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Canada in for a rude economic shock

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THUNDER BAY, ON/ Troy Media/ - January 13, 2015  ----    According to the employment numbers just released, the United States is doing Livio Di Matteoquite well, with the preliminary Bureau of Labour Statistics numbers pointing to the addition of 252,000 jobs in December. The unemployment rate in the United States has fallen to 5.6 per cent and the stimulus provided by lower gasoline prices is expected to continue propelling the United States forward in its economic renaissance. Indeed, in 2014 the United States saw its total employment reach the highest level since 2007.

Meanwhile, Canada exhibited a much weaker performance, with Statistics Canada reporting that Canada lost 4,300 jobs in December and had an unemployment rate of 6.6 per cent. This follows the loss of 10,700 jobs in November and suggests a reversal in economic fortunes is underway. The former northern tiger seems to have been declawed, while the American eagle has taken to the skies again.

This reversal in performance should not come as a surprise, given the forces driving both economies in the wake of the 2009 recession. Even though there were employment losses in central Canada’s manufacturing sector, Canada managed to ride out the recession relatively well because high commodity prices generated a resource boom in the West. Canada was so insulated that its housing sector has continued to see price gains and its burden of consumer debt and housing prices now resemble those of the United States prior to the 2009 recession.

Canada’s much touted superior economic and fiscal performance relative to the other G-7 countries can be attributed to the traditionally stronger Canadian banking sector, a strong fiscal position brought about by the deficit reduction of the 1990s and the presence of natural resource producing provinces. This good fortune bred a degree of complacency that resulted in Canada largely resting on its laurels with the sudden drop in oil prices now providing a rude awakening.

In contrast, the United States was hit much harder by the 2009 recession. In 2008 and 2009 total employment in the United States fell 2.6 and 3.8 per cent respectively while in Canada grew by 1.7 per cent in 2008 and then fell 1.6 per cent the year following. The United States has come back because its remains one of the most dynamic and innovative economies in the world, with a large dense internal consumer market and nimble firms – relative to Canada.

The shock of the 2009 recession prompted its private sector to restructure and innovate and the result has been recovery and employment growth – even in manufacturing. Moreover, the United States is generating its own energy boom via exploitation of shale oil: one of the dividends of this activity is the current drop in oil prices from the increased supply on world markets. The added impetus of much cheaper energy will provide the stimulus to further drive its economic recovery.

The recovery of the American economy has been taking shape since 2009. Indeed, the United States has actually been outperforming Canada for several years when it comes to employment growth. From 2010 to 2013, average annual total employment growth in Canada was 1.3 per cent compared to 1.5 per cent in the United States. Indeed, over these four years, Canada’s employment growth rate only exceeded that of the United States in 2010. The United States has outperformed us in each subsequent year.

Moreover, the United States appears to have overcome its manufacturing malaise and is actually creating manufacturing jobs again. Over the period 2010 to 2013, the average annual growth rate of manufacturing employment in Canada was -0.7 per cent whereas in the United States it was 1.2 per cent. In 2013 alone, manufacturing employment in Canada shrank by 2.9 per cent while in the United States it grew by almost 1 per cent. In motor vehicle production – the mainstay of Ontario manufacturing – 2013 saw employment grow 5.3 per cent in the United States and only 1.9 per cent in Canada.

The United States is back. While wage growth is not marching in tandem with the employment gains and economic inequality is still an issue, it has used the last four years to restructure its economy. Its vast market and human capital resources, coupled with the new world of low energy costs, have placed it on the path to sustained economic growth. Canada on the other hand, has not used the last four years as productively and is now banking on a low Canadian dollar and an American economic recovery to fuel its exports. Canada may be in for a rude shock as it discovers its firms cannot compete with restructured and more efficient American firms.

Livio Di Matteo is Professor of Economics at Lakehead University.

By Livio Di Matteo
Professor of Economics
Lakehead University
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Troy Media
Troy Media

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