How Atlantic Canadas Economy is Adapting to New Global Realities

Elizabeth Beale, President & CEO, Atlantic Provinces Economic Council September 2011

How Atlantic Canadas Economy is Adapting to New Global Realities

Powerful forces are reshaping the Atlantic economy. The rise of global value chains has revolutionized production around the world, leading to a shift in economic power towards emerging markets. Enhanced global connectedness has opened up opportunities for new suppliers, and Atlantic commodity producers notably in mining and energy are beneting substantially. But globalization is also exposing many existing industries to increasing competition from lower cost and/or higher value competition. Over the past decades, industries such as coal and steel, textiles, sh processing, forestry and more recently, call centres have expanded and then faded in Atlantic Canada in response to changing global realities.

The US has been the dominant force behind the growth of Atlantic Canada`s economy, a source of demand for approximately 75% of Atlantic exports, and the key market for the regions largest group of exports, oil-related products. However, Atlantic rms are often at the far end of the US supply chain, whether in manufactured goods or exportable services. With the rise in the value of the Canadian dollar and a slowing US economy, it is increasingly difcult for many exporters to remain competitive in US markets.

Concurrent with these trends is the shift towards a knowledge-based economy. While this offers considerable potential, it also poses a considerable risk for a small open economy such as Atlantic Canada. The knowledge economy places a premium on skills, and the ideas that creative individuals can bring to the development of innovative goods and services. At the same time, it creates greater specialization and requires a close interaction among individuals to trade ideas and knowledge, a driving force behind urban development. While Atlantic Canada is rapidly urbanizing, the premium growth in many high end business and professional services is consolidating in larger cities outside the region.

To add to the complexities, the global economy has now entered an indeterminate period of economic upheaval, with heightened uncertainty affecting business, individuals and government alike. Atlantic Canada passed through the last recession relatively unscathed. Current indicators suggest we may not be as fortunate this time around.

Economic Transformation

Atlantic Canadas economy has gone through a substantial transformation in the past 20 years. As in most mature economies, the service sector now dominates employment and seasonal industries are much less important to output or employment. Nevertheless, the economic fortunes of Atlantic Canada are still tied closely to its resource and related manufacturing industries.

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How Atlantic Canadas Economy is Adapting to New Global Realities

After a prolonged slump through the 1990s, the Atlantic economy rebounded in the late 1990s as investment ramped up in a range of energy related projects, including the development of the rst offshore oil elds in Newfoundland and Labrador, offshore gas in Nova Scotia and renery expansion in New Brunswick. Pushed by strong US demand, energy products rapidly rose to become the regions leading exports.

By the mid - 2000s, growth had slowed in the three Maritime provinces as increasing competition from low cost producers in Asia and South America eroded the US market share for a range of Atlantic producers. The regions forest industries including pulp, paper and wood products were particularly affected, with exports declining from a peak of $4.6 billion in 2000 to $2.6 billion in 2010. New Brunswick, Canadas most forest dependent province in 2000, lost four of its eleven pulp and paper mills between 2004 and 2007, with substantial contraction in the rest of the industry. The decline in forestry reinforced a pattern of contraction in rural employment, established with the rationalization of the shery and sh processing a decade earlier. A steady decline in employment and population from rural areas has been a dominant characteristic of the Atlantic economy for the past 20 years.

Weak Performance Persists Across Maritimes

Average annual growth in real GDP (percent)

8 6 4 2 0 -2 -4 -6 1997-2002 2002-2007 2007-2009 2009-2012

Source: Statistics Canada/Bank Consensus for 2011 and 2012 forecasts

NL 3.9 4.2 2.7 1.8 2.0 3.7

MAR

QC/ON

WEST

3.2 2.0 0.2 -1.3 -1.0 2.4

Although the Maritime provinces fared relatively well compared to the rest of the country during the recent recession, there is little to suggest a strong pickup in growth either this year or next. The investment outlook is particularly weak and further rationalization is underway in a number of sectors. As a result, the Maritimes are expected to maintain a slow-growth track in 2011 and 2012, lagging performance in other regions of Canada. With persistent weak output

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How Atlantic Canadas Economy is Adapting to New Global Realities

growth, labour productivity for all three maritime provinces, as measured by GDP per hour worked remains stuck well below the national level.

New Opportunities for Newfoundland and Labrador

In contrast to the Maritimes, the economic fortunes of Newfoundland and Labrador have improved markedly over the past decade. The development of several large offshore oilelds has brought new wealth to the province and mining developments, principally in Labrador, are now expanding the provinces position as one of Canadas leading resource producers. Newfoundland and Labrador had the fastest rate of growth among Canadian provinces in the past decade, with the oil sector contributing about 58% of total output growth between 1997 and 2010.

