OTTAWA (Reuters) – Canada’s low labor productivity level puts the country at risk of losing of billions of dollars of investments to Mexico, as the so-called nearshoring boom spurs companies to move supply chains to North America, economists and lobby groups say.
Mexico is fast becoming a global destination to manufacture products for supply to the U.S., where companies are seeking suppliers closer to home to reduce their dependence on China and shorten their supply chain. Canada, however, has seen little benefit from this trend.
If Prime Minister Justin Trudeau’s government fails to take measures to boost productivity, Canada will miss a historic opportunity to attract funds flowing into the region from the “nearshoring” boom of U.S. companies looking for suppliers close to their homebase, economists warn.
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The annual labor productivity of Canadian businesses declined 1.8% in 2023, its third consecutive year of decline. That prompted the Bank of Canada Senior Deputy Governor Carolyn Rogers to sound the alarm over the country’s productivity declines, which she blamed on Canada’s lagging investment in machinery, equipment and intellectual property.
That is primarily because an influx of cheap, low-skilled immigrant labor offered companies the incentive to substitute that for long-term investment in research, training and innovation. As a result, Canada’s productivity level among G7 economies is now second to last after Italy and below the average of the OECD grouping of rich nations.
Economists say continued low labor productivity dampens profits as well as makes Canadian output expensive and uncompetitive globally.
Mexico, on the other hand, is finding itself in a sweet spot. Foreign companies have long been drawn to Mexico due to its lower labor and other input costs, said Juan José Gómez-Camacho, senior fellow at the SAIS Foreign Policy Institute in Washington D.C. and a former Ambassador of Mexico to Canada.
Now, “Mexico is benefiting the most” from the wave of new investments driven by U.S. efforts to reduce dependence on China, he said.
Mexico last year replaced China to become the biggest trading partner of the United States. Canada lost its status as the biggest U.S. trading partner a decade ago.
Mexico has seen foreign direct investment (FDI) into the country hit a record $36 billion in 2023, a 27% jump from a year earlier, with more than half flowing into manufacturing, according to official data.
Mexico’s President Andrés Manuel López Obrador has doubled down on investments in public projects, which has helped pushed the country’s gross fixed capital formation – a metric to gauge investments in factories and machineries – up 25% in the fourth quarter last year from the first quarter of 2022, according to World Bank data.
In contrast, FDI into Canada dropped 42% to C$52.4 billion ($38.4 billion) in 2023 from a year earlier. Its gross fixed capital formation dropped by 7% between the first quarter of 2022 and last quarter of 2023.
“The US and Mexico have taken this big gamble that by having very large domestic public investment we can get substantial positive return,” said Joseph Politano, a New York-based economist who publishes the Apricitas Economics newsletter.
“Canada is not doing that at a scale like the U.S. or Mexico,” he said.
‘MISSED THE BOAT’
Mexico, whose sprawling landscape of industrial parks in the north boasts almost 100% occupancy, is setting up a trans-country railway corridor and its 18 ports have helped drive record FDI, according to economists and trade data from the government.
In the key autos sector, Mexico is already producing 1.5 times more vehicles than Canada and has already reached its pre-pandemic output level. Canada’s vehicle production is languishing below 2019 levels and the sector finds it tough to compete with Mexico on labor costs due to a unionized workforce.
Mexico is also attracting investments from an array of automotive supply chain players as part of the transition to electric vehicles(EV), including Tesla.
To be sure, Canada has seen some signs of optimism on the investment front – notably a surge in EV-related investment over the past year, thanks to government tax incentives. That includes plans announced last week for a C$15 billion EV plant and battery manufacturing by Japan’s Honda, the company’s biggest investment in North America.
Swedish battery maker Northvolt, Ford Motor Co., Stellantis NV and Volkswagen also last year committed billions of dollars in investment into battery manufacturing in Canada.
“Canada is a world-class destination for foreign direct investment,” said Katherine Cuplinskas, a finance ministry spokesperson. “The recently announced generational investments from Honda, Dow Chemicals, Volkswagen, Stellantis, and Northvolt are concrete proof points of Canada’s attractiveness for global private capital.”
The government has also promised C$2.4 billion to support artificial intelligence-related activities over five years in this month’s budget, to improve productivity.
In the first three quarters of 2023, Canada saw the largest FDI on a per capita basis among G7 countries and attracted the third highest global investments in the world, and Cuplinskas said the stock of total FDI grew by C$52.4 billion last year, with the U.S. accounting for close to half.
However, economists say the government needs more concerted efforts to tap the nearshoring opportunity, and a budget proposal to increase the capital gains tax on wealthy individuals and businesses will further drive capital away.
