Post Pandemic Business Recovery: Some Are Doing Better Than Others

The COVID-19 pandemic  had a devastating effect on Canada’s business sector and new data is emerging that helps illustrate the size of the drop in business activity as well as the subsequent recovery.  Figure 1 uses data from Statistics Canada (Table 33-10-0270-01 Experimental estimates for business openings and closures for Canada, provinces and territories, census metropolitan areas, seasonally adjusted) to generate an index of active businesses for four Ontario cities as well as the province of Ontario.  It sets January of 2016 equal to 100.  For example if in January of 2016 you had 1200 active business and in January of 2023 you had 1500, then January of 2016 would be equal to 100 and January of 2023 would be 125.  Everyone starts at 100 in order to generate comparisons that would not be easy to see if the absolute number of business are used.  For example as of January 2023 Thunder Bay had 2,832 active business while Toronto had 192,016 which would not yield terribly useful visuals if plotted together.  

 

 

 

The chart is for Ontario and four cities: Thunder Bay, Greater Sudbury, Toronto and Hamilton.  With the exception of Thunder Bay and Sudbury, there was growth in the number of active businesses from 2016 to 2020 and then a dramatic drop which affected everyone.  From January to May 2020 there was 14.6 percent drop in the number of active Ontario businesses.  Toronto saw a drop of 15.8 percent followed by Hamilton at 13.4 percent, then Thunder Bay at 11.5 percent and Sudbury at 10.3 percent.  A recovery then begins but Thunder Bay and Sudbury unlike Ontario as a whole or Hamilton or Toronto barely match their pre-pandemic number of active businesses by 2023.  Indeed, if one looks at the entire 2016 to 2023 period(See Figure 2), Thunder Bay sees a decline of 3.8 percent while Sudbury is down one one-tenth of one percent.  Relative to 2016, the number of active businesses is up 8.6 percent in Toronto, 9.3 percent in Hamilton and 7.9 percent in Ontario as a whole.  

 

 

 

Pandemic impact aside, Thunder Bay and Sudbury seem to be suffering from a longer term set of problems with business activity given that they were experiencing a decline prior to the pandemic.  Between January 2016 and December 2019, Thunder Bay saw 124 fewer active business while Sudbury saw 40 fewer business.  After the pandemic drop, both of these cities recovered but only to approximately where they were prior to the pandemic.  Over the longer term, business formation has been weak and represents a serious economic challenge.

Is Ontario's Rising Cost of Living Really That Bad?

The news currently is full of stories about the rising cost of living whether it is grocery prices, rents, housing or energy.  The release of April’s CPI inflation rate shows it nudging upwards once again to 4.4 percent raising the spectre of further interest rate increases down the road.  Apparently one fifth of Canadians feel they are completely out of money as inflation “bites.” And along with the usual afflictions on budgets, inflation is apparently also taking a toll on entrepreneurial mental health. Needless to say, those of us of a certain vintage who remember the double digit inflation and interest rates of the early 1980s sometimes wonder if part of what is going on here needs to be interpreted within the context of life experience.  That is, if you are in your 30s and 40s, what is currently underway is an extreme price shock whereas if you are in your 50s and 60s the current inflationary and cost of living surge is relatively modest.

 

What does the evidence say?  Well, the accompanying figure plots a number of times series starting from 1990 using Ontario data.  For all of them, it sets 1990 as the base year and equal to 100 thus allowing us to see how what the increases  have been for all the series in a standardized way.  The data for rents for Toronto and Ontario is from CMHC, the CPI and nominal GDP per capita from Statistics Canada and the Ontario minimum wage you can get online from an assortment of sources. As the figure shows, the cost of living in Ontario has gone up since 1990.

 

 

 

For example, since 1990 the average rent for a Toronto two-bedroom apartment has gone from $689 to $1811 per month -a 163 percent increase.  Needless to say, being an average it masks the fact that at the margin, someone looking for a two bedroom in Toronto right now will likely face rents of over 3,000 a month if not more. For Ontario as a whole, average rents have gone up similarly from $576 to $1511. At the same time, the going market rate for a new rental ranges widely across Ontario also with two-bedrooms going for $3,290 in Toronto to $2,262 in Hamilton to $2,050 in Kingston - all above the “average” for all rented units.

 

With respect to the average rents, the increases in the accompanying figure are spread out over thirty years and while higher than the increase in the CPI, they matches pretty closely to the rise in nominal per capita GDP which has risen 167 percent.  Of course, one often sees the argument that the working poor cannot keep up but the Ontario minimum wage from 1990 to 2023 has gone up 206 percent – faster than average rents (162 percent), inflation (103 percent) or per capita GDP (167 percent).

