Ontario Economic Decline is Real and Substantial

 This post originally appeared in the Fraser Institute Blog.

A spectre is stalking Ontario, and it’s the spectre of decline. For most of post-war Canadian economic history, Ontario has had a per-capita real GDP substantially above the Canadian average. At the same time, Ontario has had real per-capita GDP growth relatively close to the Canadian average.

This dominance was rooted in Ontario’s role as Canada’s industrial heartland that developed in the wake of Confederation. Ontario was indeed a beneficiary of Canada’s national economic development policies based on development of the Canadian prairie wheat economy, a tariff wall to protect domestic manufacturing and an east-west railway transport corridor. At the same time, Ontario’s economy was also marked by prosperity driven by market-based economic development best described in the words of economic historian Ian Drummond as “progress without planning.”

Ontario’s performance can be summarized in two charts using data from the Macro-data Base of Finances of the Nation. The first chart below plots real per-capita GDP separately for Ontario versus the rest of the country (Canada without Ontario) from 1990 to 2022.

 

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The second chart plots the average annual growth rate for Ontario, the rest of the country and all of Canada for the 1990 to 2022 period and the approximately 30-year period preceding it. The evidence suggests that during the 1990s, Ontario fell dramatically below the rest of the country in terms of its real per-capita GDP growth. In 2006, the rest of the country surpassed Ontario’s real per-capita GDP and remained higher for a decade before converging from about 2015 to the pandemic era. However, in the immediate post-pandemic era, Ontario has once again fallen behind the rest of the country.

 

 

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During the 30-year period prior to 1990, Ontario’s real GDP per-capita growth was quite close to the overall Canadian average and that of Canada without Ontario. What’s remarkable is what’s happened since.

Ontario’s average annual growth rate of real per-capita GDP fell from 2.6 per cent to 0.6 per cent. To be fair, a productivity decline has also marked the rest of the country. Indeed, Ontario and the rest of Canada appear locked as partners in a long-term productivity and growth decline, but Ontario’s performance is both dire and unique. The rest of Canada since 1990 saw its per-capita income growth rate cut in half. While hardly a sterling performance, compared to Ontario it was a veritable boom given that Ontario’s post-1990 average annual growth rate was barely one-quarter that of its 1960 to 1990 growth rate. One can argue that Ontario is dragging down the overall Canadian growth rate.

One can construct all kinds of palatable and soothing stories to explain why this has happened and why it’s not as unflattering as these statistics suggest. For example, one can argue that convergence of income is a good thing as it provides for a more economically balanced federation and is a logical outcome of economic development spreading across the country. At the same time, convergence could also mean that once per-capita incomes have equalized, growth rates should be similar, too, which is not the case here.

One could argue that Ontario was exceptionally hard hit by the economic adjustment its manufacturing base underwent during the 1990s in the wake of the 1998 Canada-U.S. Free Trade agreement and then NAFTA. Yet most of that adjustment was done in the 1990s and a breakdown of growth rates in the 1990 to 2022 period shows 1990 to 2000 had higher per-capita income growth than afterwards. One could also argue that the real per-capita slowdown is an illusion fuelled by rapid population growth. This of course ignores the reality that Ontario’s population has been growing about the same as the rest of the country and its share of total Canadian population today remains pretty much the same as 30 years ago.

Another potential argument is that the relatively better performance of the rest of the country is the result of natural resources with Alberta, Saskatchewan and Newfoundland and Labrador doing much of the heavy lifting. Yet this ignores that Ontario, and especially its north, is resource rich with abundant minerals and hydropower resources. Yet Ontario has been planning for more than two decades to access its Ring of Fire and little yet emerged. If the early 20th century could be characterized as “Progress without planning” then the early 21st may as well be “Planning without progress.”

Finally, one could argue it’s all just a rough patch for Ontario and that things are about to turn around. At the 1960 to 1990 growth rate, Ontario’s per-capita income would double in about 30 years. At the post-1990 average annual growth rate, the next doubling will take more than a century.

These are all ultimately unconvincing stories strung together to provide a comforting and bearable account as to why we shouldn’t worry and indeed shouldn’t do anything at all. Yet the first step to a solution is acknowledging a problem exists. Unfortunately, Ontario seems serene in the confidence it does not have to worry. Ontario needs to wake up and realize it has a problem.

 

Thoughts on Canada's Economic Future

I was invited to make a contribution on Canada's economy and its future by TheFutureEconomy.ca which is an online media outlet "that produces interviews, panels, and op-eds featuring leaders from industry, government, academia and more to define a strong vision for our future economy."  My piece on Canada's economic challenges in coming years was published January 8th and titled:"Childhood's End: Canada's 21st Century Challenges."It was a privilege to be asked to contribute to this site given the range of leaders from across Canada who have also contributed their thoughts.  There is also a nice promotional link with a bio and describing Lakehead University.  The piece starts below and you can link to the site for the remainder:

In the pandemic’s wake, Canada finds itself in a world changed yet again with forces afoot that threaten its standard of living as well as its security and way of life. After nearly 150 years of operating under the umbrellas of relatively benign global superpowers, Canada needs to prepare for a multipolar world with respect to trade and economic growth opportunities that are linked to its foreign policy and defence capabilities. In many respects, Canada’s long adolescence has come to a rude end, and it must now learn to make its way in the world in a more adult fashion. This awakening, however, comes at a time when its economic indicators suggest economic weakness. Canada came to be...

