11-010-XIB
Canadian Economic Observer
April 2007

Year end review: westward ho!

by P. Cross*

Global growth in 2006 continued its 4-year surge, the best stretch in 50 years according to the IMF. Canada and the US posted steady gains, despite much-publicized slowdowns in the auto and housing sectors south of the border, while growth picked up markedly in Europe and Japan. The rapid integration of emerging market nations, notably China and eastern Europe, into the global economy remained a key development for trade and investment flows as well as prices.

Reviewing the year, several Canadian stories stand out. Most obvious was the dominant role of Alberta in economic growth, which increasingly affected other variables, notably population flows. But the theme that echoes throughout every section of this paper is the adaptability of Canadians faced with rapid changes in their economy. Going back several years, the economy has been hit with a number of shocks which in the past could well have triggered a slowdown or even recession. Instead, growth has been remarkably stable since 2003.

The overall advance of GDP and its sectoral composition was quite similar to the previous three years. This reflects the ongoing adjustment of the economy to more muscular commodity prices and a stronger exchange rate, which continued for a fourth straight year. Real GDP expanded 2.7%, only marginally less than the 2.9% in 2005 despite a mid-year slowdown and exactly the same as the average annual gain since 2003. Domestic spending continued to lead the way, up a robust 4.5%. Business investment rose steadily by about 9% for a fourth consecutive year. Housing slowed gradually (unlike the sharp slide in the US), counter-balanced by the largest increase in consumer spending in a decade. Exports decelerated for a second straight year, trailing domestic spending for the third time in four years.

The buoyancy of domestic spending should come as no surprise. Both labour income and corporate profits grew by 6%, while import prices fell for the fourth year in a row, encouraged by another 7% rise in the exchange rate. Despite several small hikes in short-term rates in the first half, interest rates remained low across the spectrum.

The mildness of the slowdown in growth last year was even more surprising in light of the laundry list of concerns and perceived threats expressed about the economy. Potential icebergs spotted by analysts included the slump in the US auto and housing markets; growing trade imbalances between the US, China and OPEC; the US budget deficit; overexposed hedge funds; a possible bust in commodity and/or stock markets; jitters about emerging markets; threats of growing protectionism at a time when talks on a new global trade pact were suspended; high energy prices; and the overhang of unfunded pension liabilities.

That the perceived threats to growth did not derail the economy is not new. Just in the past decade, the economy has survived shocks ranging from the Long Term Capital Management collapse and Asian and Russian financial crisis in the late 1990s to the bursting of the high-tech bubble (which triggered the worst bear market for stocks since the Great Depression) to the 9/11 terrorist attacks and persistent turmoil in the Middle East to the jump in the exchange rate and commodity prices.

The resource boom

The current boom in commodity prices is now entering its fifth year. Initially, it was sparked by a surge in the energy sector. However, the increase in energy prices slowed last year, especially for natural gas after the warm winter of 2006 created a glut in North America. In its place, metals took the lead in pushing up prices to record levels last year. So-called ‘blue-collar’ metals such as copper, nickel, zinc and iron ore spearheaded the advance, overshadowing their more illustrious precious metal cousins, such as silver and gold. This reflects higher demand in the rapidly expanding industrial base of developing countries, notably China. One measure of the strength of mining was that it was the only industry that increased employment in every province last year.

Figure 1

By year end, there were signs that the strength of commodity prices was shifting into agricultural products. Steady growth in demand as well as drought in Australia pushed wheat prices to a 10-year high. Corn benefited from a surge in ethanol output, sparked by the high price of oil. Still, energy and metals prices were high enough to stimulate more investment in most areas.

While energy, metals and agricultural products have each had their turn in the limelight of the commodity boom, one unfortunate constant in the current commodity cycle has been low prices for forestry products. Lumber prices sagged as a result of the slump in US housing demand. No offset was provided by the growing number of Chinese homeowners, who traditionally shun lumber in house construction. Pulp and paper producers were squeezed by a steady decline in demand (reflecting falling North American newspaper circulation as readers turned to the Internet for information) and increased competition from tropical countries such as Brazil and Indonesia, where trees regenerate faster than in Canada’s boreal forest.¹

While natural gas prices fell sharply last year, oil hit a record $77 (US) a barrel at mid-year and stayed high enough into 2007 to keep investment growing. An ongoing feature of the increase in energy investment was the shift to non-conventional sources. The most obvious example is the development of the oilsands as well as off-shore oil. This reflects the depletion of highly productive conventional oil wells in the Western Canada Sedimentary Basin. The story is the same for natural gas. The National Energy Board said that coal-bed methane deposits (almost all in Alberta’s Mannville and Foothills areas) had grown “remarkably over the past few years” and are projected to contribute 5% of all Canadian supplies by 2008.² Partly too, this reflects the sharply lower productivity of new gas fields.

