Feature article
YEAR-END REVIEW
by P. Cross*
Introduction
The year 2002 was a stellar one for the Canadian economy, with
GDP expanding 3.4% in volume and jobs growing by 2.2%. The advance
is even more remarkable in comparison with the other G7 nations,
which averaged just 1% growth in output. While the US rebounded
from virtually no change in 2001 to post 2.4% growth last year,
this was a far cry from the preceding five straight years of about
4% annual growth. Meanwhile, the first year of a common currency
in the euro-zone saw growth slow further to less than 1%, pulled
down by lingering weakness in Germany and France. Japan continued
to lag behind with only 0.3% growth in volume: after allowing for
its continued deflation, this left current dollar GDP shrinking
for the second year in a row.
Canada’s superior economic performance is not a recent
phenomenon. Since 1995, no major OECD country has exceeded Canada’s
cumulative growth of 28% in quarterly GDP1, with the US at 26%,
the UK at 20% and the euro-zone and Japan far behind at 16% and
8%. While Canada’s ability to shrug off the woes of our major
trading partner and continue to grow surprised forecasters repeatedly
last year, our growth rate has actually surpassed the American
for four straight years. In fact, last year’s 1.0 percentage
point gap in growth rates was no more remarkable than the 1.3 point
differential in 1999 and the 1.2 points in 2001 (there was a 0.7
point gap in 2000) 2. The contrast is even greater in per capita
terms overall (5 points since 1997), reflecting faster population
growth in the US.
Every business cycle, like every year, has its unique characteristics.
During the recent downturn in the US, for example, productivity
posted its best performance ever during a recession. In Canada,
the economy continued to grow despite slumping business investment,
which normally triggers a steep downturn. Still, many recent developments
can be understood only in the context of the driving force of the
recent cycle–the boom and bust of the stock market–so
we begin this year’s review with an overview of recent developments
in global financial markets. But these cyclical events are overlaid
against longer-term trends in our society, notably an aging population
and the increasing education of women, and these events are discussed
in more detail in the review of labour market developments.
Figure 1
Financial Markets
The stock market boom originating in the US in the late 1990s set
the stage for many of the economic trends of that era. Savings,
investment and borrowing decisions were distorted by unrealistic
expectations about future demand and profits (the proof was the
subsequent bust in share prices and record bankruptcies). The
bubble made capital artificially cheap, encouraging firms to
over-invest. This was especially true of new start-ups in the
technology field, as venture capitalists poured money into IPOs
(Initial Public Offerings) that “went into useless software,
mindless dot-coms, and unused fiber-optic lines” instead
of productive investment.3
The distortion was so exaggerated that it encouraged a belief the business
cycle was dead. Whenever problems did appear, such as in East Asia in 1997
and the LTCM crisis in 19984, investors were bailed out. This helped foster
the notion that the old economic rules no longer held in the New Economy,
reminiscent of the “new era” and “new world” slogans
used to justify market bubbles earlier in the century.5 Unfortunately, innovation
extended beyond technology to increasingly creative bookkeeping.
One by-product of the bubble mentality was to create a corporate culture of “infectious
greed” in the words of Alan Greenspan, chairman of the US Federal Reserve
Board. The run-up in stock prices encouraged speculative trading, the extensive
use of stock options and problems in corporate governance. The mania in the
stock market for technology reached its peak at the turn of the millennium,
with the Nasdaq exchange doubling again in less than five months between November
1999 and February 2000, after nearly doubling in the previous year.
The subsequent bursting of the bubble triggered a vicious cycle. As stock prices
fell and economic growth slowed, the temptation rose in some firms to mislead
markets about their faltering performance. Triumphant talk of a New Economy
was replaced by new records for bankruptcies in the US, including Worldcom,
Enron, Global Crossing and Adelphia. A common feature of these scandals was
their concentration in areas recently deregulated in the US (notably finance,
telecommunications and electricity trading).
The litany of corporate governance problems exposed in 2002 led
to a worsening slump in stock prices. The US market (measured by
the S&P 500) fell 23.4% in the year, its largest drop since
1974 and the first time it had fallen for three straight years
since the 1930s. Overall, the market at year-end had lost 40% from
December 31, 1999. Technology was hardest-hit over these three
years, with the Nasdaq exchange down 70%. Just as the stock market
crash in the 1930s led to the Securities Act of 1933 and the creation
of the SEC, Congress reacted with the Sarbanes-Oxley Act, setting
new rules for corporate governance.
As bad as the US stock market was in 2002, many European and Asian markets
fared even worse. The collapse of demand and revelations of scandals led to
the total shutdown of technology-based markets in Germany and Japan. Overall,
Morgan Stanley’s World Stock Market Index fell 20% last year, its worst
showing since 1974, bringing the total drop since 2000, the peak for technology,
media and telecom stocks, to 43%. The only worse drop on record was 59% in
1929-31. By comparison, the Toronto market, while posting its first back-to-back
losses since 1973-74, performed relatively well, with a drop of 26% over the
last two years, including 14% last year. This is consistent with Canada’s
ranking at the top of economic growth in the G7.
