Volume 2, Issue 3 - Winter 2017

Growing Alberta’s manufacturing sector makes sense, but it’s not a silver bullet

By Rob Roach. 

Alberta’s manufacturing sector tends to be either overshadowed by the province’s oil and gas industry or hailed as a key source of the economic diversification needed to reduce Alberta’s reliance on oil and gas. There is truth in both sentiments, but the reality is more complex.

In Alberta, oil and gas extraction is king. The sector accounted for a whopping 27 per cent of the province’s real GDP in 2016 (the nominal figure was 17 per cent per cent due to low oil prices, yet this is still a huge proportion of the provincial economy). Nationally, oil and gas extraction accounted for six per cent of real GDP in 2016. And in Ontario, it was less than one per cent.

Alberta manufacturing represented just under six per cent of the province’s real GDP in 2016. While nothing to snuff at, this is clearly much smaller than the output of the province’s oil and gas sector, and explains why manufacturing in Alberta does not get the same amount of attention it does elsewhere.

In Ontario, for example, manufacturing yielded 13 per cent of the province’s real GDP in 2016 — double the proportion in Alberta. It would take five of Alberta’s manufacturing sectors to equal the output of Ontario’s manufacturing sector. Conversely, it would take Ontario’s entire manufacturing sector to replace Alberta’s oil and gas extraction industry. From more good jobs to greater economic diversification, expanding Alberta’s manufacturing sector makes sense for all sorts of reasons, but it will take a lot of new activity to even make a dent in the role played by oil and gas extraction.

So, even though Alberta is home to the third largest manufacturing industry in the country, after Ontario and Quebec, it is known for its energy patch rather than its manufacturing prowess. When we subtract the oil and gas extraction sector from Alberta’s economy, manufacturing’s share of real GDP rises to eight per cent. This is closer to, although still below, the national average of 10 per cent.

While its relative weight in the Alberta economy is less than in the other provinces (the only exception is Newfoundland and Labrador, where manufacturing accounted for less than four per cent of real GDP in 2016), manufacturing in Alberta still generated more real GDP last year than healthcare, retail trade, public administration, finance, education, and agriculture. Only oil and gas, real estate, and construction produced more GDP than manufacturing.

On top of this, manufacturing is a magnet for other economic activity. It becomes something of a chicken and egg situation in an advanced economy like Alberta’s — in which services, infrastructure, local amenities, natural resources, and other variables such as public policy, geography, and social norms interact in complex ways. But manufacturing businesses tend to be a base upon which other economic activity is built.

Imagine a small town that is home to a single large factory. If the factory closes, the town’s corner store might go under. If, on the other hand, the owner of the corner store was to close because the owner retired, the factory would keep operating. Manufacturing is not the only economic magnet available; it is, however, is a key one.

As such, manufacturing in Alberta is a significant and foundational piece of the province’s prosperity. And while competing against countries that have cheap labour and lax environmental standards for new investment in mass manufacturing is a non-starter, there are significant opportunities to expand and diversify Alberta’s manufacturing base.

The growing global middle class represents billions of potential new customers for our current and future products. Finding ways to outmaneuver our competitors and supply this group with what it wants will be a critical challenge going forward. Keeping the U.S. market (which accounts for 70 per cent of Alberta’s manufacturing exports) open through a renewed NAFTA and other means is also essential.

As we look for ways to do this, Albertans should keep their comparative advantages top-of-mind. North of 80 per cent of the products sold by Alberta manufacturers are linked to the province’s natural resource base in terms of providing the raw materials that are being processed or as a major customer of manufactured goods, such as machinery used in farming and oil and gas extraction.

Several vibrant manufacturing subsectors have been built around Alberta’s bounty of oil, natural gas, and trees, turning crude oil into gasoline, natural gas into plastic, and trees into lumber and paper. The same is true when it comes to agriculture. Local farmers and ranchers provide Alberta’s food and beverage manufacturing businesses with a ready supply of high quality inputs that are turned into everything from French fries and pot roasts to pasta and craft beer.

Alberta stands out among the provinces when it comes to the proportion of its manufacturing output sold into the domestic market. More than 60 per cent of products manufactured in Alberta are sold within the province or within Canada. This reflects the strong linkages between Alberta manufacturers and the Canadian energy sector, with the latter being a key buyer of products from Alberta. It also reflects the fact that most of the gasoline manufactured in Alberta is sold within Canada rather than to U.S. buyers. The opposite is true in Ontario, where two-thirds of its manufactured products are exported south of the border and to other countries.

These strong linkages to the natural resource economy explain why Alberta manufacturing was hit so hard by the recent recession in the province. The sector contracted during the recession in terms of both sales and the volume of value-added production, with a 21 per cent drop in sales between 2014 and 2016, and a 13 per cent drop in real GDP over the same period.

The contraction in the manufacturing sector was not, however, spread evenly across its subsectors. Machinery manufacturing was the hardest hit with a drop in sales of 57 per cent in two years, with real GDP dipping by almost the same amount (56 per cent). Much of this was the result of reduced demand for machinery used by the oil and gas sector. Much less reliant on the oil patch and fuel demand, Ontario’s machinery manufacturing subsector’s real GDP increased by six per cent between 2014 and 2016 (the increase would likely have been greater if Alberta’s oil and gas industry was in a position to buy more products from Ontario).

Sales of petroleum and coal products fell by 44 per cent, while output shrank by just three per cent between 2014 and 2016. This indicates that it was soft prices that cut deeply into the sales figures, rather than a large drop in the volume of production itself.

The primary metals and fabricated metals categories, both of which rely heavily on demand from the oil and gas sector, saw sales fall precipitously during the recession, at 39 per cent and 26 per cent respectively. Only the furniture, wood, and food subsectors managed to stay on the positive side of the ledger in 2016 compared to sales in 2014, with food products posting a solid seven per cent gain over the recession.

As with so many things in Alberta, manufacturing’s success — at least overall — is tied to oil and gas. This has tremendous benefits; but, it also means that any pain experienced by the oil and gas industry quickly spreads to other sectors, including manufacturing.

The ongoing quest for more good jobs, long-term and widespread prosperity, and less volatility in the Alberta economy point to the value of expanding and diversifying the manufacturing sector. Good ideas and a willingness to experiment, combined with Alberta’s highly educated labour force, fantastic quality of life, reliable infrastructure, proximity to U.S. and Asian markets, and growing expertise in artificial intelligence comprise a recipe for expanding manufacturing in the province. This is not an easy task. It is, though, achievable.

At the same time, we need to be realistic. Even if Alberta was to double the size of its manufacturing sector, it would still only replace a fifth of the output of oil and gas extraction. 

Rob Roach is the director of economics, insight, and research for ATB Financial.