Sectoral. Outlook. Province of Québec

Transcription

1 Sectoral Outlook Province of Québec

2 Sectoral Outlook Province of Québec

3 Authors Sylvain Bélisle and André Desnoyers, Economists Québec Region Telephone: (514) Translation to English Translation Bureau Public Works and Government Services Canada Québec Region Editing Social-Economic Analysis Branch Québec Region With the Collaboration of Corporate Communications and Services Branch Québec Region Graphic Design Josée Gaudreault, graphic artist Pictures Modified picture, Hélène S. Dubois, Le Québec en images, CCDMD Modified picture, Gilles Potvin, Le Québec en images, CCDMD Modified picture, Denis Chabot, Le Québec en images, CCDMD March 2006 This publication is also available at the following Internet address: www150.hrdc-drhc.gc.ca/asp/ww-mt/accueil.asp Cette publication est aussi disponible en français. The contents of this document derive from analyses made by the authors and do not necessarily reflect the views of the Government of Canada. Cat. No. : SG2-1/1-2006E-PDF ISBN: Her Majesty the Queen in Right of Canada, 2006 Sectoral Outlook Province of Québec

4 Table of Contents Summary Introduction Notes on Methodology Part 1: Overview Description of the Area Economic Environment Labour Market Indicators Part 2: Sectoral Outlook Overview Primary Sector Manufacturing Sector Consumer-Related Manufacturing Resource-Related Manufacturing Investment-Related Manufacturing Construction Industry Consumer Services Production Services Public and Parapublic Services Conclusion List of Tables 1 Main Labour Market Indicators Breakdown of Employment for Selected Industry Groups Breakdown and Employment Outlook in the Primary Sector Breakdown and Employment Outlook in the Manufacturing Sector Breakdown and Employment Outlook in the Consumer-Related Manufacturing Breakdown and Employment Outlook in the Resource-Related Manufacturing Sector Breakdown and Employment Outlook in the Investment-Related Manufacturing Sector Breakdown and Employment Outlook in Consumer Services Breakdown and Employment Outlook in Production Services Breakdown and Employment Outlook in Public and Parapublic Services

5 Summary Economic Outlook From 2006 to 2008, average annual employment growth of 1.1% should result in net creation of nearly 120,000 jobs in Québec. Given the current pace of economic growth, the employment outlook reflects significantly higher productivity growth, compared to historic trends, as a result of increased investment in machinery. Also, weak population growth and the gradual aging of the work force should limit the labour force growth rate to the point where Québec s unemployment rate could slide below 8% by the end of the forecast period. Sectoral Outlook As well as reflecting more favourable developments as regards labour productivity, job creation should also be better distributed across the major economic sectors. As in 2005, goods-producing industries are expected to contribute to job creation despite a slowdown in the construction industry. Overall, average growth of 0.6% over the next three years should result in an additional 16,000 jobs, taking the employment level in goods-producing industries past its previous peak in After a long period of adjustment, the manufacturing sector in particular should regain some of its vitality, as the export recovery continues. However, employment gains will be tempered by issues affecting some industries, as well as efforts to enhance productivity. At 1.2%, job creation in consumer services will rise at a pace very similar to that of the labour market as a whole. Slower employment growth in the retail trade sector, coming on the heels of the boom it has experienced since the beginning of this decade, largely explains why these industries will not perform better. The growth outlook is well above average in the information, culture and recreation, as well as in accommodation and food services. Finally, despite continuing pressure on the health care sector associated with an aging population, average employment growth for government services as a whole should be less than 1% over the next three years. Unlike in the health sector, the changing demographics do give the government some flexibility as regards the educational sector work force, mainly at the primary and secondary levels. As well, service modernization, coupled with the challenge at least at the provincial level of balancing budgets, would suggest a slight reduction in the size of governments. Turning to services, industries that support production activity, sometimes referred to as motor tertiary industries, are expected to continue to lead the pack in terms of employment growth, with an average annual increase of 1.7%. Professional services and management consulting industries will continue to be associated with the most dynamic employment growth in this group. Growth in the wholesale trade and transportation industries is expected to be more comparable to the average for the labour market as a whole. The weakest employment growth in this industrial group is likely to occur in the finance, insurance and real estate sectors, which continue to make invest heavily in information technology. Sectoral Outlook Province of Québec 4

6 Introduction Each year, develops medium-term employment forecasts both by industry and by occupation for Québec as a whole and for each of its economic regions. The results of these analyses are published in the form of a series of studies intended to provide a comprehensive overview of recent labour market developments and outlooks in Québec and its various regions. Contrary to what we did in recent years, we are presenting the results of our analyses in two different, yet complementary, documents. This document deals with sectoral outlooks, whereas the second, to be published at a later date, will provide occupational outlooks. We hope this series of documents will interest people who are seeking labour market guidance and those who help them, including parents, educational staff and employment assistance services. It should also interest businesses and employer associations that want to identify human resources management issues in their industries. This document is made up of two sections. The first part provides a synopsis of the labour market in the region, including an overview of economic developments and key labour market indicators. The second part presents sectoral outlooks by industrial groups catalogued according to the North American Industry Classification System (NAICS). 5