Thunder Bay's Economy: The Year Forward and Back

 

As 2023 winds down and 2024 arrives, a retrospective combined with a look ahead on the economy is a timely exercise.  The economic indicators to date for 2023 suggest that Thunder Bay has had a very good year.  Average monthly employment in 2023 to date is up about 3 percent over 2022 – representing nearly 2,000 new jobs.  However, while average monthly employment appears to have recovered from the pandemic, it has yet to permanently surpass the 2018 level.  However, on the plus side, the accompanying figure suggests that Thunder Bay’s employment does appear to be on a modest longer-term upward growth trend after years of being seemingly flat.  As well, the seasonally adjusted unemployment rate remains around 5 percent and the average for 2023 is lower than 2022 which suggests that the local labor market does not have a lot of slack in it.  

 

 

Along with employment opportunities being generated in large public sector construction projects in both the city and the region, there is also substantial activity in the local retail and tourism /hospitality sector with the opening of new retail and food service outlets as well as a very successful cruise ship season.  The port has also seen growing grain shipments as Thunder Bay resumes much if its traditional role in Canada's grain transport network.  On the housing front, while starts are not at historic highs, there nevertheless has been substantial activity particularly in the multi-residential unit sector.  Overall, Thunder Bay has seen healthy economic activity despite the recent rise in interest rates.  This is the result of continued activity in its traditional sectors of construction, forestry and port activity combined with activity on the mining front. As a result, population can be expected to grow albeit at rates still well below provincial and national growth rates.

Perhaps the biggest impact locally is the construction of Thunder Bay’s $1.2-billion provincial jail which until completion in 2025 will drive Thunder Bay’s labor market and economy even if the Canadian economy slows down in 2024. At the same time, the massive project has complicated the availability of local trades people with lengthy waiting lists for electricians, plumbers and carpentry services for smaller projects and home renovations assuming that you can even get trades people to agree to come.  However, completion of the jail project will likely see a ramping down of economic growth in the economy and in the absence of equally large new projects some alleviation of a relatively tight labor market particularly in building trades.

According to the Conference Board of Canada, housing starts in Thunder Bay are expected to grow but the numbers in their forecast seem unlikely to meet the 275 annual units required to meet provincial targets.  Nevertheless, Thunder Bay appears to be pressing forward with plans to apply for federal funding to build two thousand homes over the next three years - over 600 new units a year.  An average of 600 to 700 new homes a year is an amount that has not been seen in Thunder Bay since the baby boom years of the 1960s and 1970s.  Ultimately the success of such a grand scheme depends on local demand and this depends on what interest rates are like, what the state of the economy is and whether people have the incomes and purchasing power to pay for the housing.  Never mind if enough building trades people are available to actually do the work.

Going into 2024 and as noted in the most recent Conference Board Report, one can expect to see employment growth in construction, transport and warehousing, health care and social assistance, accommodation and food services and public administration.  Other sectors such as manufacturing, utilities, professional and scientific services, and educational services are expected to remain flat or even decline slightly.  Declines can particularly be expected in the areas of educational services given regional demographics and public funding levels, as well as the local FIRE sector (finance, insurance, real estate) given the rise in interest rates.  The post-secondary sector in Thunder Bay is also in uncertain territory given the dependence on volatile flows of international students and lack of clarity from the provincial government as to what directions in funding it may pursue in the wake of the Blue-Ribbon Panel Report. While the Blue-Ribbon Report called for increases in tuition and the provincial government grant to post-secondary institutions, the government’s response to date has been to continue to seek efficiencies which means the structural problems of university finances are unlikely to be resolved anytime soon.

Going forward there is also some economic uncertainty on several fronts.  It remains to be seen what the long-term outcome of the sale of Resolute Forest Products to Atlas Holdings will be on both local production and employment levels.  The future of the Alstom plant is also always precarious in the absence of a major transit project to generate longer-term employment.  As for the future of lithium refining in the region by companies such as Rock Tech Lithium, Toronto’s Avalon Advanced Materials and Green Technology Metals of Australia, there are positive expectations that these projects will finally trigger the long-awaited mining boom given the flurry of recent announcements and media stories. 

However, despite purchases of waterfront land, to date these are all plans, and the industry appears to be waiting for public money to assist their development.  It is unclear if any of these companies will be able to raise the necessary funds either publicly or privately to finance their activity in the face of international competition in the industry with other players with their infrastructure needs already in place.  As well, demand for fully electric vehicles – a key driver of the demand for lithium – has also been exhibiting weakness given the cost of the vehicles, their range, the availability of charging facilities and competition from alternatives such as hybrids as well as traditional gasoline powered vehicles.  As a result, the lithium refining industry in Thunder Bay and Canada while hopeful in its signs, may remain a work in progress for the foreseeable future.

Of course, in terms of what Thunder Bay can do to deal with all these changes and the economic uncertainty does not have a simple answer.  Thunder Bay, much like Canada as a whole, is a small economy unable to influence global economic and political trends beyond its borders.  Nevertheless, given the current buoyancy in the local economy, it is important to make hay while the sun shines.  Going forward, Thunder Bay must continue to make itself as attractive a jurisdiction for business investment as it can.  That means continuing to provide quality of life amenities, a range of useful and timely services for all demographic groups and a competitive local municipal service and tax environment.  Needless to say, at particularly at the municipal level, there will be a need to provide more while keeping the tax burden down – a tall order to fill at the best of times.

Ontario’s 2023 Fall Economic and Fiscal Statement: Some Thoughts

 

Finance Minister Bethlenfalvy released Ontario’s fall 2023 fiscal and economic update and a perusal of the numbers tells a number of stories.  First, the province is expecting the economy to slow down with consequent effects on its revenues though the current outlook for the current fiscal year 2023-24 shows tax revenues up just over 3 percent while 2024-25 and 2025-26 are currently projected at growth of 3.3 and 6.1 percent respectively.  Indeed, the period from 2022-23 to 2024-26 is expecting to see total revenues up 14 percent.  Over the same period total program spending is expected to rise  by 8.5 percent, debt interest by 22.6 percent and total expenditure will be up by 9.4 percent. 