The distress in corporate finances can also be measured by corporate
bond yields and their spread over government bonds. Worldwide,
defaults on corporate bonds rose to record levels.6 In Canada,
the spread between government and corporate bond yields hit a record
160 basis points last year, up from its most recent low of 50 points
in 1997 (just before the Asian and LTCM crises). Effectively, this
meant that firms did not feel the benefit of lower long-term interest
rates in recent years (unlike governments and households), reinforcing
their newly found aversion to debt. In the US, a record number
of investment grade companies were demoted to “junk” status,
while another 45% were rated only one level above, at BBB, the
most since 1988. Such firms are likely to be pre-occupied with
repairing balance sheets to avoid their de facto exclusion from
credit markets (if downgraded to junk). Another consequence of
the weakness in stocks was an increase in underfunded pensions
in large companies with defined benefit plans. As with stocks,
downgrades of European corporate bonds were even worse last year.
Figure 2
Finally, the supremacy of the US dollar began to erode. The trade-weighted
value of the dollar fell slightly against other major currencies. The dollar
had soared 28% over the previous six years on the strength of surging foreign
investment in US capital markets. (Interestingly, the US maintained its surplus
in investment income into 2002 despite rapidly-rising external debt, reflecting
a higher rate of return on its assets abroad than foreigners earned on investments
in the US.)
The crash of the stock market has had important economic effects, such as
choking off capital for new ventures. But as noted before, every cycle is unique,
and one of the most notable features of the bust in this stock market is that
it has not precipitated a crisis in the financial system.
The ability of the financial system to cope with rising bond defaults and
falling stock markets, according to the Bank of Canada, reflects the efficient
redistribution of risk (Financial System Review, p.6-7). Banks have much less
direct exposure, with investors more often on the front line to absorb losses,
especially in IPOs. Average loan loss provisions by chartered banks rose from
0.2% of assets in 1997 to a still-low 0.6% in 2002, while a high coverage ratio
of bad loans reflected good asset quality.
Investment
The boom-bust cycle in business investment was most severe in the US. There,
business outlays for plant and equipment fell steadily for 8 quarters between
2000 and 2002, its longest (but, at 12%, not severest) slump since the Depression
of the 1930s. This followed six years of growth averaging 10%. The drop began
in equipment as the drying-up of new capital and slumping demand quelled
the frenzy for computers and telecoms. Cutbacks soon spread to structures
like factories and office buildings, which continued to plummet in 2002 as
the classic cyclical phenomenon of over-capacity took hold. This was reflected
in the shift in investment cuts from equipment and software to non-residential
construction, both here and in the US.
The swing in investment was less pronounced in Canada, just as it was in our
stock market. Of course, the two are inter-related. Canadian firms did not
over-invest in the technology embedded in machinery and equipment as much
as Americans did, hence the subsequent drop-off was less severe, totalling
5% in volume between 2000 and 2002. Firms reined in spending the most for
technological goods. Telecom equipment users remained the most depressed
by over-capacity, tumbling 22% in volume in 2002 after a 10% drop the year
before. But demand for computers also levelled off for a second straight
year, after rising an average 40% per year from 1994 to 2000. Even software
spending slowed to below 10% growth for the first time since 1995. Meanwhile,
non-residential structures fell 6% after slowing to a crawl in 2001. A surplus
of plant and office space pushed new building down 11%, while engineering
was dampened by cuts in the oilpatch. (The energy sector alone accounts for
almost half of non-residential structures in Canada.)
Last year’s weakness in business investment by industry was concentrated
in ICT industries and in resources, off about $3 billion and $2 billion respectively,
both the product of a sharp downturn in worldwide demand. The slump in high-tech
investment accelerated after the initial slowdown in 2001. Hardest-hit was
manufacturing of computers and electronic products, which slashed investment
outlays 43%. Almost all of this cut originated in the communications equipment
industry, which plunged 74%. In the professional, scientific and technical
group, computer systems design retrenched by 15%, while spending by the scientific
research industry tumbled 44% to erase most of the previous year’s gain.
Slumping demand for telecom services also played a role in the 17% (or $2 billion)
drop by the broadcasting and communications industry.
All industries in the resource sector cut back sharply on investment spending.
The most severe drops were for metal mining, smelting and refining, lumber
and paper. While falling prices clearly played a role in these declines, rising
prices elsewhere did not stop other sectors from taking the axe to outlays.
This was particularly true of oil and gas, where declines for conventional
projects in the oilpatch outweighed increases for offshore projects and the
tar sands. Strong demand for non-metallic mines also did not induce more capital
spending.