7 Notes on Methodology Estimated Employment Levels The employment estimates by industry are based on Statistics Canada s Labour Force Survey (LFS), as this tool is the only reliable source that follows employment developments in both Québec and the regions. Since the employment level in some industries is very low in a number of economic regions, other sources of data mainly of an administrative nature have sometimes been used because LFS figures in these industries are unreliable. In addition, three-year ( ) averages are included in the statistical tables to provide a more reliable indication of employment levels. The employment outlooks have been established for a three-year period, from 2006 to They were developed in winter in co-operation with economists working in all of Québec s regions and with the help of the Canadian Occupational Projection System (COPS), without which we would not have had access to the many analysis and forecasting tools that were used to carry out this study. Industrial Groups The industrial analysis presented in this study is based on an aggregation using the North American Industry Classification System (NAICS). Here, we provide a brief overview of the composition of each of these groups. Precise definitions of the industries are available in the NAICS published by Statistics Canada. Primary Sector 11 Agriculture, Forestry, Fishing and Hunting 21 Mining and Oil and Gas Extraction Manufacturing Sector Manufacturing When relevant, following groups are also presented. Consumer-Related Manufacturing 311 Food Manufacturing 312 Beverage and Tobacco Product Manufacturing 313 Textile Mills 314 Textile Product Mills 315 Clothing Manufacturing 316 Leather and Allied Product Manufacturing 323 Printing and Related Support Activities 337 Furniture and Related Product Manufacturing 339 Miscellaneous Manufacturing Sectoral Outlook Province of Québec 6

8 Ressource-Related Manufacturing 321 Wood Product Manufacturing 322 Paper Manufacturing 324 Petroleum and Coal Products Manufacturing 327 Non-Metallic Mineral Product Manufacturing 331 Primary Metal Manufacturing Investment-Related Manufacturing 325 Chemical Manufacturing 326 Plastics and Rubber Products Manufacturing 332 Fabricated Metal Product Manufacturing 333 Machinery Manufacturing 334 Computer and Electronic Product Manufacturing 335 Electrical Equipment, Appliance and Component Manufacturing 336 Transportation Equipment Manufacturing Construction Industry 23 Construction Industry Consumer Services Retail Trade 51 Information and Cultural Industries 71 Arts, Entertainment and Recreation 72 Accommodation and Food Services 81 Other Services (except Public Administration) Production Services 22 Utilities 41 Wholesale Trade Transportation and Warehousing 52 Finance and Insurance 53 Real Estate and Rental and Leasing 54 Professional, Scientific and Technical Services 55 Management of Companies and Enterprises 56 Administrative and Support, Waste Management and Remediation Services Public and Parapublic Services 61 Educational Services 62 Health Care and Social Assistance 91 Public Administration 7

9 Sectoral Outlook Province of Québec 8

10 Part 1: Overview Description of the Area Québec has a total terra firma area of over 1.3 million km2, divided into 17 administrative regions. Québec occupies over 15% of Canada s total area and is by far the largest province in territorial extent. It also leads the other provinces in surface fresh water, which takes up over 10% of its area. Québec has a population of nearly 7.6 million. Of all Canada s provinces, it is exceeded only by Ontario, with a little over 12.5 million inhabitants. Québec s population is growing more slowly than the national average; over the years , it expanded at an average annual rate of 0.7%, compared with 1.0% for Canada as a whole. Economic Environment Economic growth for the entire year 2005 is expected to be about 2.2% While rising gas and oil prices have been highly beneficial to the producing provinces, they represent a significant cost for Québec While complete data for 2005 are not yet available, economic growth for the entire year is expected to be about 2.2%, or pretty well what it has been in the previous two years. Québec s economic performance will have been weaker than results for Canada as a whole, where growth is expected to be almost 3%. However, economic growth has been very unequally distributed across the country and received a considerable boost from the solid performance of provinces west of Ontario. Ontario and Québec have experienced roughly the same pace of growth. While rising gas and oil prices have been highly beneficial to the producing provinces, they represent a significant cost for the other provinces, particularly Québec and Ontario. These two regions are suffering the indirect effects of a dollar that is higher than expected, due in large part to the current energy situation, which favours the western provinces. The manufacturing sector, whose competitiveness has been sorely tested by a rising dollar in recent years, has had no respite: for 2005 alone, manufacturing employment dropped by almost 2% in Québec, and by more than 3% in Ontario. Under the circumstances, there is reason to be satisfied with the growth posted in Québec last year. Consumers fuelled much of that growth, as spending grew by 4% in real terms. That means that households took advantage of sustained increases in income but also had to dip into their savings. Consumer confidence was also reflected in the residential market: housing starts declined, as expected, but spending on renovations remained high and activity on the resale market peaked. Business investment grew by more than 5%, bolstered by high profits as well as ongoing efforts at modernization in response to the more challenging business conditions. 9