Investment flooded into energy…

The development of the oilsands in northern Alberta remained the dominant trend in the energy sector, reshaping Canada’s economic geography. Firms continued to pour money into these investments, tripling from $5.2 billion when the current surge in oil prices began in 2003 to a planned $16.1 billion in 2007.³ Investment was encouraged by a number of factors. Not only did crude oil prices hit a record high last year, but the traditional discount for the crude bitumen produced from the oilsands moderated as new pipeline connections expanded their market beyond the Midwestern US hub.⁴ As well, a variety of geo-political factors (ranging from ongoing turmoil in the Middle East and Nigeria to a series of nationalizations in Russia and South America) made investing in Alberta relatively more attractive. These inducements overcame any hesitancy firms may have had about labour and material shortages and rising costs, and investment intentions more than doubled from 18% growth in 2006 to 39% this year.

Figure 2

Investment plans for the oilsands in 2007 approached the $21.4 billion in spending on all conventional oil and gas developments in Alberta. While the lag between investment in oilsands plants and the actual production of crude bitumen is long compared with conventional sources, there have been steady gains in oil produced from the oilsands. By last year, the oilsands accounted for almost half (46%) of all the barrels of crude oil produced in Canada, nearly double their share a decade earlier.

… fuelling the Alberta boom

The economic impact of the development of the oilsands rippled across Alberta. Calgary, the traditional headquarters of oil companies in Canada, experienced an unparalleled boom. Jobs in Calgary’s goods-producing sector soared 21% last year, the most ever for a city in Canada. The growth of demand from oil companies for a wide range of business services (including architectural and engineering services to plan their development and legal, accounting and financial skills to finalize deals) helped send average earnings in Calgary up 19% in the last two years.

The growth of firms in Calgary drove office vacancy rates down to minuscule levels. In response, EnCana (which announced record profits for a single company in Canada⁵) tabled plans to build a new 59-storey crescent-shaped tower in downtown Calgary. This complex, called The Bow, would be the largest building in Canada west of Toronto. More importantly, it signified the westward shift of Canada’s economic centre of gravity, and was hailed as “a symbol of the city’s ascension in Canada and as a global energy hub” just as First Canadian Place symbolized the pre-eminence of Toronto in the late 1970s.⁶

While Calgary was the epicentre of the planning and financing of the oil sector, Edmonton was the regional hub for the actual delivery of products to the oilsands, located several hundred kilometres north. Job growth for services in Edmonton last year almost matched Calgary’s 4% gain. With Calgary, Edmonton and, of course, the oilsands around Fort McMurray all growing at full throttle, it is not surprising that Alberta’s economy again expanded at a blistering pace in 2006.

The list of Alberta’s record setting performances for a province last year includes: fastest increase ever in retail sales (16.2%), biggest hike in building permits and in non-residential construction ($3.7 billion and $1.1 billion respectively), the lowest unemployment rate (3.4%) and largest net inter-provincial migration on record.⁷ At 66,800, the number of unemployed in Alberta was the lowest in absolute terms since 1981, despite population growth of nearly one million (or 47%) in the past quarter century. Its 4.8% increase in employment was the most of any province in nearly two decades (exceeded only by Alberta in the late 1970s and BC in 1989).

Alberta by itself accounted for the faster gain in employment and retail sales in Canada than in the US. In fact, without Alberta, growth in the rest of Canada lagged slightly behind the US on both accounts. Employment in the US rose 1.9%, while Alberta boosted the 1.6% increase in the rest of Canada to a 2.0% gain for all of Canada. Similarly, Alberta’s record retail sales lifted the rest of Canada’s 4.9% gain to 6.4% national growth, leapfrogging past the 6.1% increase in the US.

