Atlantic Institute for Policy Research Highlights
Economic policy commentary and research from the AIPR

NB's recovery depends on manufacturing

Author: Herb Emery

Posted on May 19, 2020

Category: Regional Economics , Manufacturing , JDI Roundtable

Has COVID19 temporarily reduced our capacity utilization in manufacturing or has it permanently reduced our capacity to manufacture? The answer to that question is what will tell us if we can expect our economy to recover, or absent a dramatic change in how New Brunswickers treat the province’s exporters, if we will experience the de-industrialization that a series have one term governments have attempted to stave off for a decade with their own variations on taxing, borrowing and public spending to drive the economy. With the COVID19 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 New Brunswick’s manufacturing sector as having a 25 percent drop in the value of its sales in March with the COVID19 economic disruption. 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. New Brunswick’s large drop in manufacturing sales stands out compared to neighboring Nova Scotia which saw a slight increase in manufacturing sales in March, and PEI which lost only 6 percent even after closing the bridge.

Robert Jones of CBC put a uniquely New Brunswick “don’t worry, be happy” spin on the $350 million loss in monthly manufacturing sales. Jones “tweeted” that the drop in manufacturing revenue was not as “scary” as it seems for the province since its 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. Even if it is “just the refinery”, $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 “just the refinery”, COVID19 has likely had bigger impacts on manufacturing in New Brunswick than in many other provinces. Compared to most provinces, New Brunswick manufacturing is highly export based, concentrated among a small number of industries, and labour dependent for its large food industry.

Among the ten provinces, New Brunswick has the fourth highest share of GDP from manufacturing at just over 10 percent. 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.

New Brunswick has the most trade exposed manufacturing sector among the 10 provinces. Two-thirds of our province’s manufacturing output is exported, and 90 percent of our exports go to the United States.

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 Refinery in Saint John. Another 35 percent is from Food Products (16 percent), Wood Products (7 percent), and Pulp and Paper (11 percent). Other provinces also have dominant industries but not to the same extent. Ontario’s sector is dominated by Transportation Equipment, which is 31 percent of manufacturing. Nova Scotia has 27 percent of its manufacturing output from Food Products.

CBC’s Robert Jones is correct that much of the “scary” impact of COVID19 on manufacturing sales has been seen Canada wide in the Petroleum and Coal product industry, where monthly sales are down by one-third or almost $2 billion compared to February, and down almost 40 percent from March 2019. Wood product sales in Canada are only down around 3 percent in March 2020. In our other big industries, monthly sales in Canada were up in Food (+8.2 percent) and Paper (+8.4 percent) 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 to produce.

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 than 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 making our producers’ costs more impacted by COVID19.

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 higher wages for workers in these industries.

So what should scare New Brunswickers about COVID19 is its potential impact on the high level of employment in food manufacturing because the risk of coronavirus infection raises the cost of producing with labour. COVID19 has already led to challenges of bringing in Temporary Foreign Workers to staff the plants. Personal Protective Equipment, screening for temperatures, coordinating work hours with “bubbled shifts” of workers, and wage premiums for getting workers to accept riskier work situations increase the cost of employing labour and erode the advantage of low cost labour. But physical distancing in the work place, reduced shift numbers to allow for cleaning, reduced sharing of tools and equipment, operational shutdowns in the event of an outbreak reduce the capacity of labour dependent businesses to produce. If the COVID19 risk results in these workplace conditions being permanent, then New Brunswick will lose food manufacturing capacity and jobs permanently.

Food manufacturing was what jobs focused governments needed after the 2008 recession but even prior to COVID19, labour shortages were creating a problem for food producers in our province, and elsewhere, as population aging and migration that 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.

The COVID19 pandemic did not create a new problem for New Brunswick’s economy but it did lay bare the fundamental weakness that has been developing. 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 the research and development capacity in the province 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. COVID19 has kicked out the last leg of competitiveness stool.

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

What’s really scary 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-COVID19 economic recovery depends on New Brunswick voters understanding that the refinery, and other manufacturing exporters, are what drives the provincial economy.



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