11 More so than in 2004, economic growth took a serious hit from foreign trade. What may not be so obvious is that associated with this development was a slight improvement in international exports, which grew by almost 4% as a result of solid economic performance in the United States. The export recovery is also a sign that in spite of headwinds, the business community s adjustment efforts have met with some success. The short-term outlook for the Québec economy remains relatively favourable, despite concerns in a number of economic sectors The short-term outlook for the Québec economy remains relatively favourable, despite concerns in a number of economic sectors. Economic growth in Québec will remain well under the Canadian average as a result of expected strong performances in Western Canada, and particularly Alberta, but also because of less favourable demographics. Overall, economic growth in Québec should average roughly 2.6% annually over the period from 2006 to 2008, compared to almost 3% for Canada as a whole. Other than the economy s cruising speed, the contributions of the various components of economic activity are expected to be considerably different from what has recently been the case. The most notable gap will be in private investment, primarily because of an end to the residential construction boom, with activity levels already starting to decline compared to the heights they reached in recent years. Consumer spending, which represents 60% of economic activity, will rise more slowly but will nevertheless continue to be sustained by a more rapid increase in real disposable income. In particular, the expected rise in interest rates will considerably curb the appetite for consumer durables. Government spending contributed little to economic growth in 2005: the uncertainty surrounding public finances, at least at the provincial level, leaves little hope of a change of course in the coming years. In terms of positive developments, however, the current context is particularly favourable to a continuation of the increased investment in machinery and equipment modernization that have already begun. Finally, the scenario associated with this outlook anticipates a continuation of the export recovery that began in 2005, as well as a small negative international and interprovincial trade balance. On the negative side are the risks associated with this scenario. In particular, it assumes sustained growth in the United States and a weaker dollar than we have at this time. Were the dollar to be higher than expected for example, through the impetus of a new rise in energy prices the already challenging external trade context could become even more problematic, resulting in slower economic growth as a result of both weaker exports and higher energy costs. Sectoral Outlook Province of Québec 10

12 Labour Market Indicators Employment in 2005 grew by only 1% compared to an average of 1.5% in As regards employment, the labour market has performed below expectations. Although economic growth has remained at the same level as in the previous two years, employment in 2005 grew by only 1% compared to an average of 1.5% in This is the lowest job creation rate in almost ten years. Coupled with this result was a drop in the average hourly work week. Furthermore, this relatively weak job growth parallels a more robust increase in labour productivity. After very slow growth from 2001 to 2004, at 1.3%, labour productivity grew faster relative to the long-term rate, which hovers at around 0.9%. In Canada as well, productivity growth rebounded after several years below the long-term average. Despite weaker job creation, the unemployment rate dropped once again, falling from 8.5% to 8.3%, its lowest level in almost 30 years. Lower unemployment pressures reflect more modest labour market participation. Indeed, the number of labour force participants increased by only 0.7%, a slightly lower rate than in For the second consecutive year, the participation rate declined owing to lower participation among youth and an aging labour force. Table 1 Main Labour Market Indicators Province of Québec Population 15+ ('000) 6, , , ,114.8 Labour force ('000) 3, , , ,023.2 Employed ('000) 3, , , ,675.5 Unemployed ('000) Unemployment rate (%) 9.1% 8.5% 8.3% 8.6% Participation rate (%) 66.0% 65.8% 65.6% 65.8% Employment rate (%) 60.0% 60.2% 60.1% 60.1% Source: Statistics Canada, Labour Force Survey Compilations by 11

13 We estimate an annual average of 1.1% over the period from 2006 to 2008: a net creation of a little more than 120,000 jobs Québec's unemployment rate could slide below 8% by the end of this forecast period The economic context, coupled with weak population growth, suggests moderate employment growth in the short and medium term: we estimate an annual average of 1.1% over the period from 2006 to 2008, which represents net creation of a little more than 120,000 jobs over three years. Given the current pace of economic growth, this employment outlook assumes significantly higher productivity growth relative to historic trends, owing in part to heavier investment in machinery. In the longer term, weak population growth, particularly among the working-age population, points to modest employment growth: more rapid productivity growth will thus be required to maintain economic growth and the standard of living. While employment growth in the medium term is not expected to be spectacular, the forecast is consistent with further drops in unemployment. Indeed, weak population growth and the gradual aging of the work force should limit the labour force growth rate to the point where Québec s unemployment rate could slide below 8% by the end of this forecast period. Sectoral Outlook Province of Québec 12