Not all of Alberta’s records and increases were welcome: new house prices jumped 36% on average in Edmonton and Calgary, greenhouse gas emissions undoubtedly increased, crime rates rose, and it became increasingly difficult to keep youths attending school.⁸ Nevertheless, Canadians in large numbers voted with their feet in showing that the attraction of greater wealth outweighed these costs.

Resource firms again led Canada-wide profit growth last year. Operating profits in mining (excluding oil and gas) almost tripled from 2003, while oil and gas doubled. Ballooning profits in the mining and energy sectors recall the bacchanal excesses of the high-tech sector at the peak of the ICT boom in 1999 and 2000. A closer inspection, however, shows some important differences. The ICT boom was driven by giddy projections of the future growth of Internet-related projects, most of which were not realized. The current mining boom is solidly rooted in actual global demand for metals and energy, often leading to outright shortages.⁹

Furthermore, the high-tech boom triggered an orgy of investment that flooded the market with excess capacity. The investment response of energy and mining firms today has been much more muted. This is one reason why investment growth in the past three years has not exceeded past investment cycles. While the stock of capital in oil and gas has more than doubled in the past decade, the rest of mining is only just beginning to recover from a loss of one-quarter of all its productive capacity during the previous two decades. This cautious approach to expanding capacity is partly reflected in the financial surplus of corporations reaching a record high of $71 billion. Instead, these firms have concentrated on boosting the return to shareholders through extensive share buy-backs and higher dividend payments.

Figure 3

The great trek westward

Canada’s overall population¹⁰ grew 1.0% last year. Four provinces and one territory saw their populations shrink, matching 2005 as the only other year with such widespread declines. The provinces were Newfoundland, Nova Scotia, New Brunswick and Saskatchewan, along with the Northwest Territories (as well, growth was minimal in PEI and Manitoba). Migration to Alberta was the principal reason. In every instance, net outflows to Alberta more than accounted for the drops in population.

Alberta proved to be an increasingly attractive destination for people from all provinces, large or small, rich or poor. Alberta received a net inflow of 57,105 people from other provinces, the largest inter-provincial movement of people to one province on record back to 1972 (easily exceeding the previous mark of 46,133 people moving to Ontario in 1987). The trek west accelerated sharply over the last two years, as word of the Alberta boom spread: after an average net inflow of just 11,000 people in 2003 and 2004, inter-provincial migration accelerated to 34,423 in 2005 before its record-setting performance last year. In the last decade, the net inflow of 285,620 inter-provincial migrants was the equivalent of 10% of Alberta’s overall population in 1996, and nearly half of its growth of 600,600 people.

Figure 4

These migrants from the rest of Canada accounted for the bulk of Alberta’s population growth last year. Alberta is far more dependent on inter-provincial than international migrants for its population growth. Of its total population increase of 98,000 in 2006, nearly 60% came from the rest of Canada, versus just 14,000 from outside Canada (the rest reflects natural increase, including an above-average rise in births).

The demographic profile of these inter-provincial migrants fit perfectly with Alberta’s chronic need for workers. Nearly two-thirds were between 18 and 44 years old (15,200 youths and 21,800 adults 25 to 44). In 2005, an outright drop in the labour force of people in this younger age group aggravated Alberta’s labour shortage. Boosted by the in-flow from other provinces, the population, labour force and employment levels of people 15 to 44 rebounded last year.¹¹

The more efficient allocation of labour to Alberta had important implications for the national economy. Overall, job growth in Canada was 2.0% in 2006, up from 1.4% in 2005. But almost all of this acceleration originated in Alberta, where employment growth more than tripled from 1.5% to 4.8%. The major difference in the Alberta labour market was not demand (employers clearly could have used more people in 2005) but supply. With the welcome arrival of people from other provinces, employers could begin to fill some positions. Still, workers remained in short supply, with the unemployment rate at a record low and employers still reporting high levels of shortages. In the rest of Canada, the employment story was little changed, with an increase of 1.4% in 2005 and 1.6% in 2006.

