Prairie Economic Roundup

ECONOMIC ROUNDUP

Destination (and journey) unknown Prairie manufacturers heading into an uncertain recovery

By Jayson Myers

The pandemic has really knocked the wind out of Prairie manufacturing – and the western Canadian economy as a whole. Ditto for the situation across Canada.

The Canadian economy contracted by 20 per cent between February and April as businesses closed and consumers stopped spending. International demand for Canadian-made goods weakened even further. Canada’s merchandise exports fell by more than one-third over that same period.

Statistics Canada reports that 81 per cent of Canadian manufacturers were negatively affected by the COVID-19 crisis. Unfortunately, the agency also reports that only 24 per cent of manufacturers have a recovery plan in place.

The impacts came fast and furious. Manufacturing production, which directly contributes 10 per cent of Canada’s gross domestic product (GDP), dropped by one-third in March and April. Output levels fell in every sector as plants shut down or drastically reduced capacity. Every auto assembly plant in North America closed in April, sending shock waves through the entire supply chain. Other equipment producers from aerospace to industrial machinery sectors also saw dramatic drops in output. Food production suffered from the closure of meat processing facilities. Meanwhile, petroleum refining was hit by a triple whammy of global over-supply, falling prices, and lower energy demand.

Monthly manufacturing sales plummeted by 35 per cent from $56.2 billion in February to $36.3 billion in April. New orders also shrank by more than a third to $37.8 billion. Manufacturers responded by reducing inventories in line with sales and working down unfilled orders. Nevertheless, by April they were, on average, working at only 54 per cent of operating capacity, down from 77 per cent in February. Across Canada, manufacturers laid off 285,000 employees. By April, manufacturing employment had shrunk by more than 16 per cent to 1,438,000.

The good news is that both manufacturing production and employment have rebounded sharply since the economy began to re-open in May. Manufacturing sales jumped by 10 per cent that month alone to $40.1 billion. Employment increased in both May and June as 189,000 people were recalled to jobs in the sector. We’ll need to wait a while longer to get the full statistical read on the summer, but early indications are looking good, and it looks like manufacturing is leading the way. The pace of recovery in manufacturing employment has been almost 50 per cent stronger than for the economy as a whole, and much stronger than in previous economic recessions, reflecting the very unusual circumstances of the COVID-19 crisis.

Manitoba has fared relatively well

Manufacturing output fell in Manitoba as the COVID-19 crisis hit the province in March and April, but by much less than the Canadian average. Overall sales declined by nine per cent. The steepest drops came in the province’s aerospace sector (shipments of transportation equipment plummeted by 39 per cent) and in furniture (where sales were off by 25 per cent). Those two sectors alone accounted for almost one-fifth of manufacturing production in Manitoba before the pandemic hit. Other sectors have fared much better, especially machinery manufacturing where sales actually increased by 13 per cent over the same period of time. The overall level of employment in Manitoba manufacturing fell by about 10 per cent or 6,000 jobs between February and April.

While the downturn in manufacturing output in Manitoba was not as pronounced as elsewhere in Canada, the rebound since April has also been weaker. Manufacturing sales increased by just under seven per cent in May. That month shipments of processed food, chemicals, wood products, and machinery all exceeded February sales levels. Shipments of transportation equipment snapped back to just under six per cent of pre-pandemic levels, but manufacturing employment increased by only 1,500 jobs to 57,700 in July, still nine per cent lower than before the pandemic struck.

Saskatchewan saw deeper downturn, slower rebound

Sales for Saskatchewan manufacturers contracted by 22 per cent to $998 million between February and April – not as bad as the Canadian average, but still a far sharper decline for the province than the recession of 2008/2009. Production fell in all sectors except machinery where, as in Manitoba, production levels jumped by more than 12 per cent. Just over 5,000 employees were laid off by Saskatchewan manufacturers, dropping overall employment in the sector to 28,100 in April.

Saskatchewan’s manufacturing recovery was initially slower than the national average, but momentum is growing. Sales rebounded by slightly more than six per cent in May. Around 3,500 jobs reappeared in May through July – an 11 per cent increase which exceeds overall provincial employment growth.