Ultimately Canada is struggling to keep up while U.S. manufacturing activity is driven by subsidies in its Inflation Reduction Act and Mexico enjoys higher productivity levels and lower labor costs, said Pedro Antunes, chief economist at Conference Board of Canada, an independent think tank.
“We may have missed the boat,” he said.
($1 = 1.3657 Canadian dollars)
(Reporting by Promit Mukherjee, editing by Deepa Babington)
TORONTO – Canada’s main stock index was higher in late-morning trading, helped by strength in energy stocks, while U.S. stock markets also moved up.
The S&P/TSX composite index was up 34.91 points at 23,736.98.
In New York, the Dow Jones industrial average was up 178.05 points at 41,800.13. The S&P 500 index was up 28.38 points at 5,661.47, while the Nasdaq composite was up 133.17 points at 17,725.30.
The Canadian dollar traded for 73.56 cents US compared with 73.57 cents US on Monday.
The November crude oil contract was up 68 cents at US$69.70 per barrel and the October natural gas contract was up three cents at US$2.40 per mmBTU.
The December gold contract was down US$7.80 at US$2,601.10 an ounce and the December copper contract was up a penny at US$4.28 a pound.
This report by The Canadian Press was first published Sept. 17, 2024.
TORONTO – Strength in the base metal and technology sectors helped Canada’s main stock index gain almost 100 points on Friday, while U.S. stock markets climbed to their best week of the year.
“It’s been almost a complete opposite or retracement of what we saw last week,” said Philip Petursson, chief investment strategist at IG Wealth Management.
In New York, the Dow Jones industrial average was up 297.01 points at 41,393.78. The S&P 500 index was up 30.26 points at 5,626.02, while the Nasdaq composite was up 114.30 points at 17,683.98.
The S&P/TSX composite index closed up 93.51 points at 23,568.65.
While last week saw a “healthy” pullback on weaker economic data, this week investors appeared to be buying the dip and hoping the central bank “comes to the rescue,” said Petursson.
Next week, the U.S. Federal Reserve is widely expected to cut its key interest rate for the first time in several years after it significantly hiked it to fight inflation.
But the magnitude of that first cut has been the subject of debate, and the market appears split on whether the cut will be a quarter of a percentage point or a larger half-point reduction.
Petursson thinks it’s clear the smaller cut is coming. Economic data recently hasn’t been great, but it hasn’t been that bad either, he said — and inflation may have come down significantly, but it’s not defeated just yet.
“I think they’re going to be very steady,” he said, with one small cut at each of their three decisions scheduled for the rest of 2024, and more into 2025.
“I don’t think there’s a sense of urgency on the part of the Fed that they have to do something immediately.
A larger cut could also send the wrong message to the markets, added Petursson: that the Fed made a mistake in waiting this long to cut, or that it’s seeing concerning signs in the economy.
It would also be “counter to what they’ve signaled,” he said.
More important than the cut — other than the new tone it sets — will be what Fed chair Jerome Powell has to say, according to Petursson.
“That’s going to be more important than the size of the cut itself,” he said.
In Canada, where the central bank has already cut three times, Petursson expects two more before the year is through.
“Here, the labour situation is worse than what we see in the United States,” he said.
The Canadian dollar traded for 73.61 cents US compared with 73.58 cents US on Thursday.
The October crude oil contract was down 32 cents at US$68.65 per barrel and the October natural gas contract was down five cents at US$2.31 per mmBTU.
The December gold contract was up US$30.10 at US$2,610.70 an ounce and the December copper contract was up four cents US$4.24 a pound.
— With files from The Associated Press
This report by The Canadian Press was first published Sept. 13, 2024.
TORONTO – Canada’s main stock index was down more than 200 points in late-morning trading, weighed down by losses in the technology, base metal and energy sectors, while U.S. stock markets also fell.
The S&P/TSX composite index was down 239.24 points at 22,749.04.
In New York, the Dow Jones industrial average was down 312.36 points at 40,443.39. The S&P 500 index was down 80.94 points at 5,422.47, while the Nasdaq composite was down 380.17 points at 16,747.49.
The Canadian dollar traded for 73.80 cents US compared with 74.00 cents US on Thursday.
The October crude oil contract was down US$1.07 at US$68.08 per barrel and the October natural gas contract was up less than a penny at US$2.26 per mmBTU.
The December gold contract was down US$2.10 at US$2,541.00 an ounce and the December copper contract was down four cents at US$4.10 a pound.
This report by The Canadian Press was first published Sept. 6, 2024.