BC leads rest of Canada

In any other year, British Columbia would have been the provincial success story. Employment in BC grew 3.1% in 2006, on the heels of a 3.3% gain in 2005. This matched Alberta’s torrid growth over the last two years, and has been exceeded by only one other major province in the past decade (Ontario’s 6.7% gain between 1998 and 2000 at the peak of the ICT boom). By early 2007, unemployment in BC had fallen below 4.0%, a level that only Alberta and Saskatchewan have successfully broken through.

The attractiveness of BC’s economy was enough that it was the only province other than Alberta that did not have net out-migration (it had a net inflow of 3,780 people). Job growth was again led by mining, which has nearly doubled in the last two years. Construction remained buoyant as the Olympics drew nearer, while goods-handling industries were boosted by more trade with Asia.

Figure 5

The shift of growth from central to western Canada reflects a number of broad trends. The integration of Asia into the world economy has lifted natural resource prices while dampening prices for manufactured goods. The latter downward pressure was aggravated by the rising dollar that began in 2003. This shift in the relative price of resources and manufactured goods was reflected in the rising terms of trade (the ratio of export to import prices for both international and inter-provincial trade) for western Canada relative to the east. The most marked changes were for Alberta and Ontario. Alberta’s trade benefited from both higher prices for commodity exports and lower import prices as the dollar rose. Ontario was the only province (apart from PEI) whose terms of trade fell, mostly with other provinces.

The appreciation of the dollar may have helped depress manufacturing jobs in Ontario and Quebec, but it also encouraged growth in their service and construction industries, through lower import prices and interest rates. Gains in these sectors helped Ontario and Quebec post respectable job growth of 1.5% and 1.3% respectively. With the labour force participation rate little changed in both provinces, unemployment fell slightly. Quebec’s 8.0% rate represented a record low; Ontario’s 6.3% was its fifth lowest rate in the last 30 years (it was below 6% only at the peak of the booms in the late 1980s and in 2000). For Ontario this marked the first time that its annual average was not below the national unemployment rate.¹² However, this reflects the record low unemployment rates almost everywhere else in Canada (including the Atlantic region, Quebec, and BC), since Ontario’s was not high by its own standards.¹³

Figure 6

Labour market developments

Canada’s demographic profile shows the unrelenting impact of the aging of the boomer generation. The share of the prime-aged labour force (25 to 54) continued to fall, dropping below 70% for the first time in nearly two decades as the first boomers turned 60 (figure 7).

Figure 7

Labour force growth in Canada was sustained by ongoing gains in the participation rates of women. After a brief pause in growth in 2005, a record 62.1% of all women were in the labour force last year. Since 1999, their participation rate has risen 3.2 points, more than in all of the 1990s (figure 8a). One reason women continued to enter the labour force was their increasing prospect of getting a job: unemployment among adult women was a record low of 5.2% last year, and has been below that of adult men every year since 2000 (historically, it fell below men only during recessions).

Figure 8a

Figure 8b

The increasing attachment of women to the labour force was in marked contrast with the United States. There, the participation rate of women peaked at 60% in 1999, before falling steadily to 59.4%. By continuing to enter the labour force in Canada, women added 310,000 more potential workers (equal to 1.9% of all jobs) than if their participation had fallen at the same pace as in the US. This growth was a critical development in a labour market increasingly characterized by aging and shortages. Given the widening gap in educational attainment between women and men, this also assured a growing supply of the most skilled workers. In 2006, the number of women with a university degree surpassed men for the first time ever.

Another difference with the US was the recovery in youth employment rates in Canada. Last year, 58.7% of youths aged 15 to 24 held a job, up from a low of 51.5% a decade ago. The increase was equally evident for teens and older youths. The unemployment rate for youths in Canada fell to 11.6% in 2006, including a record low of 8.8% for 20 to 24 year-olds. By contrast, youths (especially teens) have been withdrawing from the labour force in the US as their unemployment rate rose.¹⁴ The increase in Canadian youths holding jobs relative to US youths was equivalent to 1.5% of total employment.

Also symptomatic of a labour market straining against its limits was the drop in the long-term unemployed (people unemployed for more than six months). Last year, they accounted for only 14.2% of all the unemployed, less than half their peak share of 30.9% at the end of the recession in the early 1990s (and near their all-time low of 13.5% in 1976). In absolute terms, their numbers have tumbled from 507,700 in 1993 to 157,900 last year. This shows that while many workers in central Canada’s manufacturing sector may have lost their jobs, most were able to find employment relatively quickly.

