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Let Canada's Financial Success be a Warning...
Topic Started: Oct 25 2012, 11:26 PM (223 Views)
Brewster
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Canada's Reduction in its Trade Deficit has Economists Worried

Calgary Herald
 
When news of Canada’s shrinking trade deficit hit news wires on Oct. 22, the information was greeted with mixed reviews by economists. Some said the narrowing gap between imports and exports was a positive sign. (I sure thought so...)

Others maintained the drop in imports was a sign of a softening economy.

Pundits have been laser-focused on Canada’s export performance, calling out the strength of the Canadian dollar as a source of strife for those who sell abroad. Less attention has been paid to the historic opportunity the high value of the loonie offers Canadian businesses — particularly those in the manufacturing and energy sectors — to purchase productivity-enhancing machinery that will make their business and industries more competitive.

With the loonie and greenback in a dead heat, Canadian businesses should be taking advantage of their historically high purchasing power to make machinery acquisitions from abroad before the currency tide turns.

There’s a huge appreciation of the Canadian dollar, which means that capital equipment has become cheaper by a factor of 40% to 50%. There couldn’t be a better time for Canadian manufacturing to invest in imported capital equipment

Data from Statistics Canada show the total dollar value spent on physical capital such as heavy machinery and industrial equipment has been on the rise since January 2010 across most categories.

Jay Myers, chief executive of Canadian Manufacturers and Exporters (CME), says the situation may be even rosier than the data suggest, noting much of the investment Canadian manufacturers make in physical capital is through leased equipment that generally isn’t captured by Statistics Canada’s analyses.

“If you look at the banking numbers, they’ll say the leasing activity has really increased over the last four years,” Mr. Myers says.

Reshoring numbers may be another indicator the purchase of physical capital is on the rise. Barry Cross, a lecturer in operations management at the Queen’s School of Business, says those companies that have chosen to repatriate jobs to Canadian soil are complementing those jobs with the physical capital needed to maximize workers’ productivity.

“Since the start of 2010, we have seen 25,000 manufacturing jobs return to Canada for business that had been off-shored at one point,” Prof. Cross says. “To support that volume of people there had to be investment in capital and facilities as well.”

Nevertheless, there is much room for improvement. A CME study released last week shows 84% of Canadian companies have a supply base in their home province. In addition, those businesses that do source from abroad have a limited pool of nations with which they trade. Only one in 10 respondents of the CME study source materials and equipment from Mexico despite obvious advantages available via NAFTA. Only 4% of companies source from Eastern Europe and only one in five sources from the European Union.

Encouragingly, those numbers are expected to rise in coming years, particularly when it comes to China and India. While 28% of Canadian companies currently source from China, 30% are expected to do so by 2015. Meanwhile, import numbers from India are expected to almost double within the same time frame.

The bigger question then becomes whether the physical capital being sourced from abroad will be of the productivity-enhancing variety. The answer, says Mr. Cross, will depend partly on the success of Canadian businesses in finding human capital to complement investments in new machinery and technology.

“If we don’t have the guy that can program the CNC controller that’s going to manage that robot that’s going to increase our productivity, then that’s just an expensive piece of decoration sitting on my plant floor,” he says.

Sandra Pupatello, director of global markets and business development at PwC and former Ontario minister of economic development and trade, says the other part of the physical-capital equation is related more to public policy than Canada’s now advantageous exchange rate.

The feedback she received while working as a government minister from the more vocal elements of Ontario’s business community was that the ability for those companies to write off their capital expenses was far greater incentive than anything else.

Mr. Myers agrees, adding that the federal government’s elimination of tariffs on imported equipment, combined with a two-year writeoff that allows businesses to realize a 12% cash savings, have spurred capital investments over the past few years.

Yet, as Prof. D’Cruz says, the degree to which Canadian businesses maximize their capital spending potential will depend largely on economic performance. “What drives capital spending is the opportunity to make sales.

And here I thought getting rid of the Trade Deficit would be pure good, not just generate new concerns...
Edited by Brewster, Oct 25 2012, 11:27 PM.
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Pat
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One term says it all. Abundant natural resojrses in a country that is sparsely populated.
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Sea Dog
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Also, a population not overly concerned
with keeping ahead of the Joneses!
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Pat
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Depends where you live. Trail, BC yes. Vancouver no.
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Sea Dog
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Well, city people are different!
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Brewster
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Nice try, Pat. But the article is about manufacturing, not Natural Resources.
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socialism
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Brewster
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I was hoping someone on the US Right would note the line in red, but apparently not.
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Pat
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I guess you are not aware of manufacturing that takes place in the valley.
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Brewster
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What Valley?

And why would one valley matter?
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