14 Part 2: Sectoral Outlook Overview The anticipated slowdown in job creation reflects a spurt in productivity rather than a slackening of economic activity From 2003 to 2005, Québec experienced average employment growth of 1.4% annually, a significant slowdown compared to the exceptional increase of 2.4% posted in the three preceding years. Québec s results surpassed the growth rate for the country as a whole (2.0%) and even for Ontario (2.3%). The recent decline in employment growth did not hit either Canada or Ontario as hard, as their job creation rates were 1.8% and 2.0% respectively during the period from 2003 to Much of the slowdown in job creation can be attributed to the poor performance of a group of goods-producing industries whose work force declined on average by 0.3% from 2003 to 2005, despite a rebound late in the period, in contrast to gains of 1.7% for the period. The manufacturing sector contributed heavily to this result: its work force declined at an annual rate of 1.7% throughout the period. The rise in the Canadian dollar and stiff competition from emerging countries in a number of key manufacturing industries had a strong adverse effect on exports, which partly explains the problems that continue to confront the manufacturing sector. On the other hand, the service-producing sectors held up much better: their work force increased by 1.9% from 2003 to 2005, compared to 2.6% in Over the next three years, we anticipate an average annual rate of employment growth of 1.1%, just below the long-term average (1.3% for the period from 1977 to 2005). The recent slowdown in job creation reflects a spurt in productivity rather than a slackening of economic activity, which should in fact pick up: from an average rate of 2% between 2003 and 2005, Québec s gross domestic product should increase at a rate of 2.6% in real terms over the period from 2006 to Thus as a result of current pressures associated in particular with increased business competition from foreign countries and the high value of the Canadian dollar, and in light of significantly higher investment in machinery and equipment, we anticipate that productivity will grow at a much higher rate relative to the long-term trend of just under 1%. In addition to reflecting more favourable developments as regards labour productivity, job creation should also be better distributed across major areas of economic activity. The goods-producing sectors in particular are once again expected to contribute to job creation, despite a slowdown in the construction industry. After a long period of adjustment and with the recent rebound in exports, the manufacturing sector should regain some of its vitality, tempered however by the problems affecting some industries and efforts to enhance productivity. 13

15 Table 2 Breakdown of Employment for Selected Industry Groups Province of Québec Average Level ('000) Share of employment All Industries 3, % 1.1% Primary % -0.6% Manufacturing % 0.9% Construction % -0.1% Services 2, % 1.3% Consumer Services 1, % 1.2% Production Services % 1.7% Public and Parapublic Services % 0.8% Source: Québec Region Historical estimates based on Statistics Canada's Labour Force Survey Average Annual Growth Employment growth in services (1.3%) will remain well above that in goods (0.5%) Despite a considerable slowdown, employment growth in services (1.3%) will remain well above that in goods (0.5%) over the forecast period. Service modernization, coupled with the challenge of balancing budgets, at least at the provincial level, will limit staff increases in public and parapublic services. Work force expansion in services related to consumer spending will be driven by more substantial increases in disposable income. However, the rate of employment growth in this service category will be limited to 1.2%, owing to an expected slowdown in retail trade, coming on the heels of the boom the sector has enjoyed since the beginning of this decade. Finally, services that support production activity, sometimes referred to as motor tertiary industries, will experience the greatest growth, averaging 1.7% over the next three years. These industries usually lead the pack of major industry groups. During the period, the production services work force grew at a rate of 1.9%, far exceeding the labour market as a whole (1.2%). Sectoral Outlook Province of Québec 14

16 Primary Sector The primary activities continue to be extremely important, and are often the only source of employment for many rural communities Apart from brief periods of recovery in the mid 80s and 90s, there has been a clear downward trend dating back as far as we can go with available data i.e. to the mid 70s. This trend is the result of both economic and structural shifts. This sector accounts for less than 3% of employment in Québec, although its significance in terms of economic activity goes well beyond numbers. The industries that comprise this sector continue to be extremely important, and are often the only source of employment for many rural communities. In addition, their development largely determines the level of activity in the downstream industries, which are often concentrated in the resource regions as well. Table 3 Breakdown and Employment Outlook in the Primary Sector Province of Québec Average Level ('000) Share of employment Average Annual Growth Whole Primary Sector % -0.6% Agriculture % -0.5% Forestry and Logging % -2.4% Fishing, Hunting and Trapping % 1.2% Mining % 0.7% Source: Québec Region Historical estimates based on Statistics Canada's Labour Force Survey The job losses should affect the agricultural and logging industries, whereas the mining industry, benefiting from favourable business conditions, will move in the opposite direction Over the last three years, employment in the primary sector once again shrank by an 0.5% annually, in spite of an upturn at the end of the period. During the forecast period, this decline is expected to continue at about the same pace (-0.6%), which is roughly comparable to the average work force reduction over the last 30 or so years ( 0.8%). The expected losses should affect the agricultural and logging industries, whereas the mining industry, benefiting from favourable business conditions, will move in the opposite direction. Recent years have been particularly trying for the agricultural industry. The problems generated by the mad cow crisis and the halt to expansion in the hog industry caused by the moratorium have been felt by the agricultural work force as a whole, which declined significantly in The high Canadian dollar also hindered exports. However, the industry did recover last year, when the moratorium on hog production was lifted and restrictions related to mad cow disease were relaxed. 15

