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.

What the Federal Economic Statement Did Not Highlight

 

Well, the Federal Fall Economic Statement for 2023 is out and soon to be relegated to the collections of fiscal and economic history.  There is a lot out there summarizing the economic and fiscal situation facing the federal government. Briefly, for 2023-24 it looks like revenues of $456 billion and expenditures of $489 billion for a deficit before actuarial losses of $32.5 billion and a deficit with actuarial losses of $40 billion.  Inflation this year will be about 3.8 percent and next year the outlook is for 2.5 percent while real GDP growth in 2023 is now forecast to end up at a lower 1.1 percent and for next year at a paltry 0.4 percent.  On the bright side, there are measures to create more housing, but they add up to perhaps 300,000 homes by 2031 which given the country apparently needs 3.5 million means the housing shortage is going to be around for some time to come. 

 

Two things the numbers on the fall statement do not highlight.  First, when one factors in population growth going forward at about 2.5 percent annually and the government's inflation and GDP growth forecasts, real per capita GDP is going to continue declining over the next five years.  As Figure 1 shows, by 2028, inflation adjusted output per person by 2028 will be lower than it was in 2014.  Given the anemic business investment in Canada and the resulting weak productivity performance of the Canadian economy and its inability to grow faster than population, falling real GDP per person means a declining standard of living.  We are looking at essentially a lost decade or more if nothing happens to ramp up growth.

 

 

 

Second, a fiscal anchor or guardrail set as a deficit to GDP ratio of 1 percent means that there will be perpetual deficits for years to come of at least 30 billion dollars.  Put more starkly as Figure 2 illustrates, federal revenues and expenditures will continue to grow in tandem like ships traveling alongside in the night but never actually meeting.  This will result by 2028 in a net federal debt of almost $1.5 trillion and debt service costs of about $60 billion annually which as a share of federal revenue will account for about 10 percent of revenue.

 

 

 

Needless to say, it is not surprising that these types of projections are not front and centre from the perspective of a government facing slowing growth and rising spending.

Solving the Homelessness and Housing Crisis

 

As rents soar in Canada and encampments spring up in cities across the country, it is evident that the country faces a housing crisis which to date seems intractable.  Even the recent slowdown in home prices does little to improve the situation given that average housing prices in Canada remain just shy of $700,000 with prices varying across the provinces. Average housing prices in Greater Vancouver are just shy of $1.2 million while Greater Toronto is slightly less at $1.1 million.  And while at an average of $322,000, Thunder Bay seems more affordable compared to Toronto and Vancouver all of these averages mask the variation in prices around the average that realistically means something half decent that you may actually like is always substantially above the average. 

 

However, the housing and homelessness crisis and what has been termed the housing shortage is not really just about the price of an average house.  There are a number of issues here.  First, there is actually not a “shortage” of houses and apartments per se as a glance at any real estate listing in cities shows that there are always houses for sale or apartments for rent.  However, the price or rents of those housing units are well above what individuals are either able or willing to pay especially given the recent rise in interest rates which has increased the cost of home ownership in particular. One could term this a crisis in affordable housing rather than a shortage of housing. Second, there is the issue of homelessness which has manifested itself with rising numbers of people in cities across the country living in tents and encampments.

 

Solving these issues requires a two-prong solution.  First, dealing with affordable housing.  The sudden drive to expand the supply of housing to make it affordable is certainly a potential long-run solution. However, in the end building more $1,000,000 homes in suburbs, which developers like to do because they can make a lot of money, really does not solve that problem. Moreover a $1,000,000 new build home program does not solve the housing affordability problem unless it is done so incompetently by the private sector that they create a glut that drives prices down which seems unlikely.  Developers across the country over the years have learned that you just do not build a couple of hundred homes in a subdivision and then sell them – you build on spec with a large deposit.  Basically, every new home built already has someone lined up for it.

