Manufacturers cautiously optimistic about rate cut
OTTAWA — Ontario’s manufacturing sector has been waiting a long time — during and since the recession — for its fortunes to return.
There have been some recent signs of movement, on-and-off employment growth being one of them, but a weak-for-longer Canadian dollar hasn’t really helped rekindle investment in the industry, as many had hoped.
Could this week’s drop in interest rates — courtesy of the Bank of Canada — get Ontario plants back into top gear?
The answer, predictably, depends on who you speak to.
Those in the industry, but not all, say a cheaper corporate loan environment could help get manufacturers in a better position to purchase new equipment, expand domestically and increase exports.
Critics feel the Bank of Canada can do little with a rate cut that hasn’t been done before — which is very little, other than feed consumers’ appetite for cheap loans, increasing their already worrisome debt load.
Better for governments to bite the fiscal bullet — impending elections or not — and spend taxpayers’ money on infrastructure projects and other public works to lift the economy, according to others.
“I think it’s fair to say that manufacturers would be cautiously optimistic” about the central bank’s 25-basis-point drop in its key lending level to 0.5 per cent on Wednesday, said Joseph Galimberti, president of the Canadian Steel Producers Association.
“A rate cut, in and of itself, is not going to necessarily stimulate growth as a stand-alone action. I don’t think it’s enough to create a boom in manufacturing. A lot of our guys are in automotive (sectors), but also big suppliers to the oil and gas industry. So, a rate cut doesn’t necessarily help us out in that context,” he added.
“If you’re a primary manufacturer which has capacity that is presently not engaged, at what point do you scale it up? The answer is: probably when you start getting orders.”
Until those materialize, and the much-vaunted pickup in the U.S. economy proves its staying power, Canadian factories will remain under utilized and hiring levels unpredictable.
Remember, Canada is technically back in recession — two quarters of negative growth, according to initial estimates — and the main reason why the Bank of Canada lowered its lending costs for the second time in six months.
For manufacturing, it’s likely a case of déjà vu.
Coming out of the 2008-09 recession, and near-zero interest rates, corporate leaders were criticized — by former Bank of Canada governor Mark Carney, in particular — for sitting on “dead money” in bank accounts and waiting for bigger signs of recovery rather than investing their cash to help spur that turnaround.
“I think what everyone wants is to get the business sector investing. But so far, cutting interest rates hasn’t really boosted investment, slashing the corporate tax rate hasn’t boosted investment,” said Erin Weir, an economist with the United Steelworkers union.
“Beyond a few basis-points reduction in interest rates for manufacturers, there’s the reduction in the exchange rate, which should boost exports. (But) a potentially more significant consequence of the interest rate cut for manufacturers is the drop in the exchange rate, which might actually increase some of the cost of the capital equipment that manufacturers should be buying,” he said.
Avery Shenfeld, chief economist at CIBC World Markets, pointed out that strong run for the Canadian dollar in the post-recession period resulted in “a substantial loss in Canada’s share of North American manufacturing, even relative to the U.S.
“So the weaker exchange rate, rather than interest rates, could ultimately boost Canada’s and Ontario’s ability to attract business investment spending by making the country a more competitive location.”
Still, Weir believes “a much more targeted approach” would be for government to invest directly in infrastructure “and that will also boost private investment.”