 

So, what is the problem?  I think the problem is the rapidity of the recent increases relative to the resources available to pay.  From 1990 to 2010, the average rent for a two-bedroom in Toronto rose 63 percent or an average of 3 percent annually.  Over the same period, average rents in Ontario rose 61 percent (or just under 3 percent annually) and the CPI rose 48 percent (about 2.3 percent annually).  Meanwhile, hourly minimum wages rose almost 90 percent (4.5 percent annually) (on average) while per capita GDP rose almost 80 percent (4 percent annually).  This suggests that resources  were able to keep up with rising prices.

 

For the 2010 to 2022 period, the average rent for a Toronto two bedroom rose 58 percent (about 4.9 percent annual average) with the Ontario average also at 4.9 percent annually.  As well, the CPI rose 31 percent (at 2.6  percent annually on average). However, much of the "pulling up" of the average has occurred since 2019 – the pandemic era.  Meanwhile, since 2010, the minimum wage has grown 51 percent (at 4.3 percent annually) while nominal per capita GDP rose 45 percent (annual growth at 3.8 percent).  All of this is notwithstanding the reality that if you have been renting the same place for the last 15 years and are rent controlled, your experience is different from someone who needs to find a new rental right now. 

 

Ultimately, the period from 1990 to 2010 in Ontario was all things given a relatively more prosperous period than 2010 to 2023.  What seems to have happened is that in general the public over the period 1990 to 2010 experienced low interest rates, relatively low inflation and fairly robust economic growth which translated into a relatively easier time of making ends meet than the period since 2010.  The period since 2010 started with low interest rates but are now seeing higher interest rates, higher inflation and lower GDP growth.  For anyone born after 1980, the current experience is undiscovered country.  Needless to say, there are a lot of unhappy campers.  So, the crux of the matter seems to be that there has been a surge in cost but not accompanied by the economic productivity that would afford a greater ability to pay.  For those at the lower end of the income distribution, the average annual increases in the minimum wage have on average been higher than the increase in nominal per capita GDP but that is little comfort if you need to find a new place to live at current market rents. 

Global Aftermath: The Economic and Fiscal Effects of COVID in Canada and the World

 

The write-up accompanying my report on COVID in Canada and the world released today by the Fraser Institute.  The full report is available here.

 

— Published on May 11, 2023 Fraser Institute

The economic and fiscal disruption and associated effects of the pandemic in Canada and around the world were severe and unprecedented. The general effects of the pandemic were to disrupt health, social, governmental, and economic systems. While the impact of the pandemic on Canada and the world was similar, variations in demographics, timing of the spread and response, and other characteristics have meant that the effects on health, the response, and the economic and fiscal impacts have varied across countries.

At 103,874 total cases per million population by June 2022, Canada performed remarkably well: incidence was the fourth lowest among the IMF Advanced Economies. Moreover, of the IMF Advanced Economies, Canada was 27^th out of 38 at 1,103 deaths per million population; Japan was the lowest at 248 total COVID-19 deaths per million population. Canada did not fare as well for crude COVID mortality: its rate of 1.1% is the second highest of the IMF Advanced Economies. As for responses to the pandemic, at 227 vaccinations per 100 population, Canada had the 7^th highest vaccine uptake rate of the IMF Advanced Economies and the 3^rd highest level of stringency in its responses to the pandemic as measured by the Oxford University’s COVID19 Government Response Tracker.

Impact on the economy

Canada’s estimated real per-capita GDP growth was negative and the country ranked 29^th out of 40 IMF Advanced Economies and had the second-worst performance of the G7 countries over the period from 2019 to 2022. Canada, during the first pandemic year, had the second worst employment drop of the IMF Advanced Economies at 5.1%, coming in just ahead of the United States. However, during the rebound in 2021, Canada had the second highest employment growth of the IMF Advanced Economies. Canada’s unemployment rate in 2020 of 9.6% was higher than the world average (9.2%), the G7 average (6.6%), and the average for the IMF Advanced Economies (6.3%). According to the International Monetary Fund’s inflation estimates for 2021, Canada was mid-ranked (19^th highest) amongst the IMF advanced economies. However, a particularly high proportion of Canada’s inflation appears to be linked to demand-side rather than supply-side factors. As well, Canada ranked 9^th out of 30 OECD comparator countries for the size of the increase in housing prices.

