Manufacturing not as hot in 2019

Manufacturing is largest business sector across the NAFTA region.
Photo: Fotolia

Canadian manufacturing has been on a roll. For 18 months leading up to December, the sector experienced its strongest growth rate in 20 years. From the end of 2016 to July of 2018, the value of goods produced and shipped by Canadian manufacturers grew by almost 10%. Indeed, shipments increased by 5.1% during the first half of 2018 alone.

They have soared in part because manufacturers’ selling prices have risen, accounting for about 60% of shipments growth since the end of 2016. But the impact of higher prices was felt mostly last year. Two-thirds of the growth in shipments value during the first half of 2018 is the result of real increases in production volumes responding to stronger customer demand.

Customers have been mainly overseas. Manufactured exports to the US rose by about 9% since the end of 2016. However, exports to other markets such the European Union, China, Hong Kong, Saudi Arabia and Indonesia in particular, have grown more rapidly, which shows manufacturers are diversifying their international customer base.

Shipments for the Canadian market have grown at a much slower pace. Exports accounted for about half of all goods shipped at the end of 2016. Today they account for almost 60% of total shipments value.

Here’s another surprising detail. Automotive vehicle and parts production has actually declined since the end of 2016. Growth has been driven largely by stronger performance in petroleum and wood products, machinery, electronics and fabricated metal products industries.

It’s unlikely the good news will last. The expansion recorded in currently available statistics occurred before manufacturers felt the full brunt of US steel and aluminum tariffs, then the retaliatory tariffs on American exports. Tariffs have increased manufacturing costs throughout North American supply chains, which weigh heavily on business confidence and investment decisions.

The USMCA will help to calm some fears Canadian manufacturers had of more punitive trade measures in the US. But the erratic nature of US trade policy stills holds significant risks for manufacturers in Canada and around the world. The future of the institutions that underpin the world’s trading system is itself highly uncertain.

Political dynamics will have a negative impact on international trade and manufacturing performance over the year ahead. The future of the European Union and the UK economy after Brexit is already weighing heavily on international markets. Meanwhile, new political risks are emerging in Mexico, Brazil and Saudi Arabia – all important export markets for Canadian companies. China will also be facing political difficulties as growth slows and the impact of US tariffs is felt.

Politics won’t be the only drag on economic growth in 2019. Growth rates are slowing in the world’s largest economies, as well as in emerging markets. The US is kicking the trend because of the impact of its tax reforms and the fiscal stimulus injected by the Trump administration. America’s momentum is good news for Canada!

But interest rates in all major economies are on the rise. Stronger growth over the past two years and increasing inflationary pressures (much of it policy induced) are convincing the world’s central banks, most notably the Fed, that they should tighten monetary conditions.

The prospect of higher interest rates has already sent asset markets into a tailspin. They also mean borrowing costs will rise for business, governments and especially for consumers and households that are more indebted than ever.

That’s certainly a threat in Canada, but we are not alone. One way or another, higher interest rates will mean consumers, companies and governments must borrow less and spend more income on servicing their debt.

Higher interest rates, tariff fallout and political instability are the three biggest risks facing manufacturers in 2019. On top of that, they will continue to experience skills shortages, higher taxes and increasing regulatory, labour and materials costs. No wonder PLANT’s Manufacturers’ Outlook 2019 survey shows manufacturers are less confident about 2019 than they were about 2018.

A leading manufacturer once told me it’s always difficult to climb into the crow’s nest in the midst of a storm, but doing so is more important than ever. This year every company will have to reassess and double down on its strategy to compete and grow.

Jayson Myers is the CEO of Next Generation Manufacturing Canada. The award-winning business economist and advisor to private and public sector leaders was president and CEO of Canadian Manufacturers & Exporters between 2007 and 2016. E-mail jayson.myers@ngmcanada.com. Visit www.ngmcanada.com.

This article originally appeared in the November-December 2018 print edition of PLANT Magazine.