17 The farming industry's recent rebound should not obscure its long-term decline, at least as regards its work force At the same time, the industry s recent rebound should not obscure its long-term decline, at least as regards its work force. Indeed, most of the job losses in the primary sector since the mid 80s have been in agriculture. The drop in the number of farms and farm business expansion, productivity gains associated with mechanized production and the shift to more productive industry segments, as well as the prolonged decline in the number of paid workers are some of the long-term factors often cited to explain the decline of the agricultural work force. Recent reductions, focussed for the most part in the livestock production industry, have occurred at the same time as exceptionally quick productivity growth: according to Conference Board estimates, productivity in that industry grew three times faster than in the economy as a whole during the 1990s. In the coming years, the export market will continue to provide opportunities for significant growth. However, given the industry s past performance tied to its rapid increase in productivity and the current uncertainty affecting the industry particularly the possible liberalization of agricultural trade as part of the WTO multilateral discussions the long-term trend towards a small agricultural work force is expected to continue. In terms of both production and employment, the logging industry, has experienced rapid expansion that began in the wake of the recession in the 1990s and continued until recently. This positive trend was clearly helped by the upswing in the downstream paper and wood industries, which experienced a strong increase in exports, particularly the latter. The logging industry's problems are clearly not over yet However, over the last three years, the industry s work force has declined sharply: sustained activity in residential construction was not enough to totally compensate for the Canada-US lumber dispute or structural problems within the downstream paper industry. And the industry s problems are clearly not over yet. A reduction in supply following the release of the Coulombe report, the anticipated weakness of demand, particularly with the decline in residential construction that is already under way, the high Canadian dollar, and difficult business conditions for both the lumber and paper industries are all factors that will affect the industry in the coming years. The lumber industry s work force is likely to be hit harder: the current scenario suggests a decline of 2.4% from 2006 to 2008 from an already considerably weakened level of employment. Sectoral Outlook Province of Québec 16

18 In the short term, the low level of exploration spending seen recently decreases the likelihood of new deposits being opened up and more jobs in the mining industry In the long term, the recent rise in exploration spending, if it continues, bodes well for the future of the mining industry in Québec Employment in the mining industry in Québec grew rapidly, at an average rate of almost 5% from 2003 to That recovery is linked to a favourable period which began in 2002, when global demand was high for most metals and the price of raw materials rose sharply. That contrasts with a long period of decline in which successive rationalizations reduced a work force of more than 30,000 workers in the mid 70s to only 12,000 in 2001; in 2005, the work force was estimated at approximately 17,000 workers, a level far below the peaks reached previously. Moreover, supply-related constraints prevented the industry from capitalizing fully on favourable business conditions. Many of the current deposits are becoming depleted and at least four metal mine facilities have had to close in the last two years. The low level of exploration spending for a number of years in large part explains the problems the industry has had renewing its resources and boosting production. However, more favourable economic conditions in the industry have recently resulted in a significant increase in exploration spending, a critical factor in terms of renewing mining potential: spending had fallen to very low historical levels at the beginning of the decade. Indeed, exploration expenditures rose from approximately $90 million in 2000 to almost $230 million in In the short term, the low level of exploration spending seen recently decreases the likelihood of new deposits being opened up and more jobs in the mining industry, particularly since some construction industry-sensitive subsectors, particularly quarries and sandpits, could be adversely affected by less favourable economic conditions. In the long term, the recent rise in exploration spending, if it continues, bodes well for the future of the mining industry in Québec. In the metal mines sector, certain projects could come to fruition by the end of the forecast period. However, the non-metallic minerals sector continues to be at a disadvantage as a result of persistent difficulties that seem to be getting worse in the asbestos industry, which has been in slow decline for many years now. Between 2006 and 2008, constraints affecting the mining industry as a whole will mean that employment should grow by less than 1% annually. Manufacturing Sector The manufacturing sector has faced multiple challenges since the beginning of the decade. They are reflected in its poor results in terms of output and especially employment. Between 2003 and 2005, employment across the sector declined at an average annual rate of 1.7%. Never has there been such a prolonged decline, other than during periods of recession. Over the past three years, output, measured in real terms, has risen by a meagre 0.5%. However and this is an encouraging fact manufacturing output has begun to recover in the last two years, albeit modestly, after declining for three consecutive years between 2001 and

