NORTHERN ECONOMIST 2.0

Wednesday, 21 June 2023

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.

Saturday, 17 June 2023

Building 21st Century Thunder Bay

Monday evening promises to be another long haul at Thunder Bay City Council given the conjunction of issues that will be arriving. In many respects, the issues of revamping the library system and redeveloping Victoria Avenue will help define the city for the remainder of the 21^st century. A common theme to all these issues is downtown development, always a complicated issue in a city which now has three downtowns as well as several smaller neighborhood cores. And to further spice things up, Thunder Bay has been left off the list of Ontario cities with strong mayor powers. However, this is not a slight given that Thunder Bay has company in southern Ontario with other big city places like Newmarket and Chatham-Kent which have been left off because they also have not yet submitted a housing pledge to the provincial government. The strong mayor powers are generally designed to help fast track housing development.

However, the issues of downtown development and housing can be linked and the current issues facing Thunder Bay City Council with respect to a new library master plan, the demolition of Victoriaville and housing development could be linked facilitating a case for the allocation of strong mayor powers to Thunder Bay – assuming that is a direction we want to go. Given the often insular and informal backroom nature of decision making in Thunder Bay, it is not surprising that informal polling suggests that the majority of people in Thunder Bay are not overwhelming keen on having the mayor’s office gain additional powers.

The issues in summary are as follows. First, a $17.5-million preferred design for the demolition of the Victoriaville Mall, reconstruction of Victoria Avenue, and addition of new public spaces will be considered by City Council as part of yet another plan to revitalize the city’s south core. The demise of the core has been ascribed to the decision to close up the traditional main thoroughfare – Victoria Avenue – with the building of the mall in the early 1980s. This was done as part of another plan to revitalize the core in a manner akin to downtown north (Port Arthur) which had a new mall built there known as Keskus. Keskus is now gone and the north core the home of a casino, new restaurants, a waterfront park and hotel, cruise ship dock and condo development, and is now considered the entertainment district. The hope is now that opening up the south core to traffic will also spur revitalization. The estimated cost is $17.5 million but realistically we can probably multiply that by two by the time everything is done given the history of public sector projects in Thunder Bay.

Second is the new master plan set of proposals for the future of the Thunder Bay library system. The current system has four branches with two on the north side and two on the south side reflecting the traditional distribution of neighborhoods and population. However, over time the two downtowns – where the two largest branches are - have seen fewer residents and the gist of the library system renewal plans are a new central location in the intercity area. Three scenarios have been proposed: Plan 1) Retention of M.J.L. Black and County Park, retention of the two downtown locations (albeit downsized) and a new central branch located in the former Lowe’s store at Intercity Shopping Center. Naturally, this is modified status quo plus one making it politically the most palatable as well as the most expensive at $9.1 million. (However, see earlier caveat about public sector projects costs in Thunder Bay).

Plan 2) A central branch again at the former Lowe’s store with retention of County Park, Waverly, and M.J.L. Black with the closure of Brodie. Cost of this option, $8.3 million. What is interesting here is the juxtaposition of revitalizing the south core by opening up Victoria Avenue while removing a key amenity such as a major public library. Given that many homeless people have been using both the enclosed Victoriaville center as well as the Brodie library as supports, their joint removal would create a new set of issues for Thunder Bay. In addition, the Brodie Branch does have some historic significance as both a landmark and a Carnegie Library and naturally there would need to be a plan to deal with that aspect. On the other hand, there would still be four branches and politically this might sell depending on how many friends the Brodie location has.

Plan 3) A central branch located at the former Lowe's at Intercity Mall. There would be two neighborhood locations at Waverley and MJL Black. Brodie and County Park locations would close. Cost would be $7.7 million. In strict cost terms, this makes the most sense but the issues with respect to Brodie raised under plan 2 holds and to that would be added neighborhood interests for the County Park branch. In the end, this option would generate the most opposition though going to a more stream-lined system of only three branches might be seen by some as an advantage.

What is common in all three of these plans is of course a new central location that is not a new build but a repurposing of existing mall space. This has pluses and minuses. The biggest minus is that no one really lives in the intercity area and in a car dependent city like Thunder Bay, despite the official ceremonial attachment to environmental causes and bike lanes, it means yet another reason to drive to the area. This is an area which incidentally still has freight trains merrily winding their way thru at the most inopportune times. The biggest plus is also that it makes use of existing mall space and transforming underused mall space into other uses is a good thing.

