Machinery an Export Powerhouse
By Peter G. Hall *
Vice-President and Chief Economist Export Development Canada
Mention Canada to an international crowd, and immediately they think commodities. Far less is known about our prowess in higher value-added goods and services. Machinery and equipment is one of the lesser-known and under-appreciated export industries, yet it boasts decent trend growth and an enviable breadth of destinations. Does the higher Canadian dollar spell the end of this industry's good run, or will nascent world growth re-ignite its prospects?
The last global economic cycle was a particularly long one, and towards the end it put big demands on machinery and equipment providers. Canada's industry capitalized on the good times, growing exports by 6 per cent annually between 2003 and 2008, slightly above the all-industry average. Recession saw sales collapse in 2009, but by much less than other exports. Since then, weak global investment has held annual growth to a more modest 4.3 per cent annually.
Most machinery sub-sectors have performed well in the past decade. Mining together with oil and gas equipment have capitalized on high commodity prices, increasing sales on average by 13 per cent annually since 2000. Agricultural equipment sales have also fared reasonably well, averaging 5 per cent per annum over the same period, reflecting robust global demand for food. Metals and woodworking machinery have posted soft results, buffeted by the currency and the US housing debacle. It's hardly a surprise that construction machinery was the sub-sector the most affected by the Great Recession, falling back by 37 per cent in 2009.
Although the principal market for Canadian machinery and equipment, sales to the United States were flat from 2000 to 2008, and tumbled 21 per cent in the recession. In contrast, sales from 2000-08 in emerging markets increased on average by 17 per cent annually, and only shed 12 per cent in 2009. The growth spread has increased the share of machinery exports to emerging markets steadily from 5 per cent in 2000 to 18 per cent in 2012. The top emerging market destinations include China, Russia, Brazil, UAE and Singapore, led by Russian growth averaging 19 per cent annually.
So much for past performance. Is the future as bright? Although the Canadian dollar is relatively strong, it has been stable at parity with the US dollar for the past two years, and has recently drifted lower. In this context, a reviving US economy is helping. Industrial capacity is getting tight, and US corporations have begun to invest again. On top of that, corporations in the OECD are cash-rich, and able to invest heavily for years to come. For their part, emerging markets are expected to see growth accelerate, feeding the need to increase their industrial capacity. All this points to sustained growth of machinery and equipment investment in the medium term.
Will they invest in Canadian equipment? The next growth cycle is bound to reignite demand for commodities, and the myriad global resource projects currently on the table - suggesting strong demand for oil and gas and mining equipment. World growth will continue to add tens of millions to the ranks of the emerging market middle class - feeding these will require substantial global investment in agricultural equipment for a long time to come. The world auto market presents a strong opportunity for Canada's auto-related machinery industry. Technological progress and the need to find mechanical solutions for labour-constrained, aging populations suggest a need for specialized machinery. As such, Canadian machinery exports are forecast to rise 10 per cent this year and next.
The bottom line? Canadian machinery might not be our most visible export, but it's a $28 billion industry with substantial future growth potential. It's also a great illustrator of the transformational effect that superior growth to the fast-paced emerging world is having on all Canadian exports.