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factors affecting regional economic performance in canada brigid brady ontario regional office and farid novin british columbia regional office over the past year economic activity in uring the second half ...

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                                    Factors Affecting Regional
                                    Economic Performance in Canada
                                    Brigid Brady, Ontario Regional Office and Farid Novin, British Columbia
                                    Regional Office
                                    •   Over the past year, economic activity in                          uring the second half of last year and the
                                        Canada has slowed, with some regions                              first half of this year, Canada’s economy
                                        experiencing more pronounced effects than              Dwas hit by three major shocks that affected
                                        others. The downturn in the U.S. economy,                         the country’s regions very differently. 1 On
                                        high energy prices, and low lumber prices             balance, these shocks have contributed to considerable
                                        affected Canada’s regions to varying degrees.         slowing in economic growth. This slowing will be
                                                                                              exacerbated in the near term by the September terror-
                                        In Ontario and Quebec, there was a sharp              ist attacks in the United States.2 In this article, the three
                                        slump in the automotive, electrical, and              shocksareanalyzedfromaregionalperspective,high-
                                        electronic manufacturing industries. In               lighting Canada’s regional economic diversity.
                                        contrast, a surge in energy prices contributed        The first shock was the slowdown in U.S. economic
                                        to economic strength in Alberta, Atlantic             growth late in 2000, which significantly affected pro-
                                        Canada, and, to a lesser extent, in British           duction levels and exports of automotive and electri-
                                        Columbia, where problems in the forestry              cal and electronic manufacturing products in Canada.
                                        sector adversely affected activity.                   This was followed by unexpectedly high energy
                                                                                              prices, exacerbated by energy shortages in the United
                                    •   Manufacturing and lumber exports                      States, which gave rise to increased exports of natural
                                        weakened, while energy-related exports and            gasandelectricity,togetherwithasurgeininvestment
                                        investments remained strong. The consumer             projects in this sector. The third shock was the uncer-
                                        sector, bolstered by easing monetary policy,          tainty created by the expiry of the Softwood Lumber
                                                                                              Agreement. A preliminary 19.3 per cent countervail-
                                        tax cuts, and high levels of employment,              ing duty was subsequently imposed on Canadian
                                        contributedtogrowthineveryregionbetween               lumberbytheU.S.DepartmentofCommerce.Volatile
                                        mid-2000 and mid-2001.                                market conditions prevailed in the forestry sector,
                                    •   Surveys conducted by the Bank’s regional              where export and production levels declined.
                                        offices indicate that inflationary pressures            In addition to these three shocks, regional economies
                                        have eased since March 2001, although there           felt the effects of a prolonged drought that affected
                                        is some variation across regions.                     agricultural crops across the country. This was
                                                                                              1.  The regional breakdown used for this article corresponds to the areas cov-
                                                                                              eredbytheBank’sfiveregionaloffices:AtlanticCanada,Quebec,Ontario,the
                                                                                              Prairies (includes the Northwest Territories and Nunavut), and British
                                                                                              Columbia (includes the Yukon). For more information on the activities of the
                                                                                              regional offices and the quarterly survey of business conditions, see Amirault
                                                                                              and Lafleur (2000).
                                    Note: The cut-off date for data used in this article was  2.  For a more detailed analysis of recent developments in the Canadian and
                                    28 September 2001.                                        U.S. economies, see the Monetary Policy Report to be released on 7 November.
                                                                                                         BANKOFCANADAREVIEW • AUTUMN2001               21
                                                   particularly important to the economy of the Prairie                                     would be more exposed to external shocks that affect
                                                   provinces, where most of the impact on wheat and                                         the automotive sector if its production is highly con-
                                                   canola crops will be felt in 2002, when supplies will                                    centrated in that sector.
                                                   likely be low.                                                                           In Ontario and Quebec, the manufacturing sector
                                                                                                                                            accounts for over 20 per cent of provincial output
                                                                                                                                            (Table 1). Within this sector, the automotive industry
                                                               Because of the striking variation in                                         is of key importance in Ontario, representing about
                                                                 industrial activity from region to                                         6percentofprovincialoutputand46percentoftotal
                                                                                                                                            exports (Table 2). The electrical and electronic equip-
                                                                region, shocks that affect Canada’s                                         ment industries also figure prominently in Ontario.