 

The solution to the affordable housing is the building of either rent-geared-to-income housing or the building of standardized-government subsidized housing units (much like the Wartime Homes Program) whose design, construction and sale is also geared to income.  One example of this is the standardized house designs being put forth by the government of British Columbia which could serve as a template for other provinces. This will enable homes to be built more quickly but it could also serve as a model for lower cost housing designs. As for rent -geared-to-income, all new apartment builds should have portions of the building ranging from 10 to 20 percent of rent geared to low and middle incomes with government social housing subsidies providing the incentive to builders. This is preferable to simple erecting mega projects of low-income apartments in neighborhoods that essentially creates clusters of low-income individuals.

 

In a sense, the Ontario government’s current approach to increasing housing supply by providing incentives and powers to municipalities to simply expand housing stock does not follow either of the above approaches.  Take the case of Thunder Bay where the target is to build over 2000 homes by 2031 according to the provincial target but given that the target has been exceeded in 2023 it is now seeking to build (with federal funding of course) 2000 homes over the next three years.  The optics tout this as a success story and the start of a housing boom fueled by mining but the 167 units for 2023 (which exceed the target of 161) is largely driven by projects already planned or underway and 60 of the units (plus another 60 which have started) are apartments being marketed as “luxury” apartments.  It means the rents for the smallest units will easily be over $2000 a month.  This will not be ‘affordable” housing given the cost-of-living crisis that has gripped the nation and its media.  Moreover, the target going forward is ambitious given the past track record of housing starts in Thunder Bay to date which given the cities rate of population growth to date has been modest. 

 

The other housing crisis – homelessness. -will not be solved by new suburban housing developments, neighborhood infill, or luxury apartments.    It is an entirely different problem all together.  The solution here is best modeled on what has been done in Finland where a non-governmental organization (NGO) called No Fixed Abode founded in 1986 reduced the number of homeless in Finland from 20,000 to about 3500 at present. Note that Finland’s population is 5.5 million and there are currently 3500 homeless people estimated.  In Canada, just Hamilton Ontario with a population of 579,000 has an estimated 1,500 homeless.  As well, since 2008 Finland has also embraced another program called Housing First which creates flats in social housing complexes that along with serving as places to live also provide a fixed address for those requiring access to government services and supports.

 

Now, Finland is not Canada and simply grafting another country’s solution to solve your problem can generate all kinds of problems. However, there is something here that needs to be explored.  Some of all the money that is going to be thrown at simply increasing housing stock irrespective of whether or not people can afford it needs to be directed to what I would term Transitional Emergency Housing.  People living on minimum wage or are evicted from apartments and have no place to live need some place to get back on their feet.  Boarding houses with rooms to let used to be a place where people of limited means often ended up til they got back on their feet, but no such places really exist anymore. People who are homeless need to be housed and housed without questions being asked.  Creating a complex or dispersed network of complexes of transitional emergency housing with very small personal units combined with social support such as a community kitchen, social workers and even a nurse practitioner and mental health workers and basic security on site would be one way of dealing with the homelessness crisis. 

 

 

 

Where to locate such complexes?  They need to be built on a scale that reflects their local neighborhood and are close to where many homeless choose to locate because of amenities – often downtown cores.  Most municipalities own land in their downtown cores that could be used for such a purpose. They will not be cheap to operate but realistically what else is the solution?  Simply leaving the problem to grow does not solve the problem.  Throwing money on market rent apartments and suburban subdivisions does not solve homelessness, never mind, really create affordable housing. Using resources in a wise and targeted way is the solution to both housing affordability as well as homelessness. True, perhaps these are the ravings of simple economist who does not fully grasp the complexity or enormity of the problem.  On the other hand, perhaps not.

House Prices Are Coming Down

 

The latest house price figures have been released by the Teranet-National Bank House Price Index for major Canadian metropolitan centres in Alberta, British Columbia, New Brunswick, Manitoba, Nova Scotia, Ontario, and Quebec. According to Teranet:

 

After adjusting for seasonal effects, the Teranet-National Bank Composite House Price Index™, which covers the country’s eleven largest CMAs, declined by 0.4% from September to October, the first decrease following five consecutive monthly increases. In October, four of the 11 CMAs included in the index experienced decreases: Toronto (-1.6%), Edmonton (-1.2%), Vancouver (-1.1%) and Ottawa-Gatineau (-1.1%). Conversely, notable increases were recorded in Montreal (+3.7%), Halifax (+1.1%) and Winnipeg (+1.0%). On the other hand, decreases were observed in 11 of the 20 CMAs not included in the composite index for which data are available in October. The biggest monthly decreases were seen in Saint John (-5.3%), Trois-Rivières (-3.3%) and London (-2.5%). Conversely, the biggest increases were in Moncton (+4.6% after a 2.3% drop the previous month), Kingston (+3.8%) and Peterborough (+2.6%).