 

Thus, revenues are projected to grow faster than expenditures but the gap between revenues and expenditures will persist until 2025-26 when a small surplus of 500 million dollars is forecast.  However, given spending that year includes a reserve of $2 billion set aside, it is likely the surplus that year will be much bigger. An economic slowdown notwithstanding, the province appears to want to keep a deficit on the books for as long as possible no doubt in part as a cautionary measure given economic uncertainty but also to quell demands for more public spending.  And as for economic uncertainty, employment is expected to grow each year until 2026 and the unemployment rate at its highest will reach 6.6 percent before declining to 5.8 percent by 2026. Hardly the recessions and downturns of yesteryear.

 

However, two items did catch my eye.  First, for 2023-24, the net public debt is expected to take a bit of a leap to $416 billion.  From 2018-19 to 2023-24, the net debt will have grown from $338 billion to $416 billion, an increase of 78 billion dollars or 23 percent.  However, deficits over that same period only sum to $42 billion.  In other words, an amount over and above the sum of accumulated deficits of $36 billion has been added to the net debt.  While this is of course likely the result of current government accounting practices that book capital and infrastructure expenditures separately from the operating expenditures, it is nevertheless a sizeable increase to see. 

 

More seriously, is the following.  If one takes past, current, and projected nominal GDP for Ontario, factors in inflation using the CPI as well as assumes population growth going forward at the medium Finance Ministry scenario of 250,000 people a year (about 1.7 percent), one gets a picture of real per capita GDP in Ontario that suggests that by 2025, real per capita GDP will be no higher than it was in 2017.  If one looks at the accompanying figure, despite ebbs and flows (with a particularly large ones circa the pandemic) as well as the early 1990s) real per capita GDP growth has been noticeably slower since about 2000.  The average annual growth rate in real per capita GDP from 1960 to 1999 averaged 2.1 percent while from 2000 to what is projected by 2025 the growth rate is 0.5 percent. 

 

 

 

You can blame some of this on population growing more quickly over the last few years, but the real culprit is that productivity growth in Ontario is lack lustre.  The long-term effects of productivity decline have begun to manifest themselves in our standard of living.  Real per capita GDP in 2022 in $2020 is $64,170.  If since 2000, real per capita GDP had grown at the average annual rate from 1960 to 1999, in 2022 it would be about $86,000 – that is a difference in output of nearly $22,000 per Ontarian.  It is not apparent that this stark difference has sunk in yet across political and policy circles in Ontario.  We have foregone a lot of output given our productivity decline and in the absence of a shift, that amount will only continue to grow.

 

 

Recent Employment Growth in Ontario: A Snapshot

 When it comes to employment growth, the Canadian and Ontario economies are still growing relatively robustly despite nearly a year of Bank rate increases that aim to cool off the economy and inflation.  The accompanying figure presents the percent change in total employment (monthly data, three-month moving average, not seasonally adjusted) across Ontario and its main economic regions over two recent time periods: May 2022 to May 2023 (over one year) and January 2023 to May 2023 (the last five months).  The results suggest overall robust growth but with some major differences across the province.

 

Year over year (May 2022 to May 2023), employment in Ontario as a whole has grown nearly 2 percent with the period from January 2023 to May 2023 growing at just below 1.5 percent.  Year over year growth was highest in Windsor-Sarnia (9 percent) followed by the Kitchener-Waterloo-Barrie area (7 percent), Muskoka-Kawartha (5 percent) and then the Northwest (4 percent).  Toronto and Ottawa also saw growth year over year at about 2 percent respectively.  The latter two account for most of the job creation in Ontario despite the lower growth rate because well over half of Ontario employment is in these two cities.  

What does stand out in these employment growth numbers is that some parts of Ontario are not doing as well as others.  Kingston-Pembroke, Hamilton-Niagara, London and Northeastern Ontario have seen employment decline both year-over-year and since January of this year.  While Windsor is up significantly year-over-year, it turns out that 2023 has seen much slower growth.  Stratford-Bruce is down year-over-year but there has been growth in 2023.  Then there is Northwestern Ontario which appears to be in the midst of a relatively strong employment surge.  

So, overall Ontario is still booming.  Over the period 2006 to 2023, average annual monthly employment growth has been approximately 1.2 percent so growth rates in the 1.5 to 2 percent range mean Ontario as a whole is still doing exceptionally well.  True, these growth rates are down from the immediate rebound of the post pandemic era but overall since May of 2022 Ontario has added 144,000 jobs which averages to about 12,000 jobs a month - well above historical performance.  On average, since 2006 Ontario has added about 7500 jobs a month.  As for the regions exhibiting slowdowns in employment creation, they are in many respects areas where longer-term economic and employment growth has consistently been a challenge with the exception of the Northwest which seems to be seeing a robust uptick rooted in forestry, mining and tourism as well as public sector construction.

So, with the first half of 2023 nearly done, it appears Ontario overall is in good shape.

Thunder Bay and Sudbury: A Tale of Two Economies

 

The Conference Board of Canada has issued its March 2023 Metropolitan outlooks for Thunder Bay and Greater Sudbury and the immediate news looks good for Thunder Bay.  As a result of the construction of a new provincial jail in Thunder Bay over the new two years, Thunder Bay is expected to see its real GDP grow 3.6 percent in 2023 making it number 1 out of 24 comparable CMAs for economic growth.  On the other hand, Sudbury at only 1.4 percent projected growth for 2023 is still doing well and expected to rank 12^th out of the same 24 CMAs.  Sudbury is doing well as a result of expected persistence of demand for nickel given the growth of the electric car industry. In terms of how Thunder Bay and Sudbury will fare in the longer term based on these economic drivers, the Conference Board projects that Sudbury will see some continued growth particularly in employment but Thunder Bay after the construction boom is expected to falter somewhat given the absence of a more robust long-term driver. 