                                                             nationaleconomymaybeexperienced                                                In Quebec, machinery and equipment account for
                                                              more or less intensely in each region.                                        35 per cent of provincial exports, reflecting the impor-
                                                                                                                                                                                                                       3
                                                                                                                                            tance of the aeronautics industry in that province.
                                                                                                                                            TheenergysectorisespeciallyimportantinthePrairie
                                                                                                                                            provinces, representing 43 per cent of the region’s
                                                   Because of the striking variation in industrial activity                                 exports, with production activity concentrated in
                                                   from region to region, shocks that affect Canada’s                                       Alberta. In Atlantic Canada, the energy sector has
                                                   national economy may be experienced more or less                                         accounted for 21 per cent of total exports over the last
                                                                                                                                                                                                                4
                                                   intensely in each region. Regional business cycles can                                   five years, but this share has been expanding.  At
                                                   therefore diverge significantly from national cycles                                      54 per cent of provincial exports, forestry predomi-
                                                   bothindurationandseverity.Forexample,becauseof                                           nates in British Columbia.
                                                   the importance of the energy sector in Alberta, and its                                  Thus, the economies of Ontario and Quebec exhibit
                                                   growing prominence in Atlantic Canada, the Prairie                                       the strongest reactions to negative external shocks to
                                                   and Atlantic regions are highly sensitive to fluctua-                                     the manufacturing sector, while the Prairies and
                                                   tions in the market for energy products. Information
                                                   oneconomicdevelopmentsacrossregionscanprovide
                                                   additional insights to those derived from national                                       Table 1
                                                   data. A sound understanding of regional business                                         Regional Sectoral Mix
                                                   cycles is thus a valuable input in formulating mone-                                     Average share of output from 1995 to 1999, per cent
                                                   tary policy.                                                                                                   British     Prairies Ontario Quebec Atlantic Canada
                                                   Regional business cycles are typically studied in the                                                          Columbia                                Canada
                                                   absenceofregionalGDPdata,whichareavailableonly                                           Primary                6.6         18.5      2.1      2.9       5.9      6.3
                                                   with a long lag. The indicators analyzed include total                                   Mining, quarrying,
                                                   employment, retail sales, housing starts, and the con-                                     and oil-well-
                                                   sumer confidence index. The Bank’s regional offices                                          drilling industries  2.7         14.2      0.8      0.8       2.8      3.8
                                                   alsoconductquarterlysurveysofbusinessconditions,                                         Logging and
                                                                                                                                              forestry             2.6          0.3      0.2      0.6       1.0      0.6
                                                   which provide additional information that is helpful                                     Manufacturing          9.6          9.5     23.4      20.2     10.5      17.5
                                                   in gaining a better understanding of recent economic                                     Transportation
                                                   developments in Canada. In this article, the three                                         equipment             na          0.6      5.7      2.3       na       3.1
                                                   shocks that affected the Canadian economy over the                                       Electrical and
                                                   past year are analyzed from a regional perspective,                                        electronic products na            0.6      2.2      1.6       na       1.5
                                                                                                                                            Goods-producing
                                                   starting with a discussion of the sectoral mix of                                          industries           25.8        38.7     33.0      33.0     26.2      32.8
                                                   each region.                                                                             Services-producing
                                                                                                                                              industries           74.2        61.3     67.0      67.0     73.8      67.2
                                                   The Sectoral Breakdown of Canada’s                                                       Source: Statistics Canada; output measured by real GDP at factor cost (1992=100)
                                                   Regions: Some Stylized Facts
                                                   The relative size of the various economic sectors is                                     3.   Aircraft are Quebec’s top export.
                                                   important in determining the intensity of a region’s
                                                   response to an economic shock. For example, a region                                     4.   Atlantic Canada increased energy exports from 17 per cent of the region’s
                                                                                                                                            exports in 1995 to 29 per cent in 2000.
