Canada’s Manufacturing Sector Outperforming Pre-Pandemic Levels, New Report Shows

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RSM Canada (“RSM”), a leading global provider of audit, tax, and consulting services focused on middle-market businesses, on Monday launched its summer 2021 issue of “The Real Economy: Canada” – a quarterly report that provides Canadian businesses with economic analysis and insights into factors driving growth, or economic headwinds, in Canada’s middle market, noting that Canada’s manufacturing sector is outperforming pre-pandemic levels.

With lockdown restrictions lifting from coast-to-coast, the third edition of this year’s “The Real Economy: Canada” report examines what strong performances from Canada’s manufacturing and housing sectors mean for Canada’s long-term growth, and how that growth may be stifled due to ongoing trade tensions with the United States and lagging business investment. The report also shines a light on resiliency in the energy sector, and how Toronto and Vancouver have managed to recession-proof their economies.

Key findings in this quarter’s report include:

Canada’s manufacturing sector is outperforming pre-pandemic levels

• Q1 manufacturing sales & railway car loadings surpassed pre-pandemic outputs.
• Rising consumer expectations coincided with the rebound in manufacturing new orders, which shows the importance of the production sector in downstream economic activity.
• Ontario stands to gain exponentially from automotive brand commitments to electric vehicle investment following shifting consumer & business expectations.

Canada’s housing market remains bullish

• Housing sector remains at the forefront of North America’s economic recovery despite headwinds facing the housing ecosystem.
• Demand is likely to continue as millennials become the backbone of consumer demand and the workplace.
• Continuing spikes in household savings indicate we may see greater housing market investment once consumers deem the pandemic less of an economic threat.
• Tariff reduction – particularly on Canadian lumber – will also be necessary to sustain the sector’s performance.

Toronto and Vancouver proving resilient despite adverse economic conditions

• Accumulation of new-economy businesses in technology, media, and entertainment have allowed both business hubs to prosper.
• Both talent supplies greatly benefit from access to premier academic institutions, proximity to the U.S. & Asian markets, and accommodative government policies.
• Vancouver’s technology sector has grown at a 29 percent annual rate – the fastest in North America – while Toronto has grown its reputation as a digital incubator.

The return of American industrial policy may heighten CAN-U.S. trade tensions

• Canadian manufactured products face market challenges in wake of Biden’s ‘Buy American’ provisions.
• Nearly two-thirds of Canada’s GDP depends on trade; the U.S. represented 73 percent of Canadian exports in 2020.
• Canada could feel the indirect effects of the latest U.S. industrial legislation if it fails to keep pace with its southern neighbor.
• Canada’s attempts to diversify its trade market with countries like China, which only represents 5 percent of domestic exports, have had mixed results to date.

Business investment continues to hit a wall

• Total business investment remains over 14 percent below pre-COVID levels, which signals trouble for Canada’s long-term economic development.
• Increases in household disposable income continue to outpace consumption, indicating further consumer sector imbalance.
• Refocusing the economy on strengthening the labour force and its ability to produce diversified items of value will be key to attracting capital long-term.

Despite the turmoil, the energy sector’s importance to the economy has increased over recent years

• In 2020, energy products comprised 18.4 percent of Canada’s total exports to the United States, up from 8.7 percent in 1998.
• In the first quarter of 2021, that ratio has grown even more extreme, with energy products accounting for 21.9 percent of Canada’s total exports to the United States.
• The timeline of transition to an all-electric economy remains undefined, suggesting a floor under the price of oil in the medium term.

“Canada’s manufacturing sector has almost singlehandedly pulled the country out of recession in recent months, and this strong performance, coupled with promising signs from other areas such as real estate and energy, suggests that better days are ahead for the economy”, says Alex Kotsopoulos, partner, projects and economics with RSM Canada in the press release. “But there’s still plenty of work to be done on the trade front. Canada’s over-reliance on the U.S. leaves it vulnerable to any trade frictions that happen between the two nations, and we’re seeing that effect now as the Biden administration continues to focus first and foremost on rebuilding the U.S. economy.”