19 The employment gains could be limited in the manufacturing sector. For the period from 2006 to 2008, they should be approximately 1% The Québec manufacturing sector is facing circumstances similar to those in the country as a whole and in Ontario, where employment is at its lowest level since The industry s recent problems can to a large extent be attributed to poor performances as regards external trade in the wake of adjustments many industries had to make in order to meet stiffer foreign competition, particularly from emerging countries, and in response to the sudden rise in the Canadian dollar starting in Throughout the 1990s, exports represented a growing proportion of manufacturing output as trade was liberalized. From only a third at the beginning of the 1990s, manufacturing shipments had increased to almost half at the start of this decade. They declined subsequently, first because of a slowdown in the United States, and then as a result of the appreciation of the Canadian dollar. Despite an upturn in the last two years, the value of manufacturing shipments in 2005 was still more than 7% lower than at the beginning of the decade. The recent rebound in exports and manufacturing output, however modest, and accelerated productivity growth herald a better future, particularly in a context of sustained growth for our main trading partner and a more stable currency. However, future gains could in large part stem from continued rapid productivity growth, as the sharp rise in investment in both machinery and equipment over the last three years would seem to suggest. All in all, employment gains could be limited. For the period from 2006 to 2008, they should be approximately 1%, or slightly below the labour market as a whole a result that, while it exceeds the long-term trend for the sector (0.6% between 1984 and 2005) in terms of employment, is still modest, given recent setbacks. Table 4 Breakdown and Employment Outlook in the Manufacturing Sector Province of Québec Average Level ('000) Share of employment Whole Manufacturing Sector % 0.9% Consumer-Related Manufacturing % 0.4% Resource-Related Manufacturing % -0.3% Investment-Related Manufacturing % 2.1% Source: Québec Region Historical estimates based on Statistics Canada's Labour Force Survey Average Annual Growth Sectoral Outlook Province of Québec 18

20 The short-term outlook for the manufacturing sector is more uncertain than usual The short-term outlook for the manufacturing sector is more uncertain than usual. On the one hand, the value of the Canadian dollar makes it difficult to ascertain to what extent exports will contribute to economic growth. On the other, the relocation of manufacturing activities to low-cost countries and pressures to increase productivity could have an adverse effect on the employment recovery. Finally, problems specific to a number of industries facing a changing and adverse trade environment for example clothing, textiles and wood as well as supply-related constraints in industries connected to the forestry sector, make the outlook more uncertain. The manufacturing sector consists of some twenty very diverse industries. For analysis purposes, we have grouped them into three segments that are as homogeneous as possible. The industrial groups are described in the methodology notes that appear at the beginning of this document. Consumer-Related Manufacturing Of the three major manufacturing sector groups, consumer-related manufacturing has recently experienced the most challenging problems, to the point where it ceased in 2005 to be the primary source of employment compared to the other two groups. In the period from 2003 to 2005, this was the only group to have seen its output decline in real terms, at a fairly high average annual rate of 2.4%. In recent months, employment in the industry declined even more markedly, at a rate of 3.8%; in addition, rather than easing, job losses were particularly severe in Table 5 Breakdown and Employment Outlook in the Consumer-Related Manufacturing Sector Province of Québec Average Level ('000) Share of employment Consumer-Related Manufacturing % 0.4% Food, Beverages and Tobacco % 1.9% Textile Mills and Textile Product Mills % -2.2% Leather Clothing and Products % -2.7% Printing and Related Activities % 0.9% Furniture and Related Products % -0.2% Miscellaneous Manufacturing % 2.0% Source: Québec Region Historical estimates based on Statistics Canada's Labour Force Survey Average Annual Growth 19