 

Figures 1 and 2 plot both real GDP growth and employment growth for Thunder Bay, Sudbury and Ontario as presented by the Conference Board reports.  While 2023 sees Thunder Bay surpass both Ontario and Sudbury for growth, for the 2024 to 2027 period, Sudbury sees real GDP growth stay at about 1.5 percent while Thunder Bay falls to just over one-half of one percent.  Despite the anticipated slowdown in 2023, Ontario real GDP growth recovers to an average of over 2 percent for 2024-27. In terms of employment growth, Thunder Bay sees a surge to a 4 percent growth in jobs created for 2024 but eventually sees employment shrink moving into 2025 to 2027.  While Sudbury also is expected to see lower employment growth moving forward, it remains positive to 2027.

 

 

 

And finally, Figure 3 provides a retrospective on local investment spending for the two cities in terms of the value of building permits from 2014 to 2021.  Fluctuations notwithstanding, the long-term trend up to 2021 has been slightly positive for Sudbury, and slightly negative for Thunder Bay. Going forward, housing starts are an important component of building permits, and the provincial and federal budgets are expected to see some initiatives for boosting housing spending.  The Conference Board is forecasting that total housing starts in Thunder Bay will fall from 193 units in 2021 to 161 in 2023 but then start to increase reaching 237 by 2027.  Sudbury is expected to follow a similar pattern declining from 434 starts in 2021 to 269 by 2023 but then recovering to 301 by 2027.

 

 

 

Both communities have aging populations which in the absence of economic opportunities attracting large scale immigration means that investment, employment, and real GDP growth in the long term will lag the rest of the province. One potential game changer is of course in the area of mining for both communities given the global demand for critical minerals and the expected development of the Ring of Fire.  Tomorrow’s provincial budget may provide a glimpse of what might happen there in terms of infrastructure spending.

The Rise of the Polygon: The Evolution of Regional Concentration in Ontario

Last post, we looked at Ontario’s population and in particular its concentration in the GTA and what I termed the GTAPlus or "The Polygon" – a geographic area essentially going from Oshawa to the end of the Niagara peninsula and then to Kitchener-Waterloo and finally out to Barrie and back to Oshawa with Toronto approximately in the center.  Approximately two-thirds of Ontario’s population and by extension its economy are clustered in this small area whose perimeter is about 500 km and encompasses a total area of nearly 14,000 square kilometers and a land area of about 11,000 square kilometers.  On a map of Ontario, this area looks like a postage stamp and represents only about 1.3 percent of its area. Yet, well over nine million people out of Ontario’s 14 million people live here and it accounts for approximately 600 billion in GDP – nearly 70 percent of Ontario’s economy.

 

 

 

In many respects, this core area has always been the heart of Ontario’s economy but less so in the past in terms of its population, urban, and economic dominance.  There was a time when Ontario had somewhat more dispersed and balanced urban and economic development but the economic development of the last century has increasingly concentrated economic activity in The Polygon.  In order to provide some perspective on the evolution of Ontario’s population over time, we start with Figure 1 which plots the population of Ontario’s largest municipalities today ranked according to their 2021 population.  These differ from CMA populations – for example, while Hamilton is the third largest CMA in Ontario, its municipal boundaries and population make it the fifth largest municipality in Ontario after Toronto, Ottawa, Mississauga and Brampton.  Population size today versus 1921obscures the size of these cities 100 years ago so Figure 2 also plots the 1921 populations on their own.

 

 

 

 

 

Needless to say, the rankings have shifted somewhat over time.  London, Ontario was Ontario’s third largest municipality in 1921 while Hamilton was fourth, Windsor fifth and Thunder Bay (then the two Lakehead municipalities of Fort William and Port Arthur) would have been Ontario’s sixth largest city.  Ontario’s third and fourth largest cities today – Mississauga and Brampton were essentially small towns in 1921.  Indeed, much of the GTA outside of the City of Toronto today in 1921 was at the bottom of the municipal population rankings.  Indeed, when one considers these 30 largest municipalities (though Pickering and Ajax have been combined) – 23 of them can be considered members of the Polygon.  These municipalities alone account for nearly 9 million people in Ontario today, representing nearly two thirds of Ontario’s population.  However, in 1921, they totaled about 700,000 out of Ontario 2.9 million for approximately 25 percent of Ontario’s population.

 

Put another way, in 1921, nearly three quarters of Ontario’s population lived outside the Polygon whereas today it is at best one-third.  The increasing concentration of economic activity and population in The Polygon – Ontario’s geographic top 1 percent so to speak – reflects the decline of resource sector (agriculture included) and manufacturing industries that had dispersed population prior to the mid 20^th century.  The relative decline of cities such as Thunder Bay, Sudbury, London and Windsor – the North and Southwest regions of the province – reflects this economic shift. The growth of the Polygon cities reflects the rise of services and knowledge industries and the increasing importance of having large urban agglomerations with economies of scale and scope for associated industries and robust international connections to world cities as the source of growth.

 

Is this a problem?  Well it depends on your perspective I suppose.  The Polygon is a dynamic and growing population and economic cluster in Ontario and is essentially Ontario’s gateway to the international economy.  While small and compact, it has a very diverse population given it is the end point for most of the international immigration into Ontario.  By world standards, having 9 million plus people clustered on 11,000 square kilometers – over 800 persons per square kilometer – is not exactly at the top of the list.  The Polygon is still quite roomy by world standards.  For example, the Hong Kong SAR with an area of just over 1,000 square kilometers has about 7,000 people per square kilometer.  Nevertheless, for the Polygon region to proposer, it will need continuing investment in infrastructure not least of which will be housing.  It will also need investment in quality of life infrastructure such as green space and recreational facilities, not to mention transit.  Still, these challenges represent opportunities for creative solutions and innovation. The most important challenge is the institutional framework given the patchwork of municipalities and jurisdictions in this area.  Infrastructure development based on existing municipal boundaries is a sense fails to take into account the true scope of the Polygon as a growing and integrated region.