Investment was sluggish in many of our other most capital-intensive industries.
The auto industry reined in investment after a sharp gain the year before,
while retailers and finance held down spending for a second straight year.
Two notable exceptions were air transport and utilities. As well, there were
large increases in the public sector, notably for education and health care.
The obvious motive for firms to pare capital outlays was to repair their
finances. As a result, the corporate sector swung from its traditional position
of being a net borrower to a large net lender in each of the last two years.
Nor were Canadian firms alone in pursuing this goal, with a similar trend away
from corporate borrowing in both the US and UK.7
One of the interesting features of the recent gyrations of the stock market
is how their effect on spending has been concentrated directly in investment
itself rather than household spending. Equity issues by firms soared to $
54 billion in Canada in 2000, the equivalent of almost 40% of on total new
investment, before falling to $31 billion last year. The absence of a noticeable
wealth effect on household consumption is partly attributable to the buoyancy
in housing prices.
Labour Markets
While the recent course of the real economy has played out against the backdrop
of the boom-bust cycle of financial markets, labour market developments have
additionally been over-laid against the fundamental trend of an aging population.
Within the overall gain of 330,000 people in Canada over 15 years old last
year there was a marked redistribution towards those 45 and over, where the
rate of increase accelerated slightly to 310,000. A fourth consecutive decrease
in prime-aged people between 25 and 44 largely offset a small gain in youths
(age 15 to 24). The largest increase among older workers was for those aged
55 to 59 (up 114,000, the most of any of the 5-year age groups between 15
and 64 years), followed by people between 45 to 49 (up 95,000). Both reflect
the steady progress of the baby-boom through the population pyramid. The
number of people actually past the traditional retirement age of 65 has not
yet begun to increase rapidly, held down in part by a fourth straight decline
in people aged 65 to 69.
Figure 3
The labour market behaviour of older workers has already begun to show
significant breaks with decade-long trends, a development that can be
expected to continue as the labour market adjusts to the reality of an
aging workforce. The average retirement age edged up over the last four
years, from a low of 60.9 in 1998 to 61.2 last year, ending a steady decrease
from 65 in the late 1970s (when the current data series began). A drop
in investment income as interest rates fell and stock markets tumbled
may have made it necessary for some older workers to work longer. The
upturn appears to be driven more by the supply of labour offered by workers
than a spontaneous change in demand by employers, since it occurred simultaneously
in the private sector, the public sector and the self-employed. 8
A further examination of labour force participation rates by age supports
this. The largest increases last year were among people over 54 years
old, up 1.9 percentage points to exceed its cumulative gain over the previous
four years (which already represented a sharp break from two decades of
steady decline). The hike was especially pronounced for people in the
60 to 64 age group, where the rate surged 3.4 points to its highest in
nearly 20 years, and the 65 to 69 group, up 1.6 points to a post-1982
peak. These increases almost exactly matched higher employment rates among
these groups, suggesting that the certainty of a job was important, thus
avoiding any prolonged spell of unemployment during job search. The greater
availability of part-time work does not appear to be a major factor, as
full-time jobs rose faster (although workers over 65 increasingly favoured
part-time, reversing their trend in the 1990s).
Figure 4
Still, it is interesting that the small number of older people who were
unemployed had the longest duration of unemployment of any age group at
almost 31 weeks versus an overall average of about 18 weeks. This suggests
that older workers may be more selective in accepting the positions they
want, enabled by a better financial position due to a larger cushion of
savings or pension benefits (alternatively, it could be harder for older
people to get a job).9 This has important implications if employers look
to older workers to keep the labour supply growing as the boomers reach
retirement age.
Another change, often taken for granted by analysts, that is basic to recent
trends in the labour force is the feminization of the workplace. Nearly half
(46.1%) of the labour force is now female, and women’s participation
rate continued to rise faster than men’s, notably among adults. In
1976, adult women participated in the labour force at only half the rate
of men (41% versus 81%), and well below half for women 45 and over. Less
than a generation later, the gap is consistently only about 10 points for
women between 25 to 44 years (81.2% for women, 92.4% for men) and 15 points
for older women. All these gains were driven by married women. Furthermore,
the part-time job rate for adult women has fallen slightly since 1976, while
it has risen 3.7 points for men.10
Not only are more women entering the labour force, but they are arriving with
more education. Last year, for the first time ever, more women than men in
the general population had at least some postsecondary education. In a little
over a decade, the percentage of women having more than high school has risen
from 39.7% to 53.3%. Since 1999, the number of women aged 25 to 44 with university
degrees has exceeded men (growing to almost 100,000, or nearly 10%, more
than men last year) reversing the advantage younger men historically had
compared with women. This trend should accelerate in the near-term, judging
by the preponderance of women currently graduating from university.