It would be more helpful if along with putting amenities in intercity, there was more of a plan to put density housing there too. In the end revitalization of core areas helps to have people living in and around them because downtowns traditionally have a lot of amenities within walking distance. In the case of the former core areas of Port Arthur and Fort William, many of those amenities have over the years migrated to the inter-city area. The inter-city area has become the de-facto main downtown of Thunder Bay and yet there has been no follow through to also put in more apartment or condo buildings. Intercity mall is a case in point, with its retail and a new library, a residential development at its north end would create much needed housing and help create the urban density that Thunder Bay claims is one of its goals. Indeed, density housing projects – six to eight story apartment and condo buildings – in both former downtown cores as well the intercity area – would be a way of Thunder Bay helping meet provincial government housing targets. This could indeed be the type of plan that would allow the provincial government to grant the city strong mayor powers, but it requires a vision and to date there is no vision.

While Thunder Bay has not been growing robustly in terms of population, it appears that there is a demand for housing given the recent move to increase density in existing residential neighborhoods via basement apartments and mother-in-law suites, while paradoxically also expanding standard suburban residential developments. One suspects if well-designed quality and affordable apartment and condo housing was more available in any of Thunder Bay’s three “downtowns” one suspects there would be a definite demand for it. Again, building it requires a vision as well as the will and the ability to implement the vision. It also requires a more favorable municipal tax rate for multi-unit residential. To date, all this has been lacking and we are left with incremental changes that do not always work together to build integrated and thoughtful end results.

Friday, 16 June 2023

Recession? What Recession?

With the Bank of Canada’s recent rate hike and the expectation that there may be another hike in July, the talk of an economic slowdown and a recession has ramped up. There is talk and rumor of looming recession and that has been underway for some time. At the same time, another view is that we risk moving into a 1970s style economic environment if inflation is not soon brought to heel. Given the lag between tighter monetary policy and the economic slowdown that would bring inflation down, it is possible that any downturn is still up ahead. At the same time, the evidence to date suggests the economy is not yet slowing down. Despite higher interest rates, demand is still being fueled by pent up consumer revenge spending, robust population growth – more people means more consumption spending - and residual post-pandemic savings.

Figures 1 to 3 show that key economic indicators after post-pandemic re-bound and adjustment remain robust. Figure 1 presents the Canadian City CPI total inflation rate (from FRED) and while it has been coming down it is still over five percent and high by the standards of recent history. Figure 2 shows quarterly real GDP growth and while recent growth at about 2 percent is down substantially from the pandemic rebound, it is akin to pre-pandemic growth. There have been no two consecutive quarters of negative real GDP growth – a traditional hallmark of a recession. And while 2 percent growth is not great, that is more a long-term productivity growth problem than anything to do with rising interest rates and recessions. And then there is Figure 3 which shows we are currently at the lowest unemployment rate in over a decade – again more a sign of an overheating economy rather than a harbinger of recession.

So, it would appear that until there is evidence to the contrary, at least another interest rate increase by the Bank of Canada is in the offing. The economy is still growing, labor markets are tight, and inflation remains high by historical standards. The current level of interest rates seems to be compatible with ongoing inflation in the 4 to 5 percent range and is unlikely to bring us to the target 1 to 3 percent range of days of yore. Keeping inflation at the 4 to 5 percent range is dangerous given that any demand or supply side shock when inflation is already in the 4 to 5 percent range could bring us to double digit inflation – a 1970s style scenario.

Friday, 9 June 2023

Interest and Debt

Wednesday's Bank of Canada rate increase reminds us once again that the era of cheap money is over not just for consumers and business but also governments. One of the notable features of the pandemic response in Canada was the enormous amount of federal fiscal stimulus injected into the economy. Federal spending rose from $363 billion in fiscal 2019-20 to reach $639 billion in 2020-21 – an increase of 73 percent. It then began to subside going down to $480 billion as reported in Budget 2023 but is set to resume an upward trend and reach $556 billion by 2027-28. As of the 2022-23 fiscal year, federal spending is 37 percent higher than going into the pandemic meaning an average annual increase in spending of about 12 percent. This has been funded by deficits which in turn have increased the federal net debt dramatically going from $813 billion in 2019-20 to $1.3 trillion by 2022-23 and is expected to reach just over $1.4 trillion by 2027-28.

The long-term implications of this spending and debt surge are of course debt service costs. As a result of recent interest rate increases, they are about to become in nominal terms the largest, they have ever been. Using data from the federal Fiscal Reference Tables and Budget 2023, Figure 1 plots both the total annual amount of federal debt charges paid as well as the annual percent increase for the period 2000 to 2022 and then as forecast until 2028. What is evident at a glance is that until 2021, annual debt charges had been on a downward trend falling from nearly $44 billion in 2011 to $20.4 billion in 2021. Since then, they have soared growing 20 percent in 2022 and forecast at 41 percent and 27 percent growth in 2023 and 2024 respectively before subsiding. Indeed, by 2028, annual debt service costs are anticipated under the current forecast to reach over $50 billion which surpasses even the peaks reached in the 1990s.