Figure 9

Financial

The major financial trend last year was an upsurge in mergers and acquisitions, both in Canada and around the world, often funded by private equity. As a result, foreign direct investment (FDI) in Canada rose to $76 billion last year, second only to the record $99 billion at the peak of the ICT mania in 2000. Only two years ago, FDI in Canada totaled less than $2 billion. Foreign interest centred on our increasingly lucrative mining companies. Several iconic companies closely identified with Canada’s economy were taken over, including Inco, Falconbridge and the venerable Hudson’s Bay Company.

Figure 10

Canadian companies continued to expand their global reach, putting $48 billion into direct investment abroad in 2006, equal to the average over the last three years (and one-fifth more than all FDI in Canada since 2004). These investments were increasingly profitable, as earnings abroad have doubled since 2003 (especially in finance and insurance). The inflow of these profits, along with more interest earned from Maple bonds, was a major factor behind reducing our deficit in investment income to its lowest level in almost 25 years.

New financial instruments continued to proliferate, notably the trend to securitisation (the bundling together of different financial instruments to diversify risk). Financial innovation may even have played a role in the recent bull market for commodities, as commodity-based exchange-traded funds (ETFs) debuted in 2004. One of the major innovations for Canadians was ‘Maple bonds’ (bonds issued in Canada by non-residents and denominated in Canadian currency). Almost non-existent before the limit on the foreign content of RRSPs was lifted in 2005, Maple bonds represented 60% of the $43 billion of foreign bonds Canadians bought last year.

The rapid improvement in the net investment income balance with non-residents is reflected in much faster growth in GNP than in GDP in recent years. Last year alone, nominal GNP grew half a point more than GDP (5.4% versus 4.9%). Since 2001, GNP growth has outstripped GDP by 2.2 points (32.1% versus 29.9%). In concrete terms, this represents an extra $487 of income per Canadian over this period. The implication is that the income of Canadians is growing faster than GDP, because of improved earnings on investment abroad. This is one reason domestic spending has expanded faster than domestic output in each of the last four years.

While it is easy to be mesmerized by the wealth oozing from mining, it is noteworthy that profits rose last year in most major industries (15 out of 18 recorded increases). Consumer-related industries such as retail and real estate benefited from strong sales and increased travel from abroad. Transportation and wholesaling profited from the increased flow of goods across the country. Finance and business services continued to expand steadily. Even manufacturing eked out a small increase, despite its well-documented woes, due to record prices for refined petroleum and metal products and stricter cost control (operating expenses rose 5% in 2004, but slowed to less than 2% in the last two years, partly due to more layoffs).

The swoon of natural gas prices noted earlier triggered the bankruptcy of the US$6 billion Amaranth hedge fund in October. It was revealing that this collapse was contained by the financial system. Instead of provoking a financial crisis (like the collapse of Long Term Capital Management did in 1998), the losses were quickly absorbed. This reflects better risk management, aided by the use of hedges and a depth of liquidity that did not exist until recently.¹⁵ More generally, the perception of less risk by the financial system was reflected in the lowest yield spread ever between risky investments (notably junk bonds) and the most secure.

Consumers were unfazed by rising gas prices

Consumer spending continued to expand briskly last year, underpinned by strong labour, housing and stock markets. Not even record high energy prices deterred consumers: while prices rose another 5% on average, the mild winter weather lowered the use of energy for home heating enough that consumers actually devoted a smaller share of their budgets to energy than in 2005.

Since 2002, the price of a barrel of oil on world markets has jumped from $20 (US) to a peak of $77 last fall, before easing to $60 at year end. Consumers in Canada mostly shrugged off the effect of rising gasoline prices on their driving habits, never mind their overall behaviour. Retail gasoline consumption has continued to increase every year since 2002, including a 0.8% rise last year. The only concession drivers made to higher prices was to switch from premium to regular grade gasoline in each year.

