Canada's plastics processing industry faces another tough year in 2007 after posting its first major setback in several years.
The slowdown in the U.S. economy will hurt processors that rely on exports. In Canada's economy, housing construction promises to be slow while consumer spending is expected by many economists to be soft.
Canada's processors logged a 9 percent drop in shipments for the first nine months of 2006, estimated Atul Sharma, chief economist for the Canadian Plastics Industry Association. Shipments were valued at about C$15.3 billion (US$13.1 billion ). Manufacturing overall fell about 3 percent in the period, according to national agency Statistics Canada.
Plastics performance was especially startling because the sector usually outperforms manufacturing in general. When Canadian manufacturing grows, processor shipments typically grow twice as fast. When overall manufacturing is in a slump, plastics still usually shows positive growth.
``It was a perfect storm of challenges,'' Sharma said in a telephone interview from CPIA's office in Mississauga, Ontario. The processors' slump was due to a high Canadian dollar, low-cost foreign competition, high energy and commodity prices and a skilled-labor shortage.
``In 2007 the concerns continue,'' Sharma added.
A slowing U.S. economy is crimping Canada's exports south of the border. Exports of all products to the U.S. represented about 76.5 percent of Canada's total exports, the lowest level in 13 years, according to economist Warren Lovely at CIBC World Markets in Toronto, the wholesale banking arm of Canadian Imperial Bank of Commerce.
Canadian firms are competing more fiercely with China for the U.S. market. October was the fourth month in a row that the U.S. imported more from China than from Canada. The U.S. slowdown is exacerbating problems exporters face because of the strong Canadian dollar. Although Canadian currency slipped in value late in 2006, it remained strong compared with several years ago.
One economist expects some currency respite in 2007.
``Although the [Canadian] dollar will remain high, it likely will settle at about 85-86 [U.S.] cents, providing some relief,'' said Jayson Myers, chief economist for the Canadian Manufacturers and Exporters. For much of 2006, Canada's dollar was valued in U.S. currency at about 90 cents.
Canadian industries were running at about 84.2 percent capacity in the third quarter, the lowest level in three years, reported Statistics Canada. Vehicle production and housing construction loomed large in the drop.
Exports of autos and parts from Canada to the U.S. are expected to drop 6 percent in 2007 after a 5 percent decline in 2006, according to federal agency Export Development Canada. U.S. Census Bureau data indicate that Mexico and China have been capturing a bigger share of auto parts exports to the United States. Canada's weaker export performance comes on top of shrinkage in domestic markets for Canadian-made parts because of slowdowns at Canadian plants run by Detroit's Big Three automakers. Major investments in Canada's auto assembly plants should start to pay off with production beginning to recover in 2007, according to the Conference Board of Canada.
Investment in residential housing slipped to its lowest level in eight years in 2006. New housing construction and resale activity both fell. Many economists predict the Bank of Canada will lower its benchmark interest rate early in 2007 to stimulate that sector.
Canada's gross domestic product will increase by 2.2 percent in 2007, well below its potential, predicts Don Drummond, chief economist with TD Economics in Toronto.
On a regional basis, western Canada will have a heated economy in 2007 as oil and gas development and mining spur construction and spending. Central Canada's Ontario and Quebec provinces will, however, bear the brunt of pain in manufacturing.
``The slowdown in the U.S. economy is adding to the woes of the export-oriented manufacturing sector in central Canada,'' noted the Conference Board of Canada in a recent report.
In the east, Newfoundland and Labrador's economy will be strong, as mining and offshore oil development drive capital spending and revenues.