 

Some of those creative solutions will also need to address what happens to those living outside The Polygon.  Here the challenges are more diverse.  In the end, Ontario really consists of three regions - The Polygon, The Ottawa Nexus (Ottawa and the Kingston-Pembroke area) and then everyone else. Figure 3 outlines what this looks like in terms of distribution with the Polygon at closer to 10 million people here because Muskoka-Kawarthas are lumped into it for population purposes. The Ottawa region is the next largest outside of the Polygon but with its role as the federal capital and its own relatively compact outlying region, it will easily  find its own solutions to its growth and development issues.  More problematic will be those parts of Ontario outside of the Polygon and Ottawa Nexus, the Southwest from London to Windsor and upwards into the Bruce Peninsula and of course “The North” which with 90 percent of Ontario’s land area only has about 6 percent of the population.  The interests of a high growth densely populated region like the Polygon will differ from these slower growth and lower population density parts of Ontario.  

 

 

 

Needless to say, there will not be a one size fits all solution to economic growth and development in these regions but their success will ultimately all hinge on their ability to tap into opportunities offered by the Polygon and how to market the goods and service of their regions there and beyond.  There is strength in numbers and it is time for cities like Windsor and London in the Southwest, Thunder Bay and Sudbury, in the North and Peterborough and Kingston in the East to forge better relationships within their regions and with each other to promote their common interests outside.  These cities may have greater success by magnifying their lobbying power and political influence within Ontario by presenting a more  united front when it comes to economic development issues.  Easier said than done?  Yes, but when it comes to the economic future, there is no say, only do.

Northern Ontario: Economic Indicator Overview

 

This is a follow-up post to the post last week in the wake of  an economic overview of the challenges and opportunities facing northern Ontario’s economy presented at the Regional Meetings of the Economic Developers Council of Ontario in Thunder Bay.  As the year draws to a close and we enter 2023, along with the demographic indicators, it is worth presenting some of the highlights for the regional economy in terms of economic indicators.  This post, a quick overview of some of the key economic trends that have been emerging in northern Ontario over the last while and they provide a framework for viewing the future.

 

First, Figure 1 looks at the evolution of employment in northern Ontario since 2006 and presents it alongside the similar trend for Ontario as a whole (note the dual scale). Ontario as a whole has seen its employment grow from 6.53 million jobs in 2006 to 7.37 million jobs by 2021 – an increase of 13 percent.  Naturally, there have been bumps along the way – namely the 2008-09 Great Recession and of course the 2020 drop in employment as a result of the COVID-19 pandemic.  However, 2021 saw a recovery from the pandemic drop and as we close out 2022, Ontario has seen employment growth continue.  The north is a somewhat different story. Simply comparing the two end points of 2006 and 2021, total employment has declined about 5 percent in the Northeast and about 6 percent in the Northwest.  In the wake of the forest sector crisis of the early 2000s, there has been a permanent downsizing of employment in the region – that is, while there has been recovery and there is a stability in employment over the long term, not all of the jobs shed then have been recovered.  Moreover, in terms of the pandemic rebound, the northwest in 2021 rebounded better than did the Northeast as illustrated in Figure 2.

 

 

 

 

 

The last two decades have seen a period of unprecedented economic change in the north which has seen jobs both created and destroyed and also accompanied by a labor force and population that has been aging at a faster rate than the rest of the province.  Altogether, the economy has been stable and has shown signs of growth in several sectors.  Employment over the long term has been growing in agriculture, profession, scientific and technical services, education and health and social services. With respect to the two largest cities, employment has actually grown somewhat in Sudbury and Thunder Bay but has shrunk outside of these two centers for the overall slight decline in the region.  Moreover, as a result of the rapid aging of the population, the labor force has shrunk faster than employment resulting in unemployment rates as low or often lower than the provincial average.  

 

 

 

 

 

There is growth in total output in northern Ontario particularly in the major centers of Thunder Bay and Sudbury as illustrated in the two final figures.  Real GDP in 2022 will finally have reached pre-pandemic levels in both cities.  Post-pandemic recovery in terms of real GDP growth in 2021 was actually better in Thunder Bay relative to either Sudbury or Ontario as a whole.  For 2022, the year is expected to end out seeing growth in real GDP in Thunder Bay and Sudbury that pretty much matches Ontario as a whole.  The robustness of the mining sector and growing Indigenous economic development, along with opportunities in tourism, agriculture and health and education services appear to be the source of growth and are the drivers in addressing the twin challenges in 2023 of fostering both economic and population growth in the north.

The Economic Agenda for the Next City Council

 

By late Monday evening, we will have in place the Thunder Bay City Council for the next four years and they will need to grapple with an assortment of issues not least of which will be trying to promote the City’s economic development.  As was noted in a report released last week, Thunder Bay’s economy has rebounded from the pandemic but still faces strong headwinds.  As the accompanying figure shows, while the employment declines of the COVID-19 pandemic were the steepest in over a decade, the recovery appears to have settled us at employment totals that are pretty much close to the long-term trend of flat long-term performance.  

 

 

 

Indeed, Thunder Bay’s rebound in both employment and income has lagged that of the rest of the province.   Moreover, given that the economy as a whole is facing higher interest rates and the probability of a recession, the New Year may not be exceptionally buoyant.  Economic growth and expansion of the city’s tax base is crucial if Thunder Bay is to avoid large tax increases as it seeks to deal with an assortment of social issues - not least of which is policing - that may indeed prove costly to the city’s budget.

