Industrial capacity utilization

Industrial capacity utilization in Canada is projected to average 79.6% in 2025, representing a modest increase of 0.4 percentage points over the previous year. This level reflects an industrial sector operating with considerable spare capacity, approximately 6.2 percentage points below the historical peak of 85.8% achieved in 2005. Second quarter 2025 data showed capacity utilization declining to 79.3%, down from 79.9% in the first quarter, as disruptions in the oil and gas extraction sector from forest fires and maintenance work reduced activity levels. The manufacturing sector saw its utilization rate fall 0.7 percentage points to 76.7% in the second quarter, driven primarily by weakness in petroleum and coal product manufacturing and food manufacturing.

The past five years have witnessed significant volatility in capacity utilization driven by pandemic-related disruptions and uneven recovery. The COVID-19 shock drove utilization down 4.5 percentage points to 75.9% in 2020, the second-worst annual reading in the data series after the 2009 financial crisis nadir of 73.5%. Recovery was robust in 2021, with utilization climbing 4.0 percentage points to 79.9% as lockdowns lifted and pent-up demand surged, though this still left capacity usage well below pre-pandemic levels. Utilization edged up modestly to 80.8% in 2022 before retreating in subsequent years as high interest rates dampened demand and investment activity.

The period from 2023-2024 saw capacity utilization stagnate and then decline slightly, reflecting the cumulative impact of monetary tightening on industrial demand. Utilization fell 1.3 percentage points to 79.5% in 2023 and declined another 0.3 percentage points to 79.2% in 2024 as manufacturers faced weak export demand, elevated input costs, and softening domestic consumption. Ontario's goods-producing sectors were particularly hard hit, with output falling at the steepest rate since the pandemic as condo construction collapsed and auto manufacturing facilities closed for electric vehicle retooling. The resulting slack in industrial capacity reflects both cyclical demand weakness and structural shifts in the composition of economic activity toward services and away from goods production.

Current capacity utilization remains substantially below pre-financial crisis norms, with the 2020-2025 average of 79.1% standing 5.4 percentage points below the 2000-2007 average of 84.5%. This persistent underutilization indicates the industrial sector has maintained excess capacity for an extended period, suggesting significant room for production expansion without triggering capacity constraints or inflationary bottlenecks. However, this spare capacity also reflects structural challenges including weak productivity growth, reduced manufacturing competitiveness, and the sector's diminished share of overall economic output.