Alberta faced hardest hit

Alberta’s manufacturers shipped 26 per cent less in April than before the pandemic hit in February. Employment dropped by 20,000 jobs to 118,000 that same month. Petroleum refining and chemicals, which together accounted for more than 40 per cent of manufacturing output in the province pre-pandemic, were hardest hit. Refinery sales plummeted by 74 per cent and chemical shipments dipped by just over 10 per cent in two months. Sales in both sectors remained depressed in May.

Other manufacturing sectors also suffered. Food production, another major contributor to Alberta’s manufacturing economy, dropped by eight per cent, metal fabricating by 12 per cent, and plastic products by a full 34 per cent. As in other Prairie provinces, machinery manufacturing fared relatively well, recording less than a one per cent decline in shipments value.

In May, sales of goods manufactured in Alberta increased by only 2.5 per cent,

Let’s hope the economy revs up rapidly. But, let’s not assume that it will be a return to business as usual.

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15%

10%

5% Percent Change in Manufacturing Sales -25% -20% -15% -10% -5% 0% -30%

-35%

-40%

Recession & Recovery in Prairie Manufacturing

10%

4% 7% 6%

-35%

Canada -23% -9%

-22%

Prairies

Recession Manitoba May Recovery Saskatchewan 3%

-26%

Alberta

reflecting the much greater hit taken by the province’s oil and gas industry from circumstances ranging far beyond the impact of COVID-19. There has been only marginal growth in other sectors of Alberta manufacturing. Manufacturing employment has also remained depressed, increasing only slightly in July to 119,600.

Where do we go from here?

A lot of uncertainty still remains. Western Canadian economies are opening up more rapidly than in the rest of the country, but the threat of another wave of infection is very real. Increasing case numbers in the United States threaten both demand and production activity in our major trading partner. Canadian manufacturers are as much, if not more at risk from supply chain disruptions as they are from faltering customer demand.

Understandably, the pandemic has stolen the headlines. As the recovery gets underway, manufacturers are focusing on ensuring safe and healthy workspaces.

But, let’s not forget that COVID-19 has aggravated threats and accelerated trends that were already apparent in manufacturing, both in Canada and around the world. Weakening demand in key markets, increasing levels of political risk and trade protection, intense competition, oversupply, falling prices, and rapid rates of technological change were disrupting and reshaping the business of manufacturing before the pandemic hit.

In many ways, the pandemic has been a great reckoning. Those companies with the strongest cash reserves, the most transparent and resilient supply chains, and the best ability to respond quickly to changing business conditions and pivot production rapidly to take advantage of new business opportunities are now best positioned to ride the wave to recovery.

There are also new opportunities for Prairie manufacturers. In the shortterm, many companies have turned to producing products – medical and personal protective equipment – critical for fighting the pandemic. Now, with recovery underway, more

opportunities are opening up as supply chain gaps become apparent and more manufacturers are looking to near-shore critical and higher value materials, components, and equipment.

However, let’s not forget, in order to take advantage of these opportunities and to support sustainable business, manufacturers need to be globally competitive. Canada is a high cost country in which to do business, and probably more so in the future as we recover from the debt hangover we will inherit from the pandemic.

Advanced technologies – digital systems, new materials, machine learning, and smart production systems – will be important tools for manufacturers determined to compete and grow in a post-pandemic recovery. However, technologies are just that – tools. If manufacturers are going to use them productively – and profitably – then, they need to be able to manage them well. They need to focus on creating value by delivering solutions to their customers, not just products. They need to identify the processes that are critical for doing so, as well as the bottlenecks and nonvalue-adding activities fundamental to process improvement. And, they need to make sure they have the information and management systems, the skill sets, and the supply chains and business partners in place to achieve their business objectives.

Let’s hope the economy revs up rapidly. But, let’s not assume that it will be a return to business as usual. It will be those manufacturers that are best able to manage change – their processes, their technologies, and above all, their people – that will lead the way.

Jayson Myers is CEO of Next Generation Manufacturing Canada – the country’s advanced manufacturing supercluster. An award-winning business economist and leading authority on technological change, Myers has counselled Canadian prime ministers and premiers, as well as senior corporate executives and policymakers around the world.

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Paid Sick Leave: Cost or Investment?

By Jeff Palamar

Employers are obliged to ensure, so far as is reasonably practicable, the safety, health and welfare at work of all their workers. This would include ensuring that employees who should not be at work are, in fact, not at work.