 

As a result, it is surprising that there was relatively little discussion of the economy in this election campaign but perhaps that is because the local economy is still rather flush with stimulus money from assorted government initiatives while the City of Thunder Bay enjoyed substantial government grant revenues and pandemic savings.  This will not last forever especially given that the economy may be moving into recession.   While much of what happens economically is due to external forces and beyond the direct purview of the City of Thunder Bay, there are steps City Council can take to prepare the city to take advantage of opportunity when it presents itself to help foster economic development and strengthen the local economy.

 

First, City Council needs to ensure the City of Thunder Bay develops a reputation for efficient and effective delivery of public services and infrastructure projects based on outcomes rather than  wishful thinking.  While a problem before the pandemic, at present projects are taking even longer to complete than necessary and are very disruptive to local businesses and residents.  For any businesses considering coming to Thunder Bay, nimbleness on the part of City projects and services is a positive feature.

 

Second, City Council will need to be more competitive on the tax front and that will require providing its existing basket of services with fewer employees in order to hold the line on taxes. This may indeed prove to be the most serious immediate challenge the new council faces given that inflation is high, and wage and cost pressures are immense.  Nevertheless, the temptation to simply pass these costs onto local business and residential ratepayers should be resisted.  As part of the process of becoming more competitive, City Council also needs to cut red tape and facilitate quicker approval for building and business projects.

 

Third, the social challenges facing Thunder Bay are an economic as well as a social issue given that they create an environment that does not put the City’s best face forward when trying to attract new economic activity.  City Council with the help of Federal, Provincial, and Indigenous governments needs to effectively tackle issues that are currently not conducive to attracting business to the City and these issues include poverty, homelessness, and crime.  Despite some of the rhetoric that has been going on in this election campaign, there is no easy solution to these problems, but the first step is to recognize that the problem requires a team effort by all levels of government.

 

Fourth, there are some bright spots in the City’s economy that go beyond the stabilization provided by a broader public sector that employs over 30 percent of workers in Thunder Bay mainly in health and education.  City economic development marketing strategies should focus on sectors with the most growth potential and these include tourism, mining, and transportation.  The recent success of cruise ship visits to the city while not a panacea is nevertheless an optimistic development.  Mining support and supply is also a source of future opportunities and with the trend towards "own-shoring" more economic activity domestically, our transportation sector – in particular the Port – stands to benefit from increased activity. As a start, this fall is expected to see a bumper crop of wheat on the Prairies and given the disruption in global grain markets, Thunder Bay’s Port should see increased activity. 

 

And finally, looking ahead towards the future, another looming economic iceberg is the potential for a new out migration wave which may not be the young but the senior population.  People in the 50 to 65 age range are currently thinking about where and when they will retire and looking forward many may indeed decide that Thunder Bay is not the place to live out their golden years.  There are many in this age range whose children have moved away to southern Ontario or further afield, and they thus face the choice of remaining here in retirement or relocating closer to children.  While much is made of the fact that housing costs a lot in other cities, it is likely going to become more affordable as prices decline over the next 6 to 12 months. 

 

Wealth and income rise with age and the loss of the purchasing power of people with substantial assets will not help the local economy.  Weighing in on decisions to stay or go are the need to downsize accommodation but there is a lack of affordable and quality apartment and condo housing in Thunder Bay.  Cheap and poor design is indeed an issue given Thunder Bay’s winter climate as there is a surprising lack of indoor parking in many existing condos in Thunder Bay.  Then, there are the types of services that become more important as one ages especially if you choose to remain in your own home and here there is relatively poor performance on things like municipal snow removal. 

 

Massive municipal windrows in your driveway after a storm aside, the oft-heard mantra that you can retire and stay in your home and get affordable services as you age is aspirational in Thunder Bay given that residential services take second place to government contracts and large business projects for many providers resulting in relatively high-cost services.  No one likes a small residential contract when there are bountiful government and institutional contracts available.  This has only grown worse in the post pandemic labour shortage/inflationary world – for example, the average quote for getting the exterior of your house painted has literally tripled over the last ten years.   This  is well above and beyond where inflation has been over the last decade even with the pandemic.

 

As expensive as some think life in other cities in the rest of Canada is compared to Thunder Bay, there is still a lot more competition elsewhere that keeps prices and quotes for services in check as well as a better stock of well-designed housing options for all demographic groups.  True, City Council cannot be expected to single-handedly address Thunder Bay’s business culture and less competitive monopoly environment.  After all, Thunder Bay has always been a sort of monopoly company town with large employers such as pulp mills or railways and their economic spinoffs serving as milch cows for local business - not to mention municipal taxes.  We are now a government town, but City Council can stop adding fuel to the fire by insisting on better value for money when it comes to the services it purchases. 

Thunder Bay's Economy: Rebound in 2022 With Future Stable

 

The July 2022 Major City Insights Report for Thunder Bay has been released by the Conference Board of Canada and it paints a picture of major and broad based economic rebound that is “firing on all cylinders”. According to the Conference Board:

 

·      Thunder Bay’s economy will rebound again in 2022 as forestry, tourism, and transportation boost economic activity to pre-pandemic levels. Real GDP growth of 3.9 per cent is forecast this year, down slightly from our forecast at the beginning of the year.

·      The economy’s recovery is expected to continue into 2023, but risks are plentiful, especially if the Bank of Canada is unable to contain inflation.

·      Thunder Bay is lagging the economic recovery province-wide, as real GDP in Ontario is already back to pre-pandemic levels. On the other hand, the city’s labour market has tightened markedly, even more than the province’s.

·      Continued economic recovery, a tight labour market, and the possibility of teleworking should help improve the city’s attractiveness to migrants. This could be an opportunity for the city, especially as the federal government ramps up international immigration targets over the next few years.

