S. greenback. Backed by that exchange rate, everyone from auto assemblers to food processors enjoyed a commanding cost advantage over competing plants south of the border.

Since then, the Canadian dollar has soared along with the rising price of oil. While the loonie has long moved to the rhythms of commodity prices, in the last decade it's danced in lock step with oil prices, which have marched from $20 a barrel to the triple-digit range. These days the loonie is trading more than 50 percent higher than it was during the last peak in manufacturing employment in Ontario.

In the context of exchange-adjusted labour costs rising by more than 50 percent, there's really no mystery behind why so many manufacturing plants are closing in Ontario. Offsetting such a dramatic swing in exchange-adjusted wage costs would take a boom in productivity that, frankly, just isn't in the cards.

What's worse, productivity in the manufacturing sector is actually languishing. In theory, a higher Canadian dollar should make it easier for plants to import machinery and equipment that will enhance productivity. The theory, however, assumes that plants will continue to run. In practice, a soaring loonie is spurring international manufacturers to look for greener pastures elsewhere. Instead of spending money in Canada to improve factory productivity, decisions are being made in the opposite direction, which is resulting in disinvestment.

The numbers speak for themselves. In the last decade, the manufacturing sector's share of business investment is down by nearly half, falling from 14 percent to as little as 8 percent. Without capital spending on new plants and equipment, productivity growth is going nowhere. That, in turn, only exacerbates the competitive disadvantage that a high Canadian dollar puts on wage costs.

Where to from here? With the loonie trading in the 95-cent range against the greenback, who's choosing to invest in boosting the productivity of an uncompetitive manufacturing sector?