Economic growth to shift west: Scotia

(October 12, 2005) Continued strength in the commodities markets will prove to be a double edged sword for the Canadian economy, likely through 2010, according to the latest global economic update from Scotia Economics.

In a report entitled Tipping Points, Scotia economists predict demand will remain strong for energy and mineral resources, propping up the economy of provinces rich in such deposits. Those provinces with a larger manufacturing base, particularly Ontario, will struggle to adapt to higher input prices and increased foreign competition.

“Canada will continue to lag the United States during 2006, with the resource-rich provinces leading the nation while net energy-consuming regions — particularly in Central Canada’s manufacturing heartland — are caught in the slow lane,” said Warren Jestin, chief economist, Scotiabank.

As more cash pours into the west, the average unemployment rate for British Columbia, Alberta and Saskatchewan is expected to drop to the 5% range, causing labour shortages and higher wage costs in the energy sector. Higher tax revenues should give these resource-rich provinces more latitude in public policy than other jurisdictions, as the unemployment rate in other provinces remains 2.5 percentage points higher.

At the other end of the country, Newfoundland & Labrador is expected to bounce back from a poor economic performance this year, as the White Rose oil field comes online and the Voisey’s Bay nickel project finally begins.

In Quebec, the mining sector will provide some support, as will the strength in electrical power generation. Consumer spending should remain healthy, and infrastructure projects will contribute to real GDP growth of about 2%.

In the Maritimes, New Brunswick will benefit from the opening of the country’s first liquefied natural gas plant, while Nova Scotia’s Sable Island gas field production may continue to fall.

Ontario is expected to bear the brunt of industrial restructuring, as the traditionally dominant manufacturing base struggles to adapt to higher costs and tougher competition. The province also faces the cost of modernizing its electrical system at both the generation and distribution level. The Scotia report even questions whether Ontario will continue as a net contributor to federal transfer payments.

“Canadian growth is already tracking more than half a percentage point below the U.S. pace,” says Jestin. “While not great, it is still a solid performance considering the drag on non-energy exports, particularly manufactured goods, imposed by increased foreign competition and a rising loonie.”

Not only will higher energy prices affect manufacturing costs, but the global demand driving these costs will also contribute to sustained strength in the Canadian dollar. The loonie could trade as high as 90 cents US, although Scotia admits the “timing and magnitude of further appreciation is difficult to predict.”

“The strength in our exchange rate will also be fuelled by a longer-term tendency for the U.S. dollar to decline against other major currencies as investors diversify to contain already large exposures to the greenback,” Jestin said. “This year’s current account deficit will exceed US$800 billion and may move higher in 2006 as the U.S. economy pulls in more imports and overseas markets in Europe and Japan remain subdued.”

South of the border

The U.S. economy, in fact poses one of the biggest threats to global economic growth. On top of the usual economic problems in the U.S. — a huge current account deficit and an ever-expanding fiscal gap, which now tops $400 billion — the administration has promised to spend “whatever it takes” on the reconstruction of the Gulf Coast, following Hurricanes Katrina and Rita.

“The U.S. consumer (a key driver in the world economy) will likely break stride as recent steep increases in oil, gasoline and natural gas prices bite into discretionary income,” says Jestin. “Domestic demand also should be tempered in Europe and Japan alongside a general shift in earnings and growth momentum from resource consumers to producers.”

Filed by Steven Lamb, Advisor.ca, steven.lamb@advisor.rogers.com