Due to the pandemic, businesses are being encouraged to have employees review screening information before attending work and stay home if they are experiencing symptoms of COVID-19 (such as cough, fever, runny nose, sore throat, breathing difficulties, etc.) or if they have travelled or been exposed to a case of COVID-19.

Some employers have chosen to provide paid sick leave to their employees, but in Manitoba, at least, that is not required by law. The closest statutory requirement we have applies to an employee who is expected to be incapable of working for a period of at least two weeks because of a serious injury or illness, who is entitled to unpaid time off.

As a result, unless an employer voluntarily chooses to pay for sick leave, an employee must take time off without pay. Employees who respond honestly in the context of COVID-19 screening and so are ‘rewarded’ by time off without pay might be tempted to hide their true circumstances so as not to lose pay. This puts other employees and customers at risk.

It likely is a stretch to conclude that employers are legally required to provide paid sick leave to live up to their duties to maintain a safe workplace. Still, that is something an employer properly should consider, particularly during this period of pandemic. Put another way, is paid sick leave a cost to be avoided, or an investment to be made?

Employment standards legislation is by definition a statutory floor of rights providing certain minimums below which employers and employees cannot legally agree to be bound. It is not a one-size-fits-all statute which mandates that everyone must operate at that lowest level. Rather, it provides certain minimum protections or standards which society has determined are required. Provided such minimums are met, it is up to employers to make their own determinations as to how they wish to operate and which expenses they see as worthwhile.

As an example, no employer is legally required to pay more than minimum wage, or provide group insurance benefits or pension, or support ongoing education through time off work or by paying for such courses. That said, from a big picture perspective it may make sense to do so. Deciding on whether or not to invest in employees and the business in these ways (or by paid sick leave) should be based on the economics and other market realities at hand.

To provide paid sick leave provides an incentive for behaviour the employer wishes to encourage and removes the incentive for behaviour it wishes to discourage.

It provides a strong message to the public and the employees that the employer is genuinely concerned about the health of those who work there and those who may choose to attend as customers.

We all have choices available to us as either employees or customers. We seek employment with employers who are seen as good employers, who offer fair compensation, benefits and working conditions. As customers we support those businesses which offer products or services we like, at a fair price and are convenient. Often, all things being equal we prefer those who offer an atmosphere or culture that we find welcoming and desirable, worthy of our support. In some cases, however, some of us will even choose to support

To provide paid sick leave provides an incentive for behaviour the employer wishes to encourage and removes the incentive for behaviour it wishes to discourage.

businesses which may provide less selection, somewhat higher prices, and are less convenient, simply because of who they are, and the atmosphere or culture offered.

Paid sick leave is not necessarily an all or nothing choice. It could be offered to deal only with COVID-19 related absences from the workplace and could be brought in on a trial basis such that if the employer found the system were being misused, it could be ended. The amount of sick pay does not have to be 100 per cent of the regular pay but could be some lesser amount. Perhaps only employees with a certain amount of service qualify, presumably on the logic that by their length of service they have proven themselves to be deserving of this benefit.

Some businesses or industries by their very nature will be more or less at risk. It is easier and much less costly for an employer to offer the possibility of paid sick leave when the actual risk of it being used is much lower. Conversely, the more likely someone is going to be taking this paid sick leave, the more it will cost.

There obviously will be employers who simply are not in an economic position to provide any paid sick leave at all. Those employers can instead consider allowing employees to access other paid leave such as by taking vacation time, or using banked time which they have accumulated, or borrowing against future earnings. Failing any of those solutions, employees may be required to rely on the public security system we have in place, which at present includes the Canada Emergency Response Benefit, Employment Insurance and/or Canada Pension Plan sick benefits and encouraged through moral suasion to stay at home if need be.

What suits a particular workplace is going to depend to a large extent on the people involved and the choices the employer makes. Above all, such choices should be reasoned and thoughtful.

Jeff Palamar is a partner with the Winnipeg law firm Taylor McCaffrey LLP, and the leader of its Labour and Employment Law Practice Group. Taylor McCaffrey LLP is the exclusive Manitoba member of the Employment Law Alliance, the world's largest network of labour and employment lawyers. Since 2008 Jeff has been listed in the peer-selected best lawyers in Canada in his field. His practice focuses on helping employers thrive by finding creative and proactive solutions to the challenges they face.