Figure 11

This is in marked contrast with the US, where households consumed less gasoline in both 2005 and 2006, their first back-to-back declines ever outside a recession.¹⁶ The different impact of gasoline prices on the two countries was reflected in consumer confidence. Soaring gas prices dampened spirits in the US but not Canada, opening up the widest gap in confidence between the two ever recorded.¹⁷

Neither did rising gasoline prices broadly affect the level or composition of vehicle sales. Overall, unit sales were the second highest ever, just 4% below the record set in 2002. For the fifth straight year, purchases of trucks (which include SUVs) rose faster than car sales. While demand increased for some segments such as subcompact cars, demand continued to grow for large and luxury SUVs and crossover vehicles (SUVs mounted on a car chassis). In fact, the strength of truck sales pushed the share of cars in all vehicle sales to a record low of 51.7% last year (eclipsing the previous low of 51.8% set during the oil price collapse of 1998).

The relative strength of truck versus car sales in Canada was the opposite of the US, where consumers switched to cars (notably hybrids) to save on fuel in the last two years. Much of the difference between the trends in the two countries can be attributed to Alberta, where two-thirds of all vehicles sold last year were trucks.

Elsewhere, consumers continued to snap up electronics and household goods in record numbers. Large retailers saw demand rise the most for televisions, notably in large screen and high-definition formats. Computer outlays also rose at a double-digit rate. Cellphone use has become so common that almost 5% of homes no longer have a traditional land-line. Prescription drugs were that fastest-growing segment of non-durable goods, although this reflected new and costlier drugs more than the aging population.

Climate change

Global climate change was increasingly evident last year. The winter of 2006 was the warmest on record, with temperatures across Canada averaging four degrees above normal. The spring was also the warmest ever, while both summer and fall were the second hottest on record. The trend to warmer temperatures has been accompanied by more destructive storms in recent years (notably the Ice Storm in eastern Canada in 1998, the record hurricane season in the US in 2005 and the storms that hit the BC coast late in 2006). The change in climate was reflected in new diseases, such as Lyme disease and the West Nile virus, appearing in Canada.

The economy increasingly felt the impact of climate change. The most obvious effect of last year’s record warmth was to melt demand and prices for natural gas. The glut of natural gas depressed the market all year, sending prices as low as $4 (US) per mm BTUs by September (they had spiked as high as $15 in the aftermath of the hurricanes in 2005). The price drop provoked sharp cutbacks in drilling plans in the gas industry (thereby freeing up resources in Alberta for other sectors such as the oilsands in a way that macroeconomic policy could not). As well, the delayed freeze-up hampered rigs from exploring rugged terrain. Crude oil prices were less affected, partly because oil demand is more dependent on motor fuels than heating.

The trend to milder winters also allowed the mountain pine beetle to infest and destroy large swaths of BC’s pine forest, before reaching western Alberta last year. Just this decade, the infestation spread from 284,000 to 9.22 million hectares of forest in BC, rendering 500 million cubic meters of wood unusable. As a result of this so called ‘bug wood’, lumber firms in BC kept harvesting even as prices tumbled (obviously, this has implications for forest availability in years to come). Mild weather also delayed the opening of the ice roads that are critical to supplying Canada’s northern communities, especially diamond mines in the Territories.

Not all the impacts of climate change were negative. Lower heating bills helped consumers cope with record prices at the gasoline pump. The construction season was prolonged, which was particularly important to the home-building industry early in the year when it was struggling to meet demand. Transportation was made easier, particularly by water as the St Lawrence Seaway had its longest-ever season. The impact on agriculture has been mixed: while mild weather extends the growing season, precipitation is more variable. The worst droughts in a century on the prairies in 2001 and 2002 were followed by heavy spring rains in 2005 and record rain in BC and eastern Canada last fall.¹⁸

Manufacturing restructures

Nowhere was the variable impact of structural and regional change more evident than in the manufacturing sector in 2006. The regional dimension was stark: Quebec and all the western provinces posted higher shipments last year, while Ontario and most Atlantic provinces saw shipments fall. A closer examination of the industries that contributed to the regional pattern of gains and losses is instructive about which adapted best to the pressures of both a slowdown in key US markets and the higher dollar. With the US auto and housing markets slumping, manufacturers concentrated on faster-growing markets in western Canada.