21 Domestically, this industrial group is closely linked to fluctuations in disposable income and consumer spending, which are influenced by changing demographics. At the same time, foreign demand has historically played an important role in supporting these activities, even though exports only represent a quarter of all shipments. Although exports initially only represented a little more than 10% of manufacturing shipments, they accounted for more than half of the growth in shipments between 1992 and Generally speaking, much of the output growth in consumer-related manufacturing industries has come from foreign markets, while the domestic market, which is subject to stiff competition from abroad in certain industries, has been less encouraging overall. Meanwhile, times have recently been much tougher. Throughout the period from 2003 to 2005, the annual average decline in exports was 3.5%, resulting in a reduction in shipments of almost 1%. Furthermore, all industries in this group were affected, with the exception of the food and beverage sector. In the medium term, this industrial group should benefit from the expected rise in personal disposable incomes and from export recovery. However, employment is expected to grow at an annual average rate of no more than 0.4% between 2006 and This significantly slower increase, compared to the manufacturing sector as a whole, is expected to be concentrated in the food and beverage manufacturing (1.9%), general manufacturing (2.0%) and printing (0.9%) industries. At the same time, the uncertainty surrounding the furniture industry and problems in the clothing and textile industries will have a considerable impact on results for the group as a whole. The textile and clothing industries are expected to incur average annual losses of more than 2% throughout the period from 2006 to 2008 The textile and clothing industries have obviously seriously affected the group s overall results in recent years. The termination of the MultiFiber Agreement in early 2005 only aggravated the problems in these industries, although their vulnerability goes back much further. In fact, throughout the 90s, exports grew significantly, in a way ensuring their survival. However, that source has dried up in recent years, as firms here in Canada have continued to lose domestic market share, more so in the clothing than in the textile industry, with the result that shipments have declined on average by more than 6% over the last five years in both of these industries. In light of the very strong foreign competition facing both these sectors, it is more than likely that job losses will continue, hitting the clothing sector even harder than the textile industry, as in the past; however, both are expected to incur average annual losses of more than 2% throughout the period from 2006 to The furniture industry, almost three quarters of which is comprised by the household furnishing sector, has recently experienced problems which have given rise to serious concerns as regards its future. As with many other industries, foreign competition, primarily from Asia, has been pinpointed as the main reason for the recent setbacks, which have taken the form of plant closures, production slowdowns, and relocation of operations. Sectoral Outlook Province of Québec 20

22 For the furniture industry, the major unknown factor remains foreign competition and its effects on both the domestic and foreign markets Along with clothing, the furniture industry has experienced the most rapid growth in exports, averaging almost 14% yearly over the entire period from 1993 to 2005, something that accounts to a large extent for the more than 8% increase in furniture shipments during the same period. However, the sector s good fortune has receded in recent times. After peaking in 2002, furniture exports destined almost entirely for the United States declined, as the value of the Loonie quickly rose. Shipments also declined in 2003 and 2004, albeit to a lesser extent than exports, before rebounding once again in Thus the domestic market seems to have at least partly offset the problems encountered on foreign markets. In the coming years, the expected decline in residential construction, both in Canada and the United States, and rising interest rates are potential liabilities for the industry. On the other hand, a more stable currency and the relatively rapid increase in real income will be beneficial. The major unknown factor remains foreign competition and its effects on both the domestic and foreign markets, although this sector does not seem as vulnerable as the textile and clothing industries. Overall, employment in the furniture industry should remain relatively stable over the forecast horizon. However, in light of the many uncertainties, the risks are clearly on the negative side. Resource-Related Manufacturing The medium-term outlook is clouded by the fact that the lumber and paper industries are facing less favourable economic conditions and significant structural adjustments Compared to the previous group, the resource-related manufacturing industries are more dependent on exports. However, since the late 90s, exports have tended to be less predominant, having declined from almost 60% of output in 1998 to a little more than 40% in Whereas the foreign market was instrumental in driving expansion of resource-related manufacturing industries during the 90s, the domestic market has taken up the slack in recent years. Indeed, over the entire period from 1992 to 2005, domestic shipments increased at a faster pace than export shipments, over 9% as opposed to 6.4%. The medium-term outlook for this group is clouded by the fact that the lumber and paper industries are facing less favourable economic conditions and significant structural adjustments. Throughout the 90s, employment in the paper industry followed a downward trend even as productivity was rapidly growing as a result of modernization efforts and the gradual replacement of some products by others with more value added. In spite of that, newsprint production continues to dominate in Québec. This segment is evolving within a market with little prospect of growth. The situation has worsened in recent years with the rapid rise in the Canadian dollar, as this industry exports two thirds of its output. Market share losses in the newsprint sector and downsizing initiatives announced by producers suggest that the long-term decline in employment will continue in the pulp and paper industry. 21

