Canada risks becoming “irrelevant” to global supply chains, with negative consequences for Canadians’ standard of living and productivity, without serious reform to revive its struggling manufacturing sector, National Bank of Canada economists warn.
In a report published Monday, economists Stéfane Marion and Ethan Currie laid out various economic markers showing Canada “is a shadow of its former self when it comes to playing a key role in the G7 manufacturing chain.” And they caution against a “digital era” mindset that assumes countries can succeed as “innovators” while letting traditional manufacturing decline.
“Achieving a critical mass in manufacturing is not merely advantageous but essential for advancing R&D, ensuring long-term competitiveness, and bolstering economic resilience,” the economists wrote, urging tax and regulatory reform in tandem with a strategy that capitalizes on Canada’s generally cheaper, cleaner energy supply.
The authors cite numerous factors for the decline, among them “structural economic shifts, insufficient investment, inadequate policy support, and pressures—both competitive and uncompetitive—from global markets.” The consequences are clear: Canada’s manufacturing sector, measured as a percentage of gross domestic product, is tied with the U.K. for the smallest in the G7 at nine per cent, the report says. Since 2018, 15 of 18 manufacturing industries in Canada have reported negative growth.
Canada’s manufacturing sector has shrunk by 5 per cent [since 2018] — a concerning indicator of economic erosion.National Bank economists Stéfane Marion and Ethan Currie
A comparison with the U.S., where manufacturing represents 10.5 per cent of GDP, puts the data in grim perspective, especially once the manufacturing data are considered in real, not relative terms.
“While the share of manufacturing in total GDP has been declining in both countries, the U.S. manufacturing sector has grown by 10 per cent in real terms since 2018,” the economists wrote. “In stark contrast, Canada’s manufacturing sector has shrunk by 5 per cent over the same period — a concerning indicator of economic erosion.”
Nor does Canada’s situation improve from a per-capita perspective. Since 2005, per-capita manufacturing output has grown by 10 per cent in the U.S., but contracted by 30 per cent in Canada, the report says.
Canada’s manufacturing decline “may provide insight into the country’s worsening productivity trends,” Marion and Currie say. Business sector productivity has dropped in nine of the past 10 quarters in Canada, they write, while in the U.S., it has improved for eight straight quarters. The business sector in Canada has put 0.9 per cent of GDP into research and development spending, versus 2.6 per cent in the U.S., “underscoring a significant gap in a factor widely recognized as a critical driver of productivity.” The economists say the gap in R&D spending between Canada and the U.S. “has reached its widest point since 1963.”