Posthaste: One sector of Canada's economy is in deep recession — and we can't even blame Trump
Canada’s economy overall may have escaped a major downturn, but one sector has been stuck in a recession that is now stretching past its 32nd month, say economists.
Gross domestic product stalled in November and one of the main drags was manufacturing output which fell to its lowest level since 2013, outside the pandemic.
“While many will be quick to blame the U.S. president, the reality is that Canada’s manufacturing sector has been in recession since May 2023 — the longest such stretch in at least a generation (data begin in 1997),” said Stéfane Marion, an economist with National Bank of Canada.
In fact, manufacturing GDP has been declining in Canada for more than two decades, said a report by CIBC Capital Markets economists Benjamin Tal and Katherine Judge.
South of the border, manufacturing output has climbed to almost 10 per cent above its pre-pandemic level, while Canada has yet to get back to where it was in 2019.
A big reason for this, says CIBC, is that the U.S. manufacturing sector is much more capital intensive.
Capital intensive industries are so named because they make large capital expenditures on machinery, technology and plants and spend less on labour. Examples include the auto industry, semiconductor and pharmaceutical production and aerospace.
In the United States, capital intensity in manufacturing has risen by an annual average of 3 per cent since the late 1980s and is now accelerating. Since the pandemic, the U.S. capital intensity index has surged by more than 10 per cent, said the CIBC report.
In Canada, however, the ratio of production in capital intensive industries to non-capital intensive has dropped since 2019.
“This trajectory is working to widen an already wide gap between U.S. and Canadian manufacturing capital intensity,” said Tal and Judge.
Capital intensity is important because these industries tend to be more productive and profitable.
Since the pandemic, U.S. manufacturing productivity has increased by more than two per cent while Canada’s has fallen by more than 5 per cent.
Profit margins in U.S. capital intensive industries are nine percentage points higher than in other manufacturing sub-sectors.
“It’s no surprise then that the profitability gap between the U.S. and Canada has been widening,” said the CIBC economists.
It’s likely to get worse.
Capital intensity in U.S. manufacturing soared during the dot-com boom in the late 1990s and the rapid pace of AI adoption today suggests future gains may be even faster.
Deglobalization and shrinking workforces ensure that more companies will exchange labour with capital and the AI revolution will accelerate that transformation, said Tal and Judge.
“Canadian manufacturing CEOs cannot ignore this reality.”
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Canadian portfolio flows into U.S. about to hit record
Canadian portfolio investment into U.S. securities climbed to $200 billion in the first three quarters of last year, exceeding a record hit in the same period in 2024 by $34 billion. At almost seven per cent of Canada’s GDP, the flows rank among the largest on record, said Maria Solovieva, an economist with Toronto Dominion Bank.
More than two-thirds of the investments were in U.S. debt securities, which offered higher yields than domestic bonds. The remainder went into U.S. stocks where investment dollars hit $64 billion by the end of the third quarter, about $8 billion more than 2024’s full-year tally.
Canadian investors were likely attracted by the mega U.S. tech stocks, but domestic equities ultimately delivered higher returns — “roughly 25 per cent versus 13 per cent on U.S. holdings, once the depreciation of the U.S. dollar is taken into account,” said Solovieva.
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Today’s Posthaste was written by Pamela Heaven with additional reporting from Financial Post staff, The Canadian Press and Bloomberg.
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