Alberta led the provinces with a 7% gain in shipments, and was the only one where factory jobs expanded significantly. High oil prices played only a small role in this increase. Chemicals contributed more than three times as much to growth. Almost as big a factor were shipments of capital goods, especially machinery destined for the oilpatch.

Alberta’s stimulus to manufacturing demand spread across the country, notably steel for pipelines made on the prairies and heavy trucks imported from BC. Capital goods industries accounted for all of the growth in Saskatchewan, again fuelled by demand from the mining sector. These same industries contributed nearly half the growth in BC, although its largest increase came from the boom in primary metals.

Primary metals also led the 3% growth in Quebec’s shipments last year (although not enough to stop jobs from disappearing). Shipments were boosted by the opening of a new aluminum refinery. Pharmaceuticals and aerospace had another good year, especially in European markets. With a 19% decrease, sawmills replaced clothing and textiles as Quebec’s weakest sector. Clothing shipments fell less than 1% last year, after plunging 40% over the previous two years after quotas on imports were removed.

Shipments in Ontario fell 4.2%, or $12 billion. However, the bulk of this drop originated in a loss of $9.7 billion in the auto sector (including parts), which plumbed its lowest level since 1998. Even within the auto industry, there was a marked contrast between the downsizing undertaken by the traditional Big Three producers and the recently arrived transplants from overseas, which operated at near full capacity.

Outside of autos, manufacturers in Ontario were equally split between expanding and contracting industries. Most capital goods industries (outside of the ICT sector) fared well, as did refiners and aerospace. These were offset by losses in industries that feed the auto industry (such as iron and steel and plastic and rubber) as well as wood and paper. Weakness in forestry-related products and the ongoing woes of the fishing industry lowered shipments in three of the four Atlantic provinces (PEI was the exception).

Another response of exporters to the loss of some US markets was to continue to diversify away from the US as growth accelerated overseas. Exports outside the US jumped 45% in the past four years, capped by a 15% hike last year. This increase overseas was ten times greater than the 4.1% growth in our exports to the US since the dollar began rising in 2003. As a result, the share of exports destined outside the US rose from 16.2% in 2002 to 21.1% last year, the highest since 1995.

Conclusion

Certainly some industries and regions were facing increasing dislocation and stress last year. All the major North American auto producers announced major structural cuts to their operations. A wave of closings swept across the lumber industry in eastern Canada. Clothing began to stabilize, but only after contracting by a third in 2004 and 2005 after import quotas were lifted. Manufacturers of telephone communications equipment remained just one-fifth their size at the peak of the ICT boom in 2000.

But overall Canadians successfully adapted to these and other changes. Unmistakable signs of prosperity were widely apparent in everyday life, beyond the statistics on aggregate GDP. Unemployment fell to a 30-year low, with people often finding work by migrating to other regions or industries in increasing numbers. Chronic joblessness was increasingly rare. The stock market set more records, while the housing market continued to hit new highs. Vehicle sales were the second highest ever and Canadians continued to drive more, undeterred by rising gas prices. Canadians loaded up on cheaper electronic goods for the home, while traveling overseas in record numbers, both tangible benefits from the stronger dollar. Fuelled by the gains in household income and spending, governments continued to record sizeable fiscal surpluses. And, Canadians increasingly profited from their investments abroad.

In retrospect, the most surprising development in 2006 was not that a surge in oil prices or the bursting of the US housing bubble did not dampen growth. Households and firms have adapted to bigger challenges than occurred last year (the Bank of Canada remarked that 2006 was notable for the absence of shocks on the scale of 9/11 or the stock market crash¹⁹). Instead, the surprise was that so many commentators continued to under-estimate the ability of Canadians to react and adapt to fast-changing or unexpected circumstances. The most dramatic example of this adaptability was the increased migration of people to Alberta last year.

So, should Canadians be complacent that economic growth is assured for the foreseeable future? Of course not. Not all of the adjustments in the economy have gone smoothly. The rapid shifts in our resource sector have some negative consequences. Productivity in mining has been declining since 1999, (see last month’s CEO feature article). Rising emissions from the oilsands helped raise Canada’s emissions of greenhouse gases, widely linked to climate change. But recent evidence suggests that the greatest challenge to sustaining growth is as likely to come from a non-economic event, such as climate change, demographic shifts or a major health epidemic.

Recent feature articles

Notes