23 Table 6 Breakdown and Employment Outlook in the Resource-Related Manufacturing Sector Province of Québec Average Level ('000) Share of employment Resource-Related Manufacturing % -0.3% Wood Product Manufacturing % -1.1% Paper Manufacturing % -1.2% Petroleum/Coal Products Manufacturing % 1.3% Non-Metallic Mineral Product Manufacturing % 0.8% Primary Metal Manufacturing % 0.9% Source: Québec Region Historical estimates based on Statistics Canada's Labour Force Survey Average Annual Growth In addition to the structural issues affecting sawmills, the wood sector will also feel the impact of the decline in residential construction over the coming years In the wood industry, the sawmill subsector seems to be wrestling with significant structural problems that we believe will continue to pose a challenge in the coming years. In particular, the sector still includes a great many small sawmills with narrow profit margins, low productivity and more problems accessing raw materials. In addition, the difficulties in the downstream paper sector are bringing added pressures for this industry segment by making it more difficult to dispose of woodchips, which are a significant revenue source for companies. In this context, many industry observers in Québec anticipate that rationalization will occur in this industry segment in the coming years, possibly leading to the disappearance of a number of companies. In addition to the structural issues affecting sawmills, the sector will also feel the impact of the decline in residential construction over the coming years, both here and in the United States. That decline could affect other segments of the industry, many of whose markets are closely linked to residential construction, notably doors and windows, as well as plywood and composite panels. The softwood lumber dispute with the United States is still not resolved in spite of rulings by international trade tribunals that supported the Canadian position. If the dispute is eventually resolved, the sector s prospects would improve considerably, since Canadian producers could expect to receive significant refunds. Sectoral Outlook Province of Québec 22

24 The primary metal manufacturing industry overall seems to be on a more solid footing and has begun to recover over the past year Within the resource-related manufacturing group, it is the primary metal manufacturing sector that could potentially save the situation. It has experienced problems since the beginning of the decade and until recently. Its work force has tended to decline: some capacities have been eliminated, particularly in aluminum, in favour of more productive units. As well, other plants could close, particularly the Alcoa plant in Baie Comeau, although that would likely occur beyond our forecast horizon. In spite of that, the industry overall seems to be on a more solid footing and has begun to recover over the past year. In the short and medium terms, it should benefit from strong global demand for some of its products, improved prospects in the downstream transportation equipment industry and levels of non-residential construction that will remain high. In this sector, employment is expected to grow at an annual rate of approximately 1.6% during the forecast period. Investment-Related Manufacturing Investment-related industries represent the manufacturing branch of the new economy and they are the key to industrial renewal in the Montreal region Investment-related industries represent the manufacturing branch of the new economy and they are the key to industrial renewal in the Montreal region. Manufacturing industries connected to the knowledge economy, in particular, are concentrated there. This group is also one that has historically demonstrated more vitality. However, this group is also the most dependent on foreign markets and, as such, is the most business cycle-sensitive. It has been seriously affected by the problems of recent years. A sharp drop in exports between 2001 and 2003 resulted in a downturn in production, in real terms, averaging 7% yearly. At the same time, in the past two years, when the other two manufacturing groups were flagging, we witnessed a vigourous rebound in investment-related manufacturing. The growth rate exceeded 5% in 2004 and 2005, leaving an output deficit of almost 10% relative to the level posted in the year Although employment has risen in the last two years, it is still 3% below the previous peak. Bolstered by a stronger export market, the investment-related manufacturing industries should continue to ride the wave of the recovery already under way, as regards both output and employment. In terms of its work force, average annual growth of some 2.3% is expected from 2006 to 2008 much more than for the other two manufacturing groups and the economy in general. This is nevertheless a relatively moderate rate of growth, considering the gaps to be filled on the production side; it also reflects the rapid productivity gains anticipated in the coming years. 23

25 Within the investment-related manufacturing group, the key transportation equipment and computer and electronic product sectors will see the most significant gains in terms of employment. However, it is important to point out that these two industries are well below their previous peaks, in terms of both output and employment. Table 7 Breakdown and Employment Outlook in the Investment-Related Manufacturing Sector Province of Québec Average Level ('000) Share of employment Average Annual Growth Investment-Related Manufacturing % 2.1% Chemical Products % 0.6% Plastics and Rubber Products % 1.6% Fabricated Metal Product Manufacturing % 2.2% Machinery Manufacturing % 2.6% Computer and Electronic Product Manufacturing % 3.1% Electrical Equipment, Appliance and Component Manufacturing % 1.1% Transportation Equipment Manufacturing % 3.0% In the transportation equipement sector, the source of this vitality will be the aerospace industry which, in Québec, accounts for almost three quarters of the output Source: Québec Region Historical estimates based on Statistics Canada's Labour Force Survey In the coming years, the transportation equipment sector will benefit from favourable economic conditions that should result in dynamic employment growth of about 3% annually from 2006 to 2008, in considerable contrast to the 5% average decline that has occurred over the last three years. The source of this vitality will be the aerospace industry which, in Québec, accounts for almost three quarters of the industry s output. Following a difficult period between 2001 and 2003, the aerospace industry s gross domestic product (GDP) has enjoyed a strong recovery in the last two years. In constant dollars, it rose by 8% in 2004, and 10% in The difficulties experienced by Bombardier in certain production areas, particularly regional jets, where competition from Embraer is stiff, have often made the headlines, as has the company s decision to put the C Series project on ice. However, operations are expanding in other areas of the business, particularly the business jet segment, which should mitigate problems in the regional jet sector. Sectoral Outlook Province of Québec 24