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Brought to you by Mitsubishi HC Capital Canada
2024 Canadian Economic Outlook: Impact on Manufacturing
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January 11, 2024
By Paul Green, Sales Director, Diversified Industries and Aviation
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Wait and see.
That may be the catch phrase for at least the first part of 2024 when it comes to the economy in Canada, and particularly so for the manufacturing sector.
The reasons are multi-fold and related. During the years of the COVID-19 pandemic, the economy was quite strong. Consumers and businesses were buying, buoyed by government stimulus money. As a result, we’re seeing a large amount of equipment on the market that still needs to be absorbed. New equipment sales are suffering. Combine these factors with high interest rates, and it makes sense that people are more apt to wait to make capital investments.
So while 2023 started out well – coming out of the ‘golden year’ of 2022 – now, the Canadian economy is slowing down, and likely grinding into a recession. At best, it’s likely to slow down further before trending upward next summer. Banks throughout Canada are taking more provisions for losses. Companies across the country are already starting to lay off staff. It’s no surprise to see businesses scale back on expenses and capital expenditures..
Looking forward to mid-year.
The good news lies in mid-2024. With interest rates as high as they are now, the U.S. Federal Reserve and the Bank of Canada have the ability to lower rates when it’s time, spurring development and investment. The mythical “soft landing” is a real possibility.
In addition, that build-up of equipment inventory mentioned above will resolve. The normal rhythm of equipment life – maintain, repair, replace – will need to return; currently, the cycle is pent up. Meanwhile, many businesses are sitting on the sidelines before making big capital purchases.
Trends
Against this backdrop, we see six key trends emerging that will impact Canadian manufacturers in 2024.
- Key industries will serve as economic proxies. The transportation industry has been impacted greatly by the slowdown, but once inflation resolves, it should bounce back. In contrast, the construction industry is harder to predict, especially as it can be affected by government spending – typically the norm in a recessionary environment. Considering the need for additional housing across the country, and resulting increases in rents and housing prices, this may be a possibility. Again, it’s a “wait-and-see” situation of how government spending scales in 2024. That will play a major role in how the construction industry fares, which will, in turn, impact manufacturing.
- Cross-border deals and U.S. investment may grow. The fact that the U.S. economy is doing well will help the Canadian economy. Although the Buy American Act and Buy America requirements are negatively impacting some Canadian companies, the current exchange rate also helping Americans invest in Canadian enterprise. Lenders that offer comprehensive cross-border financing – that goes beyond maintaining sales offices in each country – will be in a stronger position for 2024.
- As-a-service financing will continue to gain traction. As-a-service financing will grow quickly in the manufacturing sector, thanks to the needs for preventive maintenance and ongoing equipment service. Right now, the growth is positioned just before the ramp-up on the hockey stick (the chart pattern that shows a rapid increase after a period of relative stability).The as-a-service industry will evolve to accommodate its three-pronged structure: the user, the finance provider, and the manufacturer or distributor that provides maintenance and service. It’s likely that more partnerships will emerge as companies find the right associates to create cooperative arrangements.
- Innovative financing programs will help manufacturers move equipment. Going into 2024, financing will remain vitally important for manufacturers, and act as a real tool for them to conduct business. Non-captive, non-bank commercial finance companies can often be more agile and more responsive to business’ needs. Incentive-rate programs, terms with no-payment periods, usage-based billing and other options they can create will help manufacturers get equipment up and running quickly, and make purchasing easier.
- IoT will increasingly shape manufacturing equipment. The Internet of Things (IoT) describes the network of physical objects (“things”) that are embedded with sensors, software and other technology in order to connect and exchange data with other devices and systems over the internet. As new equipment increasingly incorporates these technologies, manufacturers are finding it cost- and time-effective to take advantage of the information they provide. Data including usability statistics, stress indicators and preventive maintenance cycles, along with automation abilities, will drive efficient manufacturing and fuel purchase demand.
- Work in achieving Sustainable Development Goals will mature. Manufacturers of all types and sizes are working to define what sustainability means to their companies. While sustainability can become very complicated, depending on the company and equipment, manufacturers should make big strides in figuring it out and make good progress in attaining goals in 2024.
Conclusion
As the year progresses, we should see the economy in an upward trajectory, with manufacturing moving in a positive direction. Manufacturers preparing for that period will be looking to employ favorable, customized financing to help them be one step ahead in the recovery.
Paul Green
Paul Green is Sales Director, Diversified Industries and Aviation, at Mitsubishi HC Capital Canada. Previously, he served as director of Aviation Finance and director of Strategic Programs for the company.
Paul’s nearly three decades of experience in lending and banking include heading new-business development for construction, transportation, and food and agriculture industries at DLL in Toronto. He has also held the position of vice president at LiftCapital Corporation in Toronto, and chief risk officer at AerCap in Amsterdam.
Paul holds a Bachelor of Commerce degree from Memorial University of Newfoundland, and a Master of Business Administration degree from Dalhousie University.
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