2 Manufacturing and the resource boom in central Canada

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'Dutch Disease' refers to a situation where rising commodity prices and an appreciating exchange rate lead to declining manufacturing output and rising economy-wide unemployment. ³ Canada's recent performance contradicts these stylized facts. For Canada as a whole, manufacturing output rose by 0.2% per year between 2002 and 2007, despite a 59.5% appreciation of the dollar and a 294.3% rise in energy prices. Although manufacturing shed 323, 000 jobs from January 2003 to December 2007 as firms raised productivity, the overall unemployment rate in Canada declined from 7.4% to 6.0%.

Rather than a wholesale retrenchment in manufacturing, output losses were confined to areas like clothing that were most exposed to international competition or experienced declining demand, such as for forestry products and autos (Figure 1). Nevertheless, demand for other manufactured goods remained robust, particularly for capital goods, leading to an offsetting increase in output.

However, individual provinces differ from the national average. In Ontario, manufacturing output declined by an average of1.1% per year between 2002 and 2007, while factory jobs fell by 183,000 between January 2003 and December 2007. The output losses were spread across almost all manufacturing industries in the province with the exception of non-metallic minerals, computer and electronic equipment and transportation equipment (Figure 1). Due to the broad range of industries contracting, the manufacturing industry in Ontario was showing the symptoms of 'Dutch Disease' more than Canada as a whole.

Figure 1
Average annual manufacturing GDP change, 2002 to 2007

Manufacturing in Quebec was essentially the same as the national average (Figure 1). The average annual change in manufacturing GDP from 2002 to 2007 was a modest decrease of 0.2%, while shedding 127,000 jobs. Quebec's manufacturing output declined modestly, with larger cutbacks in non-durable industries related to clothing offsetting smaller gains in many durable manufacturing industries.

Changes in non-durable manufacturing in Ontario and Quebec have been similar. Both provinces had sizable declines in industries experiencing growing competition from emerging economies. Textiles, clothing and leather have contracted in both provinces. The paper and printing industries also have seen lower output due to changing preferences for electronic media.

A difference emerges in durable goods manufacturing. In Ontario, output has contracted in a majority of industries, notably primary metals and fabricated metal manufacturing. Exceptions were non-metallic minerals, computers and electronics and transportation equipment.

In Quebec, durable goods have generally done well. Output has increased in almost all industries, with the exception of wood, electrical equipment and furniture (in the last case, competition from emerging economies displaced domestic production).

3 . Some manufacturing industries have been quite resilient in the face of rapid changes in their competitive environment. Hutchinson (1994) examines the response of the manufacturing industries in Norway, the Netherlands and the U.K. He concludes (p. 326) that: "For the economy of the Netherlands, where the term 'Dutch disease' was originally applied, very little systematic and long-term net adverse consequences of natural gas development on the manufacturing sector were found."