Canada's Manufacturing Sector Faces Extended Recession Amid Productivity Challenges
While Canada's broader economy has managed to avoid a severe downturn, one critical sector has been mired in a recession that has now surpassed 32 consecutive months, according to economic analysts. This prolonged contraction represents the longest such period in at least a generation, with data tracing back to 1997.
A Two-Decade Decline in Manufacturing Output
Gross domestic product figures stalled in November, with manufacturing output emerging as a primary drag, falling to its lowest level since 2013 outside pandemic periods. Economists Stéfane Marion of National Bank of Canada and CIBC Capital Markets analysts Benjamin Tal and Katherine Judge have highlighted that manufacturing GDP has actually been declining in Canada for more than two decades.
The contrast with United States manufacturing is particularly stark. South of the border, manufacturing output has climbed to nearly 10 percent above pre-pandemic levels, while Canada has yet to return to its 2019 production benchmarks.
The Capital Intensity Divide
A fundamental reason for this growing disparity lies in capital investment patterns. Capital-intensive industries—including automotive manufacturing, semiconductor production, pharmaceuticals, and aerospace—make substantial expenditures on machinery, technology, and facilities while spending comparatively less on labor.
In the United States, capital intensity in manufacturing has increased by an average of 3 percent annually since the late 1980s, with acceleration occurring in recent years. Since the pandemic began, the U.S. capital intensity index has surged by more than 10 percent.
Meanwhile, in Canada, the ratio of production in capital-intensive industries to non-capital-intensive sectors has actually declined since 2019. "This trajectory is working to widen an already wide gap between U.S. and Canadian manufacturing capital intensity," noted Tal and Judge in their report.
Productivity and Profitability Consequences
Capital intensity matters significantly because these industries tend to demonstrate higher productivity and profitability. Since the pandemic, U.S. manufacturing productivity has increased by more than 2 percent, while Canada's has fallen by over 5 percent.
Profit margins in U.S. capital-intensive industries are currently nine percentage points higher than in other manufacturing subsectors. "It's no surprise then that the profitability gap between the U.S. and Canada has been widening," observed the CIBC economists.
The situation appears poised to deteriorate further. Capital intensity in U.S. manufacturing previously soared during the dot-com boom of the late 1990s, and the current rapid adoption of artificial intelligence suggests future gains may occur even more swiftly.
Future Challenges and Transformations
Deglobalization trends and shrinking workforces are prompting more companies to substitute labor with capital investments, and the AI revolution is expected to accelerate this transformation. "Canadian manufacturing CEOs cannot ignore this reality," emphasized Tal and Judge.
The manufacturing sector's struggles come at a time when other economic indicators show mixed performance. While some sectors have demonstrated resilience, the manufacturing recession highlights structural challenges that require strategic attention from both industry leaders and policymakers.
