Canada’s economy is increasingly exhibiting the symptoms of dual economic performance
By Livio Di Matteo, Professor of Economics, Lakehead University
The last decade has seen a mixed performance when it comes to the role of exports and investment spending in moving the Canadian economy forward. Together, these two spending flows are key macroeconomic drivers accounting for nearly 50 per cent of Canada’s GDP.
Exports drive GDP and employment growth while investment spending on plant, machinery and equipment also improves long-run productivity and growth by introducing new technology. Canada is experiencing both an investment boom and an export slowdown.
Over the period 2000 to 2012, Canadian annual real GDP growth averaged 2.2 per cent. The annual average growth rate of investment spending or real gross fixed capital formation over this same period was 4.1 per cent while the growth rate of the real value of exports to other countries was 0.8 per cent. While the ratio of investment spending to GDP in Canada rose from 19 to 24 per cent between these two years, the ratio of the value of international exports to GDP fell from 38 per cent to 31 per cent.
In other words, while the investment engine is powering ahead, the export engine is sputtering.
The export sector is showing substantial growth in Western Canada where agricultural and energy products dominate. The real value of international exports over the period 2000 to 2012 grew at an annual average of 2.5 per cent in Alberta, 2 per cent in Saskatchewan and 3.4 per cent in Manitoba. The worst performers were Quebec, where the average growth rate for real exports was -0.2 per cent, Prince Edward Island at 0.1 per cent and Ontario at 0.5 per cent.
The weakness of the U.S. market is a major reason for the sputtering export sector, given that over two thirds of our exports go to the U.S. This has certainly affected provinces like Ontario and Quebec the most. In 2000, the international export share of GDP in Ontario was 44 per cent but by 2012 it dropped to 34 per cent. Meanwhile, in Quebec, it went from 37 per cent to 25 per cent. Even resource-driven Alberta and Saskatchewan have seen a small drop in their export to GDP ratios, with Saskatchewan going from 42 to 38 per cent and Alberta from 39 to 34 per cent. Manitoba was a bright spot in this regard, seeing its international export to GDP share rise from 27 to 31 per cent.
Fortunately, investment spending in Canada has been more robust, though even here the performance is disconcerting when examined on a regional basis. This more robust growth rate is being driven mainly by investment spending in the energy producing provinces. Highest average annual growth rates in real gross fixed capital formation over the period 2000 to 2012 were for Alberta at 6.9 per cent, Newfoundland and Labrador at 6.7 per cent and Saskatchewan at 6.6 per cent. At the bottom is Nova Scotia at 1.6 per cent, New Brunswick at 2.3 per cent and Ontario at 2.8 per cent. In Ontario, this growth rate is less impressive when only business investment is considered.
Canada’s economy is increasingly exhibiting the symptoms of dual economic performance. On the one hand, its resource-driven provinces are fueling a capital investment boom that will be the source of future export gains. Much like the early 20th century, when prairie settlement led to massive infrastructure expansion creating an export oriented wheat-producing economy, the current boom is putting in place the infrastructure for future exports of energy and agricultural goods.
However, these increased exports will not be sufficient to offset the decline in exports from the traditional manufacturing heartland of the country – namely, Ontario and Quebec. Ontario and Quebec have seen their combined share of Canada’s international exports over the last decade decline but still generate over half of Canada’s international exports.
Ontario and Quebec are simply too large a part of Canada’s economy to not be a serious drag on the national economy if they do not improve their performance. Ontario and Quebec need a burst of private sector driven capital formation to retool their economies to meet the world export markets of the 21st century. This requires, first and
foremost, private sector vision to find and seize new international opportunities.
What is ominous is that the share of private sector capital formation to GDP in Ontario and Quebec has been flat for a decade, with little sign of change on the horizon.
Article provided by Troy Media, http://www.troymedia.com.
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