Overall, Canada’s performance in controlling COVID-19 incidence and vaccine uptake was good but this was accompanied by lower testing rates for COVID as well as higher crude mortality rates. In terms of economic performance, Canada did not fare well in per-capita GDP growth during the pandemic; employment growth was also low, though this did improve in 2021. Canada was also generally mid-ranked for inflation compared to the IMF Advanced Economies, though it appears to have had a higher proportion of its inflation driven by demand-side factors. Canada’s success in some aspects of dealing with COVID appears to have come at an exceptionally high price, particularly from negative short-term employment effects and weaker per-capita GDP growth.

Impact on the fiscal situation

In 2020, of 194 IMF countries, at an increase of government expenditure of 19.7%, Canada ranked 25^th highest in the world for spending. This increase of nearly 20% was well above the world average of approximately 9%, the G7 average of 13%, and the average of the IMF Advanced Economies of nearly 11%. Canada also averaged a 2.2% drop in general government revenue in 2020 according to the IMF, not as severe as the average drops for either the IMF Advanced Economies or the G7.

The world saw its negative fiscal balance widen from 3.6% in 2019 to over 10% in 2020 before starting to decline to under 8% in 2021 and to just over 5% in 2022. According to the IMF, Canada initially saw a negative fiscal balance of about 11% in 2020 from a balance of close to zero in 2019. The fiscal balance for 2020 was later revised to 11.4%, with a revised forecast of 4.7% in 2021 and 2.1% in 2022.

Globally, from 2019 to 2021, the average gross debt-to-GDP ratio rose from 57% to 67%. All together 161 out of 196 countries—nearly 80%—saw an increase in their gross debt-to-GDP ratios from 2019 to 2021. Canada saw its gross debt-to-GDP ratio increase by nearly 25 percentage points from 2019 to 2021, the 15^th largest increase in the world. It is worth noting that, of the increased government debt accumulated in Canada during the pandemic, much was incurred by the federal government rather than the provincial governments.

Canada’s fiscal response was especially large and driven mostly by the federal response. In some respects, the ability of Canada to ramp up its fiscal response in time of need reflects its long-term prudent fiscal management and resulting low debt-to-GDP ratio achieved in the decades after the federal fiscal crisis of the 1990s. At the same time, the size of the deficit and fiscal response during the pandemic should not be allowed to become a long-term feature of the public finances given the recent rise in interest rates, especially as it limits the ability and fiscal flexibility for responses to future events.

The Rise and Fall of Ontario's Relative Income

 

As part of my work on Ontario’s fiscal history since Confederation, I have also been putting together long-term series on Ontario output and population.  Such information is useful given Ontario’s historic role as Canada’s largest economy and key industrial powerhouse.  Much of this data is now available at Finances of the Nation which has Ontario nominal GDP back to 1926 as well as population back to 1867 and CPI (for Canada back to 1867).

 

The larger issue is how to estimate GDP for Ontario prior to 1926.   However, given that Canadian GDP is available back to 1867, using Ontario’s average share of Canadian GDP from 1926 to 1950, one can apply that estimate (0.445) to Canada’s GDP from 1867 to 1925 (also available at FON) and obtain an estimate.  This is not that unreasonable an approach given that past studies have suggested that at the dawn of Confederation, Ontario’s per capita incomes were already nearly 60 percent above Nova Scotia and New Brunswick and 25 percent higher than Quebec.

 

In terms of Gross Value Added as estimated by Alan Green (Regional Inequality, Structural Change, and Economic Growth in Canada. 1890-1956, Econ. Dev & Cult. Change, 1969) in 1890 Ontario’s economy was 49 percent of the Canadian economy while by 1910 it was at 41 percent and by 1929 it was 39 percent which averages out to 43 percent.  So, the Alan Green numbers are used to estimate Ontario’s GDP for the 1867 to 1925 period using 49 percent to 1890 and 43 percent to 1925. It is important to note that these are estimates and far from perfect, but they nevertheless tell a long-term story.

 

Ontario’s per capita GDP is plotted alongside the rest of Canada’s (ROC) real per capita GDP in Figure 1.  In 1867, Ontario’s real per capita GDP in $2020 was $3,428 compared to $2,768 for the rest of Canada – a 24 percent difference.  By 2022, Ontario’s real per capita GDP has grown to $66,600 and the ROC’s to $67,258 – practically the same.  What happens in between is a period of per capita income divergence till approximately the eve of the Second World War and then a period of convergence – with a fair amount of fluctuation.  