Oil Output Has Boosted Aggregate Productivity Levels in Newfoundland and Labrador
Real GDP per hour worked ($) 50 Newfoundland and Labrador Canada Maritimes

45

40

35

30

25 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Source: Statistics Canada

The province now produces about 23% of conventional crude oil in Canada. However while further delineation is taking place, oil production is expected to decline until a fourth eld Hebron - comes on line in 2017. Counterbalancing this decline is the growth in mining and the development of other resource industries, including the Lower Churchill hydro project. The total value of investment in the province has grown rapidly: APEC estimates the total value of Newfoundland and Labrador major projects in 2011 at $43.6 billion, up from $29 billion in 2007 . Foreign investment in the province has tripled over the decade, now accounting for an estimated 64% of the regional total.

Increased royalties and rising incomes have boosted government revenues to the point where the province no longer receives federal equalization payments, a dramatic turnaround in a province that as recently as 2004 received the

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How Atlantic Canadas Economy is Adapting to New Global Realities

highest per capita equalization payments in Canada. The improved scal position has enabled the province to lower income and business taxes, as well as spend more liberally on infrastructure and diversifying its economic base. However, despite its strengths, the province still faces challenges in building linkages between its new-found wealth and the rest of its economy. Productivity remains low in most industries beyond the mining and energy sectors.

Behind the aggregate numbers, there are encouraging signs of positive adaptation in key industries across Atlantic Canada. Atlantic seafood and other marine producers for example have strengthened their global footprint by moving to higher-value products and diversifying markets. Not only does this add value beyond an existing resource, the increase in research and development related to nutraceuticals and functional foods is building innovation capacity within rms and creating crucial linkages to research institutions. It is currently estimated that there are 100 bioscience rms in total in Atlantic Canada, a small but increasingly important component of the regions economy .

Emerging Sectors

Other sectors are also starting to make their mark in the region. The information and communication technologies (ICT) industry has grown substantially over the past decade, and contains an estimated 2,000 rms in Atlantic Canada, including clusters of rms in multimedia and gaming, e-learning, e-health, ocean technology and defence-related software. The regions ICT industry grew more than twice as fast as the overall economy between 1997 and 2008, increasing its share of the regions GDP from 2.5% to 3.7%. Nova Scotia has the largest ICT industry in Atlantic Canada, accounting for 4.3% of GDP, trailing only Ontario and Quebec in relative importance. Another key sector - aerospace and defence - currently includes over 200 aerospace, defence, space, marine and security companies, employing an estimated 10,000 in Atlantic Canada. This sector has grown strongly - export sales almost doubled between 2001 and 2008 to $1 billion annually.

Although the growth of new industries is encouraging, many of the rms in these sectors are small, and the gains in these industries are not yet able to counterbalance losses in established sectors. In aggregate, Atlantic exporters have struggled to grow since 2000, apart from the energy and mining sectors. The region has made only modest gains in diversifying its exports beyond the US.

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How Atlantic Canadas Economy is Adapting to New Global Realities

The Challenge in Labour Markets

The changes in the regions economic structure are reected in labour markets. Many rural and remote parts of Atlantic Canada continue to be dened by high unemployment rates and a steady loss of employment, reecting the decline or rationalization of resource based industries. Northeast New Brunswicks Acadian Peninsula, for example, lost 12% of its employment between 2005 and 2010, largely due to restructuring in the forest sector. A similar pattern can be found in many parts of the country: however with a large share of its population still in rural areas, the net economic impact of rural decline is magnied in Atlantic Canada.

Service Sect0r Has Grown, But Not Enough to Absorb Losses in Manufacturing
Index of Employment (1997=100)
135 130 ATL - Services 125 120 115 110 105 100 95 90 97 99 01 03 05 07 09
Source: Statistics Canada

ATL - Goods CA - Goods CA - Services

In contrast, the growth in the service sector is helping to support employment growth in urban areas. Atlantic Canadas six fastest growing cities currently contain 41% of the regions population. Employment in these cities and their surrounding regions increased by 5% or more in the 2005-2010 period, well above the trend for other parts of Atlantic Canada. As a consequence, unemployment rates have fallen steadily in these cities since the late 1990s. In Halifax for example, the unemployment rate in 2010 was 6.3%, on a par with Ottawa or Calgary. In St. Johns, where most of the Newfoundland and Labradors employment growth has occurred, the unemployment rate is currently 6.8%, well below the 19% rate for the rest of the province.

