Alan Arcand is chief economist, Canadian Manufacturers & Exporters.
SHOP: What are you expecting in terms of business conditions in 2024?
ARCAND: I think 2024 will be a lot like 2023 with a continued slowdown in growth. I characterize 2023 as resilient. Most economists, including me, were predicting a recession for this year and obviously that hasn’t materialized. The ideal scenario of a soft landing appears to be working out so far, but I would caution we could still see a recession next year. The reason growth will be slower next year is because you are still going to see the lagging effect of the interest rate increases we’ve seen the last couple of years. Those take a long time to work their way through the economy and I think we haven’t seen all the consequences yet. That’s even if the central bank starts cutting rates next year, perhaps by the middle of the year as core inflation gets closer to 2%. Those cuts will take time to work their way through the economy. Many economic indicators show the economy is still doing okay, although things are slowing down. The labour market is still tight, the economy is still growing, slowly but still growing. If those things don’t start showing weakness and inflation doesn’t come down, then I think the central bank will continue to raise rates. Everyone has been happy to see headline inflation come down quickly, but the core numbers have been coming down at a glacial pace and that’s what the Bank of Canada is really focused on. Headline inflation is affected by gas pricing which is very volatile.
One of the negative consequences of higher interest rates is that it makes it more difficult for firms to invest because they’re facing higher interest rates. To what extent it’s affecting investment, I don’t know. If you look at purchasing data, manufacturers remain fairly upbeat about the future outlook so that could offset some of the pain of higher interest rates and persuade manufacturers to continue to invest. On the green economy front you are also seeing government providing more support for those kinds of investments so there is a pickup in investments in clean technology in Canada.
SHOP: Economics aside, manufacturing has faced a host of issues in 2023. Heading into 2024 how would you describe the state of the industry?
ARCAND: I would use the term resilient, just like the overall economy. GDP growth in manufacturing for 2023 has just been modest but that’s better than what we were initially expecting. For 2024 there are forecasts that it would pick up to maybe 1.3% growth. I will reevaluate when I do my next forecast, but I don’t think it will be much different than that. One of the main reasons that manufacturing output in Canada has been resilient has to do with the auto sector, which struggled to produce cars during the pandemic due to the global semiconductor shortage, creating pent up demand. The semiconductor shortage is easing, enabling automotive manufacturers to increase production throughout the year. This has kept the automotive sector stronger than what it normally would have been during such a high interest rate environment. The aerospace industry also saw growth this year. It was one of the hardest hit sectors during the pandemic and it’s still recovering.
SHOP: What is the most important issue that still needs to be addressed?
ARCAND: I think labour shortages remain a key issue for manufacturing. If you look at a lot of the indicators for manufacturing, they’ve all been sluggish except for manufacturing employment. Manufacturing employment in Canada right now is at its highest level since December 2008. Job vacancies in manufacturing are down by a third but they were still around 60,000 in May. As of July, year-over-year wage growth in manufacturing was 7.6% whereas the historical average is just about 2.5%, which shows you how shortages are causing manufacturers to raise wages. This is something that will continue to impact manufacturing in 2024. A lot of it is demographics related. The manufacturing workforce is older than the average workforce and you are looking at a lot of retirements still coming over the next few years.
SHOP: What’s your advice to our readers as they prepare for 2024?
ARCAND: Prepare for continued economic challenges from the massive interest increases of the last couple of years. But there is light at the end of this tunnel. Rates will start coming down at some point next year. There is also a huge push in North America to near shore or friend shore manufacturing. Whether we are successful with that remains to be determined but having an industrial policy is back in vogue. There is a renewed interest in making sure we can make things that we need in this country. There are also considerations about de-risking our relationship with China so we are looking to make our supply chains more resilient, which will also lead to more investment in Canada and North America. So there will be opportunities to grow business.