·      Real GDP is forecast to grow 1.0 per cent annually on average over 2023–26, while the city’s population will remain flat at around 125,000

 

While generally an upbeat report, it does note that Thunder Bay is nevertheless lagging the province wide economy, and this is expected to persist.  While Thunder Bay’s real GDP growth in 2022 is ranked fifth amongst 11 comparator CMAs (including places like London or Sudbury) for the 2023-26 period it is forecast to remain at number 11.  Total employment will recover to about 65,000 jobs (up from 61,000 in 2021) but will essentially remain around there until 2026.  Housing starts will also recover and return to their annual figure of circa 200 starts a year.  These are ceilings that has not been breached since the end of the forest sector crisis.  It should be noted that while the unemployment rate is very low, the shrinking of the labour force has been a factor in that.

 

Until the forest sector crisis of the early 2000s, Thunder Bay’s employment would essentially range from about 65,000 to 70,000 jobs.  Since then, there has been a permanent downsizing of employment in the city and has ranged from about 60,000 to 65,000.  Over the long term, there have not been sufficient long-term and sustained economic opportunities to boost growth above that.  And, with slow in migration and an aging population, the paradox of a growing labour shortage at a time when there has been an economic rebound has driven costs and prices of skilled trades and many renovations upwards. As well, it remains that much of the recent growth remains in broader public sector activities such as health and education – indeed educational employment surged in 2021 according to the Conference Board.

 

At the same time, the report points out opportunities in tourism, transportation and manufacturing, and resources and while high inflation and rising interest rates are eroding household purchasing power, some of the city’s industries should see increased profitability form high resource prices. As noted, transportation will benefit as airport and port activity improves. Potash shipments are booming, while a rebound in western agriculture production will help lift grain shipments through the port this summer.  Overall, transportation and warehousing output is forecast to grow by 15.8 per cent in 2022 as the sector continues to recover from the hit it took during the pandemic.

 

Indeed, one point acknowledged by the Conference Board Report is that there is significant “upside” risk to these projections – that is, they could turn out to be better than expected.  As they note: “A significant upside risk to the forecast is the plan to spend as much as $1.2 billion over the next four years to build a new Thunder Bay Correctional Complex. The project will be funded by the province as part of an effort to modernize the correctional system.”  Indeed, this project based on some expectations could generate an additional 700-800 construction jobs though given the current labour shortages in the city this will either drive up local costs even more crowding out other local activity or require out of town temporary workers.  As well, there is future highway construction for the Thunder Bay to Nipigon corridor and numerous local road projects that will generate activity. 

 

So, 2022 appears to be a positive year.  Things are rebounding quite well to the point that there are local labour shortages and rising costs.  Once the rebound bump is complete however it would appear that the local economy will stabilize at its recent historical levels of employment.  Even projects like highway corridor upgrades and the new correctional center construction represent short term bursts of employment growth rather than a permanent long-term increase.  Indeed, Thunder Bay’s economy continues to grow at below the rate of most other Ontario cities.  What impact the rise in interest rates will have on planned or scheduled construction projects is of course a major downside risk on activity going into 2023.  However, if inflation peaks this summer and subsides in the fall, one can expect interest rate increases to level off and a slow decline begin.

 

 

Employment Growth Snapshot: The Niagara Region

 

Ontario’s economy over the last decade has seen the GTA-Waterloo-Barrie triangle as the province's employment growth engine with the Ottawa region thrown in for good measure.  The rest of the province has seen more differential and often slower employment growth.  While many in northern Ontario might feel that all of southern Ontario is a cornucopia of economic growth it remains that even this  region is not homogeneous.  One interesting region a stone’s throw from the GTA is of course the Niagara region which can be subdivided into the Hamilton area at the head of the lake and St. Catharines-Niagara along the remainder of the Niagara peninsula.

 

Figures 1 and 2 show employment in these two sub regions of Niagara for the period 2006 to 2021.  After almost a decade of stability, Hamilton saw an employment boom after 2016 which saw about 30,000 jobs – an 8 percent increase – added literally overnight.  While there was a drop during the pandemic, the rebound has returned employment to almost where it was during the boom suggesting that this is a permanent expansion in its employment base.  Between 2006 and 2019, St. Catharines-Niagara added about 12,000 jobs – an expansion of 6 percent over a much longer term.  However, the pandemic rebound does not seem to have taken hold in the region and employment now is back where it was over a decade ago.

 

 

 

 

 

This differential performance between two sub-regions adjacent to the GTA is largely a function of Hamilton’s closer proximity to Toronto which is fueling a construction boom in residential development both detached and multi-unit.  The downtown area is seeing numerous high density condominium units and even the rest of the city particularly on the mountain fringe demarked by beyond Rymal Road is seeing residential development.  Of course the continued expansion of residential sub-divisions is causing concern as adjacent farmland is being taken out of service and urban sprawl proceeds.  This of course raises an interesting dilemma as on the one hand, housing has become extremely unaffordable in Hamilton over the last couple of years in part because of supply constraints in the face of increasing demand.

 

However, it is not just all residential construction.  There have been quite a few non-residential projects over the last few years including a new Amazon distribution center currently underway near the airport area, and expanding transport, retail and research facilities. The result is employment growth as Hamilton becomes increasingly integrated into the Mississauga Conurbation stretching from Oshawa-Whitby in the east to Hamilton with feelers stretching down to St. Catharines.  The launch of hourly GO-Train service into Hamilton this month is the final linchpin that will make the city a home to more Toronto based employees.  However, without an expansion in housing supply whether high density infill or new greenfield, housing prices will likely continue to rise.  This risks pricing local residents out of their own city - something that is already happening. 

