It’s an economic roller coaster but this ain’t no amusement park

By Jayson Myers. 

Manufacturing on the Prairies is a lot like riding a roller coaster. And, sometimes, it seems as if manufacturers are riding more than one.

The steep climb in oil and other commodity markets that occurred both before and after the recession gave way two years ago to plummeting prices, dramatic declines in business investment, and resource projects either cancelled or postponed. Meanwhile, the Canadian dollar that was trading at par only two-and-a-half years ago lost a third of its value by last February, only to rebound by more than 15 per cent over the next three months. The U.S. economy that was strengthening for most of 2015 is now showing signs of weakness. Never mind the problems in Europe and Japan, the BRICS that were supposed to drive economic growth into the future have become industrial basket cases. I include China in that assessment as well. Now, the Fort McMurray wildfire. Hold on, there’s probably more to come.

None of these wild gyrations in markets were predicted. The fire certainly wasn’t. They were all beyond the capacity of manufacturers to manage or control. But the impact on Prairie manufacturing has been gut-wrenching. Manufacturers’ sales across the Prairies have fallen more than 16 per cent since January 2014. Petroleum refining has taken the biggest plunge, but suppliers of components and equipment for oil sands, conventional oil extraction, mining, and agricultural markets have all been hard hit. Manufacturing sales have dropped by more than 21 per cent in Alberta and 14 per cent in Saskatchewan. Only in Manitoba have sales actually increased — by about six per cent. There are 30,000 fewer people working in Prairie manufacturing today than there were 30 months ago, and manufacturing employment is down in every province.

There are some lessons to be learned here. One is never to trust economic forecasts. Another is that diversification cushions market downturns — that’s the lesson from Manitoba. Companies that can leverage their capabilities to serve customers in other product or export markets less dependent on commodity swings have a somewhat easier ride. There are other takeaways I think are important as well.

The first is that business planning needs to build in a tremendous amount of economic volatility. That is easier said than done. But, there are some root causes of market volatility that, once taken into account, may provide a bit of a hint as to where economic roller coasters are heading. The more central banks pump money into their economies, the more we see market bubbles and crashes. Money flows quickly into and out of financial markets; unfortunately, that has a big impact on industry and trade as well.

Keep your eyes peeled on where interest rates are shifting around the world and on the American dollar. The expectation that rates will rise in the U.S. before those in other economies has inflated the greenback and depressed both commodity prices (denominated in USD) and the loonie. At least half of the collapse we’ve seen in oil prices has actually been due to the appreciation of the U.S. dollar against other major currencies. Commodity prices will rise again when the U.S. dollar weakens, but that will take renewed confidence that economies are back on-track around the world. That may take a very long time, too. The Canadian dollar is likely to bounce around between 70 and 85 cents USD for the rest of this year. How’s that for accuracy? Meanwhile, more volatility can be expected in currency, commodity, and other asset markets, regardless of the real conditions of supply and demand.

Market roller coasters are not going to disappear anytime soon. Risk management is vital for financial sustainability. In my experience, learning from peers is one of the simplest and best risk mitigation measures anyone can take. Banks and organizations like Export Development Canada can help by customizing short-term financial hedging solutions. Manufacturers can reduce exposure to higher priced imports by purchasing more from suppliers in Canada or other countries whose currencies have also depreciated against the U.S. dollar. Lean management and waste reduction are also critical to providing the cash cushion necessary to help withstand unexpected swings.

Prairie manufacturers, however, cannot take their eye off business growth. There will be opportunities as a result of new infrastructure investments and the massive rebuild after the fire. Business plans need to focus on market diversification as well as export growth, and place a much greater emphasis on sales, marketing, and customer service. Collaboration will be important in shaping the customer solutions needed to enter new markets or growing (and defending) market share.

Keep in-mind, too, that manufacturers around the world are struggling with the same wild market conditions. The winners in this business will be strategic. They will be able to respond quickly to changing markets conditions and new business opportunities. They will be flexible, agile, and highly efficient. Above all, they will realize that their business is no longer one of just getting product out the door, but of providing individualized solutions to customers incorporating new technologies, customized design, and supporting services.

These are all strengths I see in Prairie manufacturing today.

Enjoy the ride.

Jayson Myers is widely regarded as one of Canada’s foremost economists. He currently serves as president and CEO of Canadian Manufacturers & Exporters, as well as chairman of the Canadian Manufacturing Coalition.