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JDI Roundtable on Manufacturing Competitiveness in New Brunswick

Economic recovery depends on province’s manufacturing sector

Herb Emery

Has COVID-19 temporarily reduced our capacity utilization in manufacturing? Or has it permanently reduced our capacity to manufacture?

The answer to this question is what will tell us if we can expect our economy to recover. Absent a dramatic change in how New Brunswickers treat exporters, it will also tell us if we will experience the de-industrialization that a series of one term governments have attempted to stave off for a decade. With the COVID-19 pandemic, the public-sector-driven economy is nearing the end of the fiscal runway and never got the plane off of the ground.

Last week, Statistics Canada released statistics showing a 25 per cent drop in the value of New Brunswick manufacturing sales in March. Only Newfoundland and Labrador had a larger percentage decrease, and New Brunswick’s lost manufacturing sales were double the percentage loss for Canada in total. Neighbouring Nova Scotia saw a slight increase in manufacturing sales in March, and Prince Edward Island lost only six per cent – even after closing the bridge.

But is there reason to be concerned? Robert Jones of CBC put a “don’t worry, be happy” spin on the $350 million loss in monthly manufacturing sales. Jones tweeted on May 14 that the drop in manufacturing revenue was not as “scary” as it seems for the province since it’s likely just the loss in revenue for the Irving Oil refinery “shipping lower priced product due to crashing oil prices...”

Many economists don’t find a loss of that size comforting or less scary, even if it is just one manufacturer, albeit a huge one for the economy. Contrary to what many in New Brunswick seem to believe, the province does benefit from having the refinery which has well paid jobs that increase property values in Rothesay and Quispamsis, and which sustains business for the port.

Having $350 million in lost sales revenue will have a potentially scary negative multiplier effect if its sales do not recover.

The bigger problem with the Jones view is that even after accounting for that huge hit to the provincial economy from the refinery, COVID-19 has likely had bigger impacts on manufacturing in New Brunswick than in many other provinces. New Brunswick manufacturing is highly export based and, in the food sector specifically, labour-dependent.

Among the 10 provinces, New Brunswick has the fourth-highest share of GDP from manufacturing at just over 10 per cent. And if New Brunswick’s share of GDP from the broader public sector were more in line with other provinces, then the importance of manufacturing for the non-government supported economy would be more apparent.

Manufacturing GDP in New Brunswick is generated by relatively few industries compared to other provinces. Almost half the province’s manufacturing output is from petroleum, which is basically production from the Irving Oil Refinery in Saint John. Another 35 per cent is from food products (16 per cent), pulp and paper (11 per cent) and wood products (seven per cent).

Other provinces also have dominant industries but not to the same extent. Ontario’s sector is dominated by transportation equipment, which accounts for 31 per cent of manufacturing. Nova Scotia has 27 per cent of its manufacturing output from food products.

It’s true that much of the “scary” impact of COVID-19 on manufacturing sales has been seen Canada-wide in the petroleum and coal industries, where monthly sales are down by one-third or almost $2 billion compared to February, and down almost 40 per cent from March 2019. Wood product sales in Canada are only down around three per cent in March 2020. In our other big industries, monthly sales in Canada were up in food (8.2 per cent) and paper (8.4 per cent) in March 2020 over February.

Our province likely has shared the gains in paper manufacturing as that was the result of what Statistics Canada refers to as “panic buying of toilet paper and hygiene products across the country.” We are less likely to have seen gains in the food industries which were due to increased demand for meat and dairy products, for which we don’t have major producers.

Our food producers have been more affected by the decreased demand from restaurants for things like potato products. Seafood processing for export is a bigger share of our food industry, and those producers face reduced international demand and challenges bringing in temporary foreign workers.

New Brunswick has a potentially bigger problem with food manufacturing, which of our big four industries is the largest employer. Since 2008, our province has benefited from growing employment through sustaining a high reliance on low-wage, labour-intensive food manufacturing. As late as 2008, the value of capital (buildings, machinery and equipment) per worker in our food industry was no different from the Canadian average. Since 2008, however, our food manufacturers in aggregate have added workers without investing in capital, resulting in higher labour intensity of production and lower labour productivity.

Seafood producers are a large part of our food industry and they are labour-dependent. Compared to other provinces, food manufacturing in New Brunswick relies much more on labour to produce, which makes our producers’ costs more impacted by COVID-19.

In contrast, petroleum, wood products and pulp and paper in New Brunswick compare to manufacturers in other provinces, in terms of their higher reliance on capital to produce. And in these industries, we have seen investment and higher labour productivity. We also have higher wages for workers.

So what should scare New Brunswickers about COVID-19 is its potential impact on the high level of employment in food manufacturing. The risk of coronavirus infection raises the cost of producing with labour. Personal protective equipment, screening for temperatures, co-ordinating work hours with “bubbled shifts” of workers and wage premiums for getting workers to accept riskier work situations increase costs, and erode the advantage of low-cost labour. As well, physical distancing in the workplace, reduced shift numbers to allow for cleaning, reduced sharing of tools and equipment, and operational shutdowns in the event of an outbreak are factors that reduce the capacity of labour-dependent businesses to produce.

If COVID-19 results in these workplace conditions becoming permanent, then New Brunswick will lose food manufacturing capacity and jobs for good.

Food manufacturing was what jobs-focused governments needed after the 2008 recession. But even prior to COVID-19, labour shortages were creating a problem for food producers in our province, and elsewhere, as population aging and migration reduced the available labour supply for food producers, particularly outside of the cities. We have recently learned as well that some young New Brunswickers feel that working in a fish plant is like a “slap in the face,” while employers lament that young New Brunswickers lack the work ethic needed for the jobs.

A near-term solution has been to rely on temporary foreign workers for the seasonal fish processors. For year-round producers, the push has been for higher immigration numbers to gain more available workers. Now, COVID has complicated those solutions.

The COVID-19 pandemic did not create a new problem for New Brunswick’s economy, but it did lay bare the fundamental weakness that has developed. New Brunswick, as an exporting economy, has historically relied on abundant low-wage labour, a cheap dollar and a perceived immobile resource base to drive competitiveness of our exporting businesses that competed on the basis of price. Go back a generation or two, and you will see efforts of governments to broaden the sources of competitive advantage for exporting from New Brunswick.

Previous governments developed low-cost sources of electric power for industry, backbone infrastructure to reduce costs of getting to market, and invested in research-and-development capacity to support industry productivity. New Brunswick’s competitiveness has eroded because the province became too reliant on cheap labour as the sole source of advantage. COVID-19 has kicked out the last leg of competitiveness stool.

Prior to 2008, governments in this province had a good understanding of manufacturing exports’ value, and focused efforts on creating competitive advantages for producing here. That understanding of economics was honed from previous severe economic crises – similar to the one we may be about to experience.

What’s terrifying for an economist is that New Brunswick didn’t have the same capacity to come to this understanding after the 2008 financial crisis. Our post-COVID-19 economic recovery depends on New Brunswick voters understanding that the refinery, and other manufacturing exporters, are what drives the provincial economy.

Herb Emery is a Brunswick News columnist and Vaughan Chair of Regional Economics at the University of New Brunswick.

This article first appeared in Brunswick News publications – May 20, 2020

The JDI Roundtable on Manufacturing Competitiveness in New Brunswick is an independent research program made possible through the generosity of J.D. Irving, Ltd. The funding supports arms-length research conducted at UNB.