 

 

 

Figure 2 plots the ratio of Ontario’s real per capita GDP to the ROC’s.  There is a brief period during the wheat boom Prairie settlement era from about the early 1890s to about 1902 when Ontario per capita incomes fall relative to the rest of Canada, but this coincides with both the recession of the early 1890s and the scaling down of the Green Adjustment factor from 0.49 to 0.43 and may be a statistical artifact.  The Ontario per capita income advantage generally rises during the leadup to World War I and continues to rise afterwards peaking in the 1930s.  It then falls as the rest of the country economically develops and grows and by the first decade of the 21^st century, Ontario real per capita GDP is pretty close to the average of the rest of the country.  On average, for the entire period 1867 to 2022, Ontario's real per capita GDP has been about 30 percent higher than the rest of Canada. The average since 2000 has only been 7 percent.

 

 

 

Ontario’s early economic advantage and dominance fueled by the economic protectionism of the national policies enabled it to grow its per capita income relative to the rest of the country.  With the economic development and diversification of the post-World War II period and the growth of western resource-based economies, the per capita income difference has fallen.  In many respects, this process of long-term convergence can be viewed as a long-term Canadian economic success story that has seen a muting of regional economic differences  There are of course still regional economic differences in terms of per capita incomes across Canada’s provinces and Ontario is still Canada’s largest economy and one of its wealthiest provinces, but it is not the cash cow you might think it is when it comes to per capita incomes at the moment. 

 

Population Growth and Property Taxes in Ontario’s Top 30

 

The last decade has been marked by rapid population growth in Ontario with total population rising from 12.852 million to 15.109 million - nearly 18 percent growth.  This growth has largely been in urban areas and some municipalities have grown substantially faster than others.  Figure 1 presents population growth rates from 2011 to 2022 for Ontario’s thirty largest municipalities.  These municipalities range from 2.928 million for Toronto to just under 100,000 for Niagara Falls and their population total in 2022 was 10.645 million people or about 70 percent of Ontario’s total population. Population growth rates ranged from a high of 69 percent for Milton followed by 34 percent for Brampton, and 32 percent for Waterloo.  At the bottom of the list were Mississauga, Thunder Bay, and Chatham-Kent.  Of these 30 communities, about half grew faster than Ontario as a whole while the remainder grew more slowly.  

 

 

 

Now the determinants of municipal population growth are complex but largely revolve around socio-economic incentives of one type or another including general economic opportunities and employment, access to locational amenities and services, the ability to provide housing via both availability and affordability and municipal taxation.  Taxation is an intriguing variable at the municipal level because on the one hand one would expect higher property tax levels all other things given to discourage population inflows and reduce population growth.  On the other hand, rapid economic growth and population growth expands municipal tax base and allows for lower rates on a broader base and hence lower average property taxes paid – residential, commercial, and industrial.  Needless to say, the resolution of the effect of property taxes on population growth is ultimately an empirical question and a fairly complicated estimation process that would need to account for this bi-directional effect.  

 

 

 

Nevertheless, it does not hurt to look at some charts.  Figure 2 presents the percentage change in average detached residential bungalow taxes (Source: BMA Municipal Reports and several municipal websites) for the period 2011 to 2022 for Ontario’s 30 largest municipalities ranked from highest to lowest.  The largest increase appears to be for Richmond Hill which saw average property taxes essentially double.  It should be noted that Richmond Hill was in the bottom third of these 30 Ontario municipalities when it came to population growth.  There is then a steep drop off going to 53 percent for Markham  and then a gentler downward slope ending with Windsor at 19 percent.  

 

 

 

 

 

In terms of the relationship between residential property taxes and population growth, there are two more figures.  Figure 3 looks at population growth from 2011 to 2022 as a function of the average bungalow taxes in place at the start of the period – taxes in 2011.  This does not control for anything else but does suggest a slightly negative relationship.  That is, places with higher property taxes in 2011 saw slower population growth in the decade afterwards.  Figure 4 looks at the relationship somewhat differently plotting population growth against the percentage change in average property taxes paid by a bungalow and here the relationship is slightly negative.  However, if you dropped the two obvious outliers in this chart (Richmond Hill and Milton), you get a more negative linear relationship between population growth (vertical axis) and property tax growth (horizontal axis) (see Figure 5).

 

 

 

So, the long and short.  Do higher property taxes affect population growth in a negative way?  Probably, but the relationship is only one of many factors that affect population growth.