The Long Saga of Arrested Development in Northern Ontario

 

Ontario has suffered from slowing economic growth over the course of the late 20^th and early 21st century but nowhere in the province has the problem been as severe as in northern Ontario.  From 1990 to 2005, total employment in Ontario grew 23 percent and real per capita GDP grew by 17 percent.  However, even omitting the pandemic year, going from 2005 to 2019, Ontario’s total employment grew only 15 percent while real per capita GDP grew by 8 percent.  There is a similar trend of slowing employment growth after 2005 on a regional basis but some regions - especially the north - have fared worse than others.

 

The most alarming picture comes from a glance at the overall employment growth picture from 1990 to 2019 (we need to omit 2020 because it is the pandemic year and makes things look even worse). As the accompanying figure shows, from 1990 to 2019, total employment in Ontario grew by 42 percent.  The fastest growing regions were Kitchener-Waterloo-Barrie, Toronto/GTA and Ottawa.  This triangle region has indeed become the new core of the Ontario economy with the rest of the province increasingly being relegated to more peripheral status with the peripheral nature worsening the farther out from this core.  In Ontario, being out of sight of Toronto in the end also means being out of mind.    Indeed, the most distant regions from this core – Stratford-Bruce, Windsor-Sarnia and the North have done the worse.  But it is only the North that has seen long-term employment decline over the course of thirty years with the Northeast shrinking by 1 percent and the Northwest by 7 percent.

 

 

 

 

Of course, the first response of most members of northern Ontario’s mover and shaker elite will be to rear up on their hind legs, shake a finger at government and bemoan their failure to promote northern economic development and argue we need a new program to address northern needs.  The fact is, it is not that there has been insufficient attention by government.  Indeed, the most significant growth industry of the last thirty years has been in government funded studies, reports and programs designed to kick start the northern Ontario economy and help engineer a new golden age of growth.   Here is a quick list of major initiatives at both the federal and provincial level that show the last 50 years has seen a plethora of plans, programs and policies.  Here they are:

 

Federal

 

1969-1987 Department of Regional Economic Expansion (DREE)

1987 to Present FEDNOR (1987 – present)

2018 to Present Prosperity and Growth Strategy for Northern Ontario

 

Provincial

 

1966 Regional Development Councils established (NWORDC & NORDC).

1970s Design for Development: Designation of “Primate Growth Centers.”

1970 Creation of Northern Affairs Branch within Department of Mines

1977 Ministry of Northern Affairs Created

1977-85 Royal Commission on the Northern Environment

1985: Ministry of Northern Development & Mines established

1985: Advisory Committee on Resource Dependent Communities: Rosehart Report

July 1986 Northern Ontario Relocation Program (1,600 public servants to North).

1987 Northern Ontario Heritage Fund

1999 Regional Development Teams

2002 Smart Growth Panels

2004 Northern Prosperity Plan

2005 Northern Development Councils & GO North Investor Program

2008 Northwestern Ontario Report: Rosehart as Facilitator

2010 Far North Act

2011: Northern Ontario Growth Plan – a “25-year plan” to strengthen Northern Economy

2011 to Present: Highway Four-Laning/Ring of Fire promotion/Northern Policy Institute

 

It is not that there have not been enough government attempts to save the north, it is that they have all been ultimately unsuccessful or at best a short-term holding action because they have not addressed the fundamental core economic problem of the region.  The three major engines of northern Ontario economic development are natural resources, transportation and indeed government.  During northern Ontario’s development, economic growth was most robust during eras where all three engines came together to provide the impetus for economic growth and employment creation. 

 

The most robust periods of economic growth and development occurred during the eras from 1867 to 1913 and 1946 to 1969.  Both of these eras coincided with good global economic conditions which fostered a demand for resource products and led to private capital investment flowing to production facilities and transportation networks.  Both of these eras also saw a large spending and policy role for government particularly in infrastructure which facilitated resource development.  However, the institutional environment of a region dependent on external decision making both in terms of public and private sector decisions  resulted in an inability of the region to retain maximum benefits from resource development. The fundamental problem is one of arrested economic development rooted in the long-term inability of the economy to diversify beyond the industries that powered its original takeoff because of the inability to substantially retain the economic linkages generated by those industries. 

 

Successful development and diversification via linkage retention requires retaining a greater share of the income through local entrepreneurs and government institutional policies to allow for local decision making in the development of the natural resource export base – the region’s comparative advantage.  Aside from wages to labour during the labour-intensive phases of development, the vast majority of the income flows from northern development went to external owners of investment capital in the railway, mining and transportation sectors who also made the investment decisions.  Absence of such flows reduces the opportunities that exercise and promote local entrepreneurial talent and development.  It is not that were no successful local entrepreneurs in forestry, mining and transportation.  It is just that there were not that many and they did not persist.

 

The failure of persistence of local entrepreneurial magnates was partly a function of being able to make more money elsewhere and partly the result of government policy at the federal and provincial level.  Government institutional decisions regarding taxation and natural resource policy were external as they were made at Queen’s Park or Ottawa.  Moreover, during the first 50 years of northern development, the private income flows out of the region were complemented by the resource rents going to Queen's Park from forestry and mining - that on average provided about 20 percent of provincial government revenues.  In northern Ontario’s case, it was bereft of its own institutional capacity for promoting linkage retention by being part of Ontario rather than a separate province such as Saskatchewan or New Brunswick. Government decisions were made more to promote provincial or national development strategies rather than the long-term economic success of the region.   In the end, the north was useful in driving economic opportunities for Ontario and Canada but ultimately expendable.

 

All those plans and programs?  They were not designed to actually really do anything that mattered.  They were short term political bones thrown to placate the locals and secure elections by providing evidence that government did indeed care.  And, in the short run they did create a few temporary jobs and allow some people to make money before moving on, while all the while professing how much they loved the north.  The long run implications are now evident.  Arrested regional economic development.