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Philip Cross: Mining up, manufacturing down, despite industrial policy

Ottawa lavishes money on central Canadian industry but what grows is mining, including oil and gas. Let's stop trying to overrule markets

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Canadian manufacturing output has been declining steadily since well before Donald Trump’s tariffs targeted the sector. The decline is despite hefty subsidies in industries targeted by government industrial policy as potential hotbeds for growth. So far, such investments have not paid off in terms of higher factory output.

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In the meantime, despite the Trudeau government’s best efforts to shut it down, rapid expansion in mining production (including oil and gas) has offset much of the drop in factory output. This shift from manufacturing to mining underscores the futility of government industrial policies that try to divert growth to industries market forces don’t favour.

Philip Cross: Mining up, manufacturing down, despite industrial policy Back to video

According to Statistics Canada’s reading of monthly real GDP for January, since its peak in March 2022, manufacturing output has fallen 9.3 per cent. The nearby chart shows how this $20.1-billion drop in factory production has been partly offset by a $13.8-billion expansion of mining output, despite overall mining output (right-hand axis) being less than half of manufacturing output (left-hand axis). The 11.7 per cent increase in mining production reflected widespread gains in oil and gas and both metallic and non-metallic mining.

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Slowdowns in the demand for motor vehicles have been widely publicized. But autos account for only about a tenth of the fall in factory production since 2022. Declines were larger in the lumber and paper industries, capital goods, primary metals — where both iron, steel and aluminum were severely affected by U.S. tariffs — and food processing.

Trump’s tariffs can’t be blamed for all our manufacturing losses since the March 2022 peak, however. Output in the sector fell $10.7 billion before he took office in January of last year, versus only $9.4 billion since. For years, Canadian manufacturing has suffered from reduced competitiveness and faltering innovation due to our own governments’ misguided policies — epitomized by extravagant federal and provincial subsidies for EVs, batteries and the sexiest high tech.

Capital spending in the manufacture of computers, electrical equipment and motor vehicles has more than tripled since 2019, accounting for 70 per cent of all manufacturing investment growth, according to Statcan investment data. Only five per cent of these investments took place outside central Canada. But there has been no payoff in higher output: GDP in these industries has fallen since 2022, and firms are now writing off large investments in EV and battery manufacturing in response to persistently weak consumer demand and the bankruptcy of Northvolt.

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Meanwhile, investment and output have flourished in Canada’s mining sector. Capital spending in the mining industry has risen 42 per cent since 2019, buoyed by rising prices on global markets, not government subsidies. Metal mining spearheaded this gain, with a doubling of investment, while capital outlays by both the oil and gas and non-metal mining sectors increased by a third. The vast majority of the increase in mining investments since 2019 — fully 83 per cent — has occurred in Western Canada.

Rising investment in mining has been reflected in a double-digit surge in the sector’s production since 2022. Oil and gas have led the gain, propelled by higher overseas exports of both as expanded pipeline capacity facilitated access to Asian markets. Output in metal mining was spurred by record high prices for gold and copper, while non-metal mining piggybacked on higher potash production.

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The steady erosion of manufacturing output despite lavish government support does not augur well for the Carney government’s goal of spurring growth with interventionist industrial and regional development policies — not even when the latter are hidden in the Trojan horse of surging defence spending.

The record shows economic growth fares better when markets alone allocate investments — which has the added benefit of not burdening taxpayers. It is surprising that an economist with Mark Carney’s credentials either does not understand this principle or has allowed his judgment to be distorted by short-term political calculations favouring largesse for vote-rich central Canada. Neither possibility bodes well for Canada’s economy for the rest of the decade, even as the world signals it needs Canada’s natural resources.

Philip Cross is a senior fellow at the Fraser Institute.

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