The month over month figures for October show decline in most centres but the more interesting numbers are the declines from the peak price.  Peak price for most of these cities occurred in Spring of 2022 though Calgary and Saint John appear to have seen peaks in 2023. The accompanying figure shows that no one has seen a price increase since the peak though Sherebrooke, Quebec City, Moncton, Lethbridge, and Calgary appear to be perfectly flat since their peak.   

 

As for the remaining cities, the percent change since peak price range from -2.7 percent for Montreal to -18.6 percent for Brantford.  Thunder Bay is in the company of cities with relatively small declines coming in at -3.6 percent while Sudbury is a bit more coming in at -9 percent.  

Tracking Thunder Bay’s Economy: Another View

 

As 2022 begins to wind up, it is worth taking a look at how Thunder Bay’s economy is doing using less traditional indicators to shed light not only on its economic performance but the perennial question of whether its population is growing or not.  One way of looking at Thunder Bay’s economy and making some comparisons to other centers is the use of Tax Filer data available from Statistics Canada. The number of T1 Tax Filers can be used as a correlate of not only population numbers but also incomes and economic activity.   

 

Figure 1 plots the number of tax filers by year from 2000 to 2001 in the Thunder Bay CMA with a linear trend.  There has definitely been some growth in the number of tax filers over the last few decades. From 88,240 T1s filed in 2000 to 92,660 in 2021, Thunder Bay has seen a 5 percent increase in the total number of tax filers between those two years though numbers do fluctuate from year to year.  Thunder Bay’s CMA population in the 2001 Census was 121,986 and its CMA population in the 2021 Census was 123,258 – an increase of 1 percent.  One would expect the number of tax filers reporting income is somewhat a more robust count than the number of people filling out the census at least in terms of compliance. 

 

 

 

If the 5 percent growth Tax Filer growth rate was applied to Thunder Bay’s population in 2001, then in 2021 one would have a CMA population of 128,085.  So, in response to the question of whether or not there are more people living in Thunder Bay than the official census count states, the answer it is perhaps so.  Even so, it is not the tens of thousands of people that seems to have seized the imagination of local politicians lobbying for more resources.  At least that is assuming that these tens of thousands of additional people have employment and are reporting an income.  Of course, if they are not working and therefore not reporting an income or are working and not reporting an income, well those are entirely different matters that should definitely concern the federal and provincial governments.

 

 

 

Delving deeper into the numbers, Figure 2 plots the average annual growth rate of the number of T1 Tax filers over the period 2001 to 2021 for Thunder Bay, as well as Toronto, Hamilton, Greater Sudbury, and Ontario as a whole.  It appears that Thunder Bay’s average annual tax filer growth rate is well below that for Ontario and Toronto but also Hamilton and Greater Sudbury.   Thus, another indicator that while we are growing, we are not growing as quickly as other population centres. 

 

 

 

Finally, Figure 3 plots average annual T1 Tax Filer Income and it illustrates that while average income has grown, Thunder Bay is below Ontario and also below the other three comparison cities in the chart.  As of 2021, average tax filer income in Thunder Bay is $53,289 compared to $56,691 in Greater Sudbury, $57,936 in Hamilton and $59,410 in Toronto with the average for Ontario at $56,893. Given that average rents and cost of living in Thunder Bay have grown to levels not incomparable to southern Ontario cities, this would suggest that many in Thunder Bay are currently quite stretched when it comes to their finances.

 

So, there you have yet another set of performance indicators on Thunder Bay’s economy.