Strategy

Manufacturing: Trillium turmoil

Manufacturing woes have hit have-not Ontario hard. So what's the plan, Premier McGuinty?

Ouch. This downturn is really beginning to bite. Wall Street may have stabilized, but the problems have moved into the wider economy. Consumers are pulling in their spending and manufacturing levels in the U.S. have fallen to 26-year lows. We’re in a scary place.

Nowhere does this downturn hurt more than in the manufacturing heartland of southern Ontario, where unemployment has touched 10% in the auto capital of Windsor. The pained look on Ontario Finance Minister Dwight Duncan’s face at the announcement on Nov. 4 that Ontario will receive equalization payments for the first time in the history of confederation said it all.

Is there anything that can be done? Not much in the short-term, say the authors of a recent report from TD Bank Financial Group that looks at the crisis. The fallout from this summer’s energy price spike (which toppled an economy already made delicate by high leverage levels) is already in the pipe, and so we’ll suffer those effects for the next year or two. But while the current downturn will have its day, the bigger issues lie in the long term, say TD economists Derek Burleton and Don Drummond, the report’s authors. The economic pillars — among them a competitive dollar, regulatory agreements and privileged access to the U.S. — that have long supported the Ontario economy are just now giving way, and may never come back. And this is going to create problems in the long term. If the government doesn’t begin to lay out a plan for the long-term health of the Ontario economy, say Burleton and Drummond, things will only get worse.

The province’s manufacturing power was built on the 1965 Canada-U.S. auto pact, a competitive Canadian dollar, low-cost energy supplies, lower costs associated with Canada’s public health-care system, a skilled labour force and a good location. Over the past 30 to 40 years, these factors combined to elevate Ontario into the golden goose of confederation. In 1980, for every dollar in goods sent to other provinces, one dollar in goods went to the U.S. By the year 2000 — when manufacturing as a percentage of provincial GDP hit a peak of 23.4% — $3 of goods were going to the U.S. for every $1 of goods sent to other provinces. The Ontario trillium had fully flowered.

But decay is now setting in. Not only have we suffered the dismantling of the auto pact under the World Trade Organization, and the attacks of 9/11, which thickened the border, but the impact of low-cost manufacturers from China has pushed down wages and business levels.

The TD economists suggest a major decrease in the average pay of U.S. auto workers is going to happen faster than many think, and this is going to “hollow-out” manufacturing wages in Canada.

In 2007 in Ontario, manufacturing as a percentage of GDP dropped to 18.3% from its 2000 peak. And the temporary boostthe Ontario economy received from a booming home market, a surge in public-sector hiring and a short-term bump in financial-sector employment is also rapidly fading. Throw in the fact auto and forestry product sales from Ontario were boosted by easy credit over the past decade — sales that can now be expected to temper — and you have the ingredients for an extended period of sluggish growth, say Burleton and Drummond. “In sum, with the exception of the skilled labour force, health care costs and location, [Ontario’s] competitive strengths are probably gone forever,” they write.

Backing up the findings in the TD report is the Conference Board of Canada’s most recent provincial outlook, which suggests the global financial turmoil will bring Ontario to the brink of recession next year. “In 2009, Ontario will post its first trade deficit since the province began keeping records almost thirty years ago. Ontario consumers will also tighten their belts, weakening growth in the domestic economy,” said Marie-Christine Bernard, an associate director with the Conference Board, in a release.

What to do? The TD economists call on the provincial government to begin grappling with these issues by putting together a major report on how the government expects to deal with the looming shift in Ontario’s economy. They suggest a typical litany of fixes — focus on education, integrate immigrants better, create a stable electrical supply and ensure good infrastructure, among other things — but we need to get started, said Burleton in a recent conversation. “The economy will get some traction in 2010. But that won’t be the time to get complacent,” he says. “You’ve got to look at 2015, 2020. Where do we want to be?” Preferably in a better economic position.