Now of course, as a share of total federal government spending, these debt charges may seem less alarming as at less than ten percent of total expenditure, they are modest relative to peaks of nearly 30 percent or more in the 1990s and 1930s. However, it should be noted that the share of total federal government spending going to debt service more than doubled between 2021 and 2023 rising from 3.2 to 7.2 percent and is expected to keep rising to just over 9 percent by 2028. Nothing to worry about you might think? However, it all depends on what happens to interest rates. The fact remains that not surprisingly there is a strong correlation between the growth rate of federal debt charges and the effective interest rate on the net federal debt.

Figure 2 plots the annual percent change in federal debt charges against the effective interest rate on the net debt since 1867 (calculated as debt charges divided by net debt) using data from A Federal Fiscal History, the federal Fiscal Reference Tables and Budget 2023. With a linear trend fitted, there is a definite positive correlation that has a bigger impact than you might think. On average, a one percentage point increase in the rate of interest is associated with a nearly two percent increase in debt charges. Given such sensitivity, it is not a surprise that debt charges have doubled since 2021. And the current situation is anything but average given the enormous stock of nominal debt meaning that even with the staggering of long-term government bond debt issue, small interest rate increases can have large increases in government debt interest costs. Moreover, with the anemic real GDP growth forecasts and an increase in interest rates, the long-term sustainability of the federal fiscal position becomes more of an issue. We are in for interesting times.

Thursday, 1 June 2023

Ontario's Net Debt: A Long Term Overview

With all the focus on the US debt ceiling political debate, it is sometimes easy to lose focus on our own debt situation at both the federal and provincial levels. Taking a long-term view on Ontario’s net public debt of course requires data and as part of my ongoing efforts on putting together Ontario’s fiscal history, I have been able to get Ontario’s provincial government net public debt back to 1914. The data comes from two sources. First, there are the more recent numbers going from 1966 to the present which are obtainable from Finances of the Nation and the Ontario Financing Authority. As for the pre-1966 numbers, there are a number of provincial budgets from the early and mid-1960s which among other things contain a lot of historical data on revenues, expenditures, deficits and debt.

Ontario from 1867 and into the early 20^th century generally ran surpluses largely due to the bountiful natural resource revenues from forestry and mining rents and royalties. The acquisition of large amounts of capital debt appear to coincide with northern Ontario infrastructure development of the early 20^th century – in particular the advent of the Temiskaming and Northern Ontario railroad circa 1902. Further expansions of debt occur during and after World War I with the advent of the motor care and provincial highways as well as the expansion of the hydroelectric grid. And of course, there is the Great Depression which played havoc with public finances. Ontario’s net debt numbers begin in 1914 (See figure 1) at just over 6 million dollars and by1945 had reached 480 million dollars. Between 1945 and 1960, Ontario’s net debt grows to 994 million and in 1961 Ontario’s net debt tops one billion dollars. By 1980, Ontario’s net debt had reached nearly 11 billion dollars and grew to just over 35 billion by 1990. It is the period since 1990 that sees an even more rapid expansion of nominal net debt growing to 134 billion dollars by 2000, 194 billion dollars in 2010 and then about 380 billion dollars by 2022. Over 90 percent of Ontario’s net public debt has been acquired since 1990.

Of course, nominal numbers alone are not sufficient as it is the size of the debt relative to the economy - the net debt to GDP ratio – that matters more. Figure 2 illustrates this quite nicely. The Great Depression era sees a first peak of the Ontario net debt to GDP ratio in the 15 to 20 percent range. It then falls and levels off at about 5 percent going into the 1970s. After that it begins an overall rise with particularly steep jumps during periods of recession – in particular, the early 1990s, and the era of the Great Recession/Financial Crisis 2007 to 2010. As a result of fairly generous federal transfer support, the pandemic did not see as large a spike in Ontario’s net debt to GDP ratio as these other two periods.

In the end, while the size of the provincial debt in nominal terms seems to shake a lot of people, it is debt relative to the size of the economy that should generate greater concern. The Great Depression Era aside, Ontario generally had a net debt to GDP ratio at about five percent up
until the 1970s. The period since the 1970s represents a period where the ratio has generally trended upwards. If one defines fiscal sustainability as a stable or declining net debt to GDP ratio, then the period before 1970 can be seen as one where Ontario’s revenue and expenditure structure was generally fiscally sustainable. One cannot say the same with respect to the period since 1970. And yet, it would appear that despite occasional fits of rhetoric, Ontario has not been stirred to action when it comes to its net debt.