Immigration is playing an increasingly important role in the growth of Atlantic cities. In 2010 about 83% of all immigrants into the region settled in one of the six cities. However while the number of immigrants has tripled between 2003 and 2010, retention of immigrants continues to be a challenge as many eventually move on to opportunities elsewhere in Canada. Even with the recent

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How Atlantic Canadas Economy is Adapting to New Global Realities

growth, Atlantic Canada is still only capturing about 2.7% of the immigrants into Canada, well below its 7% population share.

Employment in Atlantic Cities Matches or Exceeds the National Pace

Employment growth by economic region, 2005-2010 (%)
Fredericton Avalon (St. John's) Halifax Moncton Saint John PEI South Coast NL Southwest NS Northwest NB Annapolis Valley Cape Breton Northern Nova W. Coast NL/Labrador North/Central NL Acadian Peninsula

Atlantic Canada = 2.7%

Canada = 5.7%

-15

-10

-5

10

15

Source: Statistics Canada/APEC

Although the trends towards greater urban growth are certainly encouraging, labour force performance is expected to remain weak across the maritime provinces this year and next. Nova Scotia has experienced almost no growth in its labour force since the start of 2010. Employment is now expected to fall over the balance of this year due to closure of its largest paper mill and a number of call centres. New Brunswick is following a similar track with declines in its employment of 0.9% in 2010 and a further 1.6% to date this year. Prince Edward Island, facing fewer losses in manufacturing, could slightly exceed performance of the other Maritime provinces this year with labour force growth matching national performance, although much of this is concentrated in government-led sectors such as education and health.

In Newfoundland and Labrador, there are now encouraging signs that the province is on a more sustained path towards strong employment growth. Employment has steadily accelerated since the beginning of 2010, averaging nearly 4% growth over the past 18 months compared to 1.5% nationally, with wage growth also up by 5%. And while oil extraction and support services have only a small impact on direct employment, major project spending contributes strongly to employment in other sectors notably professional services, and construction. Provincial government incentives are also boosting employment in strategic sectors such as aerospace and defence, aquaculture and ocean technologies.

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How Atlantic Canadas Economy is Adapting to New Global Realities

A Rapidly Aging Population

One of the consequences of the changes underway in the Atlantic economy is an acceleration in the trend towards an aging population. With limited employment opportunities for those entering the labour force for the rst time, the Atlantic region typically loses a high percentage of those graduating from its post-secondary institutions to other parts of Canada, with a net loss of nearly 47,000 people in the 15-24 age group between 2000 and 2010. Outmigration trends also reect the pull from faster growing parts of Canada: the region lost a net of 38,000 people to Alberta between 2004 and 2008, and the number of migrants is picking up again as work resumes on oil sands and related projects in western Canada. As a result, little population growth is anticipated in Atlantic Canada up until 2021, but the share of those in the 55+ age group will increase from 30% to 39% between 2010 and 2021. The aging population and labour force has widespread implications, not only for the employers but also for provincial governments who are facing an increased demand for health and other services.

Challenges Ahead on Demographic Front in Atlantic Canada

Actual and projected population by age, Atlantic Canada (thousands)
1,200 1,000 800 600 400 200 0 1981 1986 1991 1996 2001 2006 2011 2016 2021
Source: Statistics Canada

< 25 years 25-54 55-64 65+

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How Atlantic Canadas Economy is Adapting to New Global Realities

A major restructuring of Atlantic Canadas economy is clearly underway. The benets of this restructuring are already evident in lower unemployment rates and higher incomes in many parts of this region. Does this shift in industrial structure imply that over time, Atlantic Canada will be able to move beyond decades-long subpar performance and generate growth and productivity performance to match other provinces? The potential for substantial change is clearly there Newfoundland and Labrador has vaulted to new heights in terms of growth and labour productivity on the backs of the expansion in the energy sector, exposing the tremendous gains that can ensue from investment in new industries.

Looking Ahead

Is there similar potential to boost growth and productivity performance in the rest of the regions economy? Clearly, many Atlantic entrepreneurs are already taking advantage of opportunities in the global marketplace and achieving success. But governments and industry alike need to embrace a more coherent strategy to target innovation and build a more competitive economy if we are to achieve broader based results. For Atlantic business, this implies a need to be more responsive to global trends, embracing leading technologies and being willing to invest more in the skills of their workers. For provincial governments, it implies a need to move beyond strategies that are primarily addressed at mitigating the impact of economic restructuring in favour of creating an economic climate which supports the most productive elements. For the federal government, this will require a long term commitment to support research and development, to help build key industrial sectors as well as invest in infrastructure which can facilitate those critical global linkages.

i Atlantic Provinces Economic Council, Major Projects Inventory 2011. ii Halifax, Moncton, Fredericton, Saint John, Charlottetown, St. Johns.

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