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Southern Ontario ‘The New Rust Belt,' The Economist Declares

'Canada's problem is Mexico, not oil.'

The Economist magazine has published an article on the “puzzling weakness” of Canadian manufacturing, noting the sector’s years-long slide, which the magazine says has turned southern Ontario, Canada's manufacturing heartland, into a “new rust belt.”

Observers had been expecting Canadian manufacturing to put in a strong performance this year, thanks to a steeply lower loonie that makes exports more competitive.

But so far, the rebound hasn’t happened. Output in Canadian manufacturing was 2.3 per cent lower this May than it was a year earlier, the latest month for which data is available, and job growth has been at half the pace of the broader economy, after years of declining job numbers.

The Economist article adds an interesting talking point to the debate: In 2000, manufacturing was 18 per cent of Canada’s economy, the same level as Germany. By 2013, it had fallen to 10 per cent, the same level as the U.S. and U.K. It attributes that to the long period during which the Canadian dollar was high thanks to high oil prices, harming the competitiveness of non-oil exporters.

It notes that the number of people employed in manufacturing in Canada has fallen by 500,000, to 1.7 million people, even as the economy and the country grew over the past 15 years. Some 20,000 factories have shut their doors.

The magazine pinpoints a problem that some others have noted as well: Even though the loonie has been falling against the U.S. dollar, so have the currencies of many other countries that compete with Canada. And that makes Canada no better off relative to those countries.

Citibank currency strategy head Steven Englander recently argued that "Canada's problem is Mexico, not oil." He noted that the Mexican peso and the Canadian dollar have been trading in the same range for years, meaning Canada’s oil and auto parts exports aren’t gaining any advantage on the U.S.'s southern neighbour.

“The Canadian dollar depreciation hasn’t gained them any competitive advantage, so they’re, you know, getting clocked, both oil and non-oil,” Englander said, as quoted at Bloomberg.

The Economist notes that the party leaders in the current federal campaign have “had little to say about manufacturing’s listlessness.” But they haven’t ignored the issue altogether.

Most recently, NDP Leader Tom Mulcair pledged to create a $40-million innovation tax credit to make it easier for manufacturers to buy new equipment and to invest in research and development.

"The manufacturing industry helped Canada's middle class, however over the last 15 years, this important sector has been hit hard by job losses," Mulcair said last week. "Consecutive Liberal and Conservative governments have sat on the sidelines while half a million manufacturing jobs disappear."

Liberal Leader Justin Trudeau has pledged to put $200 million towards the creation of green technologies that can be used in industries such as agriculture, energy, fisheries, forestry and mining.

Conservative Leader Stephen Harper has been touting a promise made in the budget to extend a 10-year tax break for manufacturers that allows them to take half the tax off new equipment purchases.

The tax break “will provide manufacturers with the support they need to continue generating jobs and economic growth across the country,” Harper said in May.

But looking at the problem in the context of exchange rates, The Economist sees little effect from government policy.

"That may be because there is not much that government can do," the article concludes. "Manufacturing in Canada will not disappear. Neither, sadly, will the rust."

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