The economy is not in great shape — and the outlook for the next few years is not altogether encouraging.
The hard truth is that we are not rebalancing the economy quickly enough.
Canada needs to shift away from building housing and piling up consumer debt as our main drivers of economic growth to an economy driven by productive investment, building more factories, and exporting more goods and services through an innovative, high-productivity business sector.
Business productivity is weak and business, aside from the oil industry, is not investing enough in productive capacity.
While oilsands development is adding to productive growth, we are too dependent on oil exports, and high oil prices.
Overall, we are uncompetitive in the international economy and as a result we are running trade deficits and deficits on our current account.
This makes us a net borrower from the rest of the world and we are accumulating a growing foreign debt to sustain our standard of living.
Last year our current account deficit amounted to $60.7 billion and since 2009 we have accumulated a $275.5 billion current account deficit which had to be financed abroad.
Moreover, many economic forecasts, including that of the International Monetary Fund, show our current account deficits running to at least the end of this decade.
A country’s current account balance is the total of its trade balance in goods and services and its net income from the rest of the world (including interest and dividends and public and private transfers,).
The main reason we have a current account deficit is that the healthy surplus in trade in goods and services we enjoyed in the early 2000s has, since 2009, become a big deficit.
In the early part of the 2000s, we were running annual trade surpluses of $55 billion to $65 billion. But since 2009, we have had a trade deficit every year, with a deficit last year of $31.9 billion.
The decline in our manufacturing sector is a big factor.
According to a study by Statistics Canada, worldwide Canadian exports of manufactured products fell by $20.7 billion or more than 7 per cent between 2002 and 2012 even though the global marketplace was bigger in 2012 than in 2002.
While the U.S. recession hurt our exports there, other countries increased their exports to the U.S. — suggesting a decline in Canadian competitiveness.
To be sure, Canada has expanded manufactured exports going to other parts of the world, with a notable increase in exports to China.
But as Statistics Canada points out, in three key sectors where Canada has made manufacturing export gains worldwide (primary metals, basic chemicals and refined petroleum products), much of the gain came from price increases, not increases in the volume of exports.
One factor affecting the competitiveness of Canadian industry and our attractiveness for new investment has been the sharp rise in the value of the Canadian dollar.
The dollar soared in value from 2001, when it traded as low as 61.8 U.S. cents, to a high of US$1.103 in the latter part of 2011. In 2011 and 2012 our exchange rate was just above parity with the U.S. dollar.
It is now trading in the 90 U.S. cents range.
The sharp increase in the exchange rate not only hurt exports and jobs by making our products and services (including tourism) less competitive, as economist Avery Shenfeld of the Canadian Imperial Bank of Commerce points out.
It came at a time when North American manufacturers “were making long-term decisions on where to retain plants, and where to shutter them for good.”
Our high dollar meant more closings in Canada and made Canada less attractive for new investment.
“In effect, monetary and exchange rate policy traded off more condos for fewer factories,” said Shenfeld.
Nor are there signs of a manufacturing pick-up.
According to Statistics Canada, manufacturing capital investment this year, at $18.9 billion, will be lower than it was in 2005, when it was $19.4 billion.
Moreover, 2014 could be the third successive year of almost zero growth in manufacturing capital investment, including weak investment in advanced technology – machinery and equipment – which provide workers with the tools to be more productive and businesses to be more competitive.
Building a more productive, innovative and diversified economy that can deliver prosperity in an increasingly competitive global economy is our number one structural task today.
That’s our biggest policy challenge.
David Crane can be reached at crane@interlog.com.