Why CIBC warns Canada is falling behind U.S. manufacturing

Investing.com -- The North American manufacturing landscape is undergoing a profound divergence as the United States leverages capital intensity to outpace its northern neighbor. According to a note from CIBC economists Benjamin Tal and Katherine Judge, U.S. manufacturing GDP has climbed almost 10% above pre-pandemic levels while Canadian output still struggles to reach its 2019 baseline.

This performance gap is rooted in a structural shift toward automation and technology that Canada has failed to mirror. "The US performance is not only stronger but it’s also much more capital intensive," the CIBC economists noted, highlighting a trend that has accelerated since the pandemic began.

Data parsed by CIBC suggests that the U.S. capital-intensity index rose by more than 10% between 2019 and 2024, far outpacing previous cycles. Conversely, the ratio of production in capital-intensive industries to labor-intensive ones has actually fallen in Canada during that same window.

The implications for national wealth are stark, as capital-heavy firms typically command significantly higher profit margins than their labor-dependent counterparts. "Capital-intensive manufacturing industries contributed no less the 8%-pts. to the performance gap since 2019," Tal and Judge observed regarding the disparity in growth rates.

As artificial intelligence begins to permeate the factory floor, analysts expect this divide to widen even further. The economists warn that "the rapid pace of AI technology adoption means that capital intensity in US manufacturing will rise even faster in the coming years."

While Canada faces an uphill battle to close this productivity void, its less-leveraged manufacturing sector may find silver linings in a high-rate environment. However, catching up will require a massive pivot in industrial strategy to harvest the "low hanging fruit" of technological integration before the AI era leaves the Great White North behind.

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