                                                   22         BANKOFCANADAREVIEW • AUTUMN2001
                                                          Table 2                                                                                            decline in demand. As the demandforautomobilesin
                                                          Share of Total Goods Exported                                                                      the United States fell off, Canadian exports declined.
                                                          Average from 1995 to 1999, per centa                                                               The unintended accumulation of North American
                                                                                   British      Prairies Ontario Quebec Atlantic Canada                      automobile inventories that resulted led to a marked
                                                                                   Columbia                                     Canada                       cutbackinCanada’sproductionofmotorvehiclesand
                                                          Agricultural and                                                                                   parts. Automobile production in the first quarter of
                                                            fishing products        6.3          21.3       3.6        4.4       22.5        7.9             2001 declined by about 30 per cent, and exports of
                                                          Automotive                                                                                         motor vehicles and parts fell by about 27 per cent.
                                                            products                2.3           1.5      45.5b       7.1        0.4       24.7             Giventheimportanceofitsautomotivesector,Ontario
                                                          Industrial goods                                                                                   experienced these developments most intensely. A
                                                                            c
                                                            and materials           13.0         16.0      17.0       25.5       12.3       17.8             similarpatternoccurredintheelectricalandelectronic
                                                          Machinery and
                                                            equipmentd              9.6           9.9      23.5       35.2       11.0       21.3             components sector, where the decline in U.S. demand
                                                          Forestry                  53.7          6.5       4.6       18.3       30.1       13.2             for computers and telecommunications equipment in
                                                          Energy                    11.7         42.8       0.8        1.9       21.2       10.4             the second half of 2000 led to a sharp reduction in
                                                          Other                     3.4           2.0       5.0        7.6        2.5        4.7             Canadianproductionoftheseproductsearlythisyear.
                                                          Foreign exports as                                                                                 This reduction had the largest impact on Quebec and
                                                            percentage of     b                                                                              Ontario. Exports of telecommunications equipment
                                                            regional output         28.6         31.9      46.0       31.8       27.0       37.1             from both provinces had grown rapidly throughout
                                                                                                                                                             2000, but in the first quarter of 2001, they declined by
                                                          a. Note:Althoughmorerecentexportdataareavailable,thistimeperiodwaschosentobe                       36 and 24 per cent in Quebec and Ontario, respec-
                                                            consistent with Table 1. With the exception of “Foreign exports” in the lower panel, pro-        tively. Exports in this sector continued to decline in
                                                            vincial exports include international and interprovincial trade.
                                                          b. The automotive sector accounts for more than half of Ontario’s exports to the United            the second quarter of 2001.
                                                            States. About 90 per cent of Canadian automotive production is exported, and about
                                                            80 per cent of Canadian automotive purchases are imported.                                       TheslowdownintheU.S.economyhasbeenfeltmore
                                                          c. Includes mining                                                                                 broadly in the economies of Ontario and Quebec.  In
                                                          d. Includes electric and electronic products                                                       Ontario, employment growth has been sluggish for
                                                          Source: Statistics Canada                                                                          mostof2001,withdeclinesinrecentmonths(Chart3).
                                                                                                                                                             Although consumer confidence has declined in
                                                          Atlantic provinces are most sensitive to changes in                                                Ontario (Chart 1), the housing market has remained
                                                          energy demand. Ontario’s economy is the most vul-                                                  strong, and retail sales are positive. Investment levels
                                                          nerable to changes in external demand, since foreign                                               were fairly flat in 2000, but some improvement in
                                                          exportsmakethemajorcontributiontothisprovince’s                                                    investment intentions is expected for 2001 (Charts 5
                                                                 5                                                                                           and 6) (Statistics Canada 2001). In Quebec, the promi-
                                                          GDP.  Moreover, given the solid interprovincial trade                                              nence of the aeronautics and pharmaceutical indus-
                                                          links in Canada, an economic shock to one province                                                 tries has been a stabilizing factor. Employment has
                                                          would be transmitted to other provinces (McCallum                                                  grown in 2001, following a decline in the pace of
                                                          1995).                                                                                             expansion in 2000. Buoyed by strong consumer confi-
                                                          Shocks to Canada’s Economy during                                                                  dence, housing markets and retail sales have been
                                                          the Second Half of 2000 and the First                                                              firm in 2001.
