Credit Herald

The Canadian economy looks healthier than its American counterpart right now. But don’t get too comfortable with that. There are signs that Canada – and especially its industrial heartland of Ontario and Quebec – faces some wrenching changes.

What’s happening in the auto industry, with plant shutdowns and loss of jobs, is just one example. Much of the manufacturing sector is under pressure, and this will spill over into business services such as finance, trucking, construction and wholesale trade.

This past week, analysts at both Merrill Lynch Canada and the Bank of Montreal warned that Canada’s current account surplus was about to disappear. The current account is the best measure of Canada’s overall performance in the global economy each year. It includes our trade in goods and services, the interest and dividends Canadians earn abroad or pay out to foreigners and Canadian tourism abroad and tourism spending in Canada.

David Wolf of Merrill Lynch suggests that Canada’s current account deficit could swing from a projected surplus of $12 billion last year to a deficit of $20 billion this year and $36 billion in 2009, ending Canada’s many years of surpluses.

While, as he says, "this is not a disaster," since financial markets can handle this massive shift, it is nonetheless troubling because it is mainly the result of Canada’s deteriorating merchandise trade surplus.

Canada managed a trade surplus this past year largely because of the high price it got for oil exports. Reflecting our higher dollar and the slowing U.S. economy, our overall exports to the U.S. fell 10.8 per cent last year, while our automotive exports fell almost 26 per cent.

In a separate report, Derek Burleton of TD Economics warned of a continuing decline for Canadian manufacturing. Since 2002, about 17 per cent of Ontario factory jobs and 20 per cent of Quebec factory jobs have disappeared. This amounts to a loss of 320,000 factory jobs in the two provinces so far, with more to come.

Canada is not unique in this regard, as the U.S., Europe and Japan have also seen manufacturing job losses paydayloans. If Ontario and Quebec had the same share of workers in manufacturing as these other key economies, they would lose another 370,000 jobs over the next five years, Burleton said.

Why is this job shock hitting Canada now? One explanation is that for much of the past decade, our low dollar helped shield Canadian manufacturers from the need to restructure, raise productivity, participate in global value chains and become global traders, not just exporters to the U.S. While productivity in U.S. manufacturing was rising by up to 4 per cent a year this decade, it has been rising just 1 per cent a year in Canada.

Now, as Burleton points out, manufacturers are being forced to make tough adjustments other countries have been making for some time and this will cause much pain and upheaval.

Moreover, just at the time that they need to invest in advanced production technologies, improve research and development spending and become more innovative, they are also facing intense cost pressures, not only because of China but also the United States.

The announcement this past week by General Motors in the U.S., for example, that it was offering buyouts to 74,000 unionized employees, reflects the fact that under its new union contract it can replace workers taking early retirement with new workers whose pay and benefits will be much lower, with a saving of nearly $50 an hour in pay and benefits per worker. This puts pressure on Canada in the competition for new investment.

All of this underlines the massive changes under way in the global economy. Unfortunately for our manufacturers and their workers, we have a federal government that seems indifferent to their problems, apparently operating on the dubious assumption that Canada is an energy superpower so we don’t need to worry.

This will be a costly mistake for our country.

David Crane’s Global Issues column appears on Sundays. He can be reached at crane@interlog.com

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