                                                          Half of 2001                                                                                       The second major shock was the unexpected rise in
                                                                                                                                                             energy prices. The price of crude oil, as measured by
                                                          TheslowdownintheU.S.economyinthesecondhalf                                                         the West Texas Intermediate benchmark, rose to
                                                          of 2000 and the first half of 2001 affected all regions of                                          US$34.52 per barrel in November 2000, almost 38 per
                                                          Canada adversely but with varying degrees of inten-                                                cent higher than a year earlier. The price remained rel-
                                                          sity. The automotive industry and the electrical and                                               atively highinthefirsthalfof2001,butthensubsided,
                                                                                                                                                                                                                                                     6
                                                          electronic manufacturing industries were the sectors                                               and was about US$27 per barrel in early September.
                                                          most affected, with both experiencing a sudden                                                     Natural gas prices also soared in North America, as
                                                                                                                                                             demand rapidly outstripped supply, reflecting the
                                                          5. TheFreeTradeAgreementhasresultedinadramaticincreaseinCanadian
                                                          exports and imports as a per cent of GDPsince 1990, reflecting the expansion                        6. OPEC, which produces about 40 per cent of the world’s oil, has announced
                                                          of same-industry trade in manufactured products.                                                   a target range of US$22 to $28 per barrel for its benchmark oil price.
                                                                                                                                                                           BANKOFCANADAREVIEW • AUTUMN2001                                            23
                                       Chart 1                                                                                      Chart 2
                                       Index of Consumer Attitudes                                                                  Index of Consumer Attitudes
                                       1991 = 100                                                                                   1991 = 100
                                       140                                                                 140                      140                                                                 140
                                       130                                   Ontario                       130                      130                                                                 130
                                                    Quebec                                                                                                               Prairies
                                       120                                                                 120                      120                                                                 120
                                       110                                                                 110                      110                                                                 110
                                       100                                                                 100                      100                                                                 100
                                        90                       Atlantic Canada                            90                       90                                                                  90
                                        80                                                                  80                       80                                        British Columbia          80
                                        70    1994   1995    1996    1997    1998   1999    2000    2001    70                       70   1994    1995    1996    1997   1998    1999    2000    2001    70
                                            Source: Conference Board of Canada                                                          Source: Conference Board of Canada
                                       Chart 3                                                                                      Chart 4
                                       Employment Growth                                                                            Employment Growth
                                       Year-over-year percentage change                                                             Year-over-year percentage change
                                         6                                                                  6                         6                                                                 6
                                         4                                                      Ontario     4
                                                                                                                                      4                                    Prairies                     4
                                         2                                                                  2
                                                                                                                                      2                                                                 2
                                         0                                   Quebec                         0
                                                                                                                                      0                                                                 0
                                        -2                          Atlantic Canada                        -2                                                                British Columbia
                                        -4                                                                 -4                        -2   1994    1995    1996   1997    1998    1999    2000    2001   -2
                                             1994    1995    1996    1997   1998    1999    2000    2001
                                            Source: Statistics Canada                                                                   Source: Statistics Canada
                                             24        BANKOFCANADAREVIEW • AUTUMN2001
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...Factors affecting regional economic performance in canada brigid brady ontario office and farid novin british columbia over the past year activity uring second half of last has slowed with some regions rst this s economy experiencing more pronounced effects than dwas hit by three major shocks that affected others downturn u country very differently on high energy prices low lumber balance these have contributed to considerable varying degrees slowing growth will be exacerbated near term september terror quebec there was a sharp ist attacks united states article slump automotive electrical shocksareanalyzedfromaregionalperspective electronic manufacturing industries lighting diversity contrast surge shock slowdown strength alberta atlantic late which signicantly pro lesser extent duction levels exports electri where problems forestry cal products sector adversely followed unexpectedly shortages gave rise increased natural weakened while related gasandelectricity togetherwithasurgeininve...

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