While demand for university grads continues to rise (though less than
5% average in the late 1990s), it has not kept up with supply. As a result,
last year, for the first time on record, they were the only educational
group whose employment rate fell, continuing a four-year reversal of a decade-long
trend of higher employment. These four straight declines have cut the employment
rate for people with university degrees from 79.1% in 1998 to 77.4% in 2001
and 77.1% last year, their lowest level on record back to 1990. (Even more
surprising, the drop was led by people aged 25 to 54 and those with post-graduate
degrees.) This was reflected in a jump of a full percentage point to an
unemployment rate of 5% among those with a university degree.11 The increase
in unemployment originated among both men and women, as job opportunities
did not keep up with their growing numbers: their labour force expanded
19% in the last four years, while jobs rose 18%. Still, this latter gain
was more than twice as fast as all other groups, which combined saw jobs
rise 7% versus only a 6% gain in the labour force. The only other group
that saw its employment rate fall in recent years was those with only an
elementary school education, despite a slight rebound last year.
Figure 5
All other groups between those with the most and the least education have
seen employment rates rise since 1997, a trend that continued in 2002. High
school graduates led the way, with their employment rate up 1.9 points over
the last five years, followed closely by people with a post-secondary certificate
and those who did not finish high school. The persistence of this trend,
through various stages of the business cycle and rapid changes in technology,
remains one of the interesting shifts in labour markets. It is worth emphasizing
that the trend towards convergence between different education groups should
not obscure the reality that, in absolute terms, job opportunities grow,
earnings rise, and unemployment falls as education levels increase. Still,
it is noteworthy that in a more knowledge-oriented society employment gains
are more evenly-distributed, after widening through most of the 1990s.
Dividing the labour force between those with only a high school
education or less and those with at least some post-secondary education
summarizes how these trends have evolved over the past decade.
From 1993 to 1997, the less educated saw steady job losses (totalling
almost half a million or 1% in terms of their employment rate),
while more educated workers saw jobs grow 27%, keeping their employment
rate steady. Since 1997, jobs for the high school or less group
have risen, raising their employment rate 3.0 points. Meanwhile,
employment for more educated people slowed, posting the smallest
back-to-back increases on record in 2001 and 2002, presumably due
in part to the slump in demand from high-tech industries. After
all these gyrations, the unemployment rates for these two groups
returned almost exactly to where they were in 1990, at 10.2% and
6.0%. This also reflects the shrinking number of people in the
labour force with less education, and the acceleration of those
with some post-secondary.
Some clues to the narrowing gap in employment rates by education
level emerge from examining growth by industry. Fuelled by the
housing boom, construction surged ahead by 5% last year, bringing
its total increase since 1998 to 20%. Construction jobs are now
the most numerous on record, cutting unemployment in the industry
to below 10%, less than half the rate 10 years ago. Manufacturing
has also seen a remarkable turnaround. Neither industry requires
extensive formal education, as 46% of workers in each have only
high school or less. The primary sector, which has the least schooling,
remained an exception. Mining retrenched in the face of weak prices
on world markets, while forestry trimmed jobs for the second year
in a row. Farming levelled off, but only after shedding nearly
one-quarter of its workers over the previous three years.
Growth in services returned to the average rate of increase of the late 1990s,
after a brief slowdown in 2001, but the mix of jobs shifted away from industries
associated with university education. Demand picked up for consumer services
such as retail trade and accommodation and food, areas that require relatively
less schooling, with nearly half of all workers having high school or less.
Furthermore, the professional, scientific and technical group—which
has the highest educational attainment in the private sector—saw growth
stall, after a decade of uninterrupted gains averaging nearly 7% a year.
This industry includes computer systems design, which slowed markedly after
the bursting of the tech bubble. Information, culture and recreation services
also suffered a setback after years of uninterrupted rapid growth.
Some services continued to thrive. Management and administrative services led
all industries, with continuing double-digit growth in business services
(which doubled from 1998 and tripled since 1994 as firms out-sourced work)
reinforced by a pick-up for building and private security services. Public
services saw the next-largest gains, with health and education bouncing back
from a respite in 2001, while public administration posted its first significant
increase since 1992. Government was the only area with a preponderance of
knowledge workers that posted above-average growth (with nearly 70% women,
it also helped boost their employment).
It is useful to put last year’s changes in industry employment
in the context of long-term trends since 1989. Starting in that
year and continuing into 1993, the economy lost jobs as it adjusted
to recession and the restructuring related to a number of structural
changes (including free trade, the GST, and tight monetary policy
to reduce inflation). Manufacturers led the retrenchment, while
losses in construction and resources compounded the weakness in
goods-handling industries (notably transportation and wholesale
trade). With the consumer and technology sectors also weak, this
left public sector areas (health, education, public administration)
to shoulder the burden of buttressing employment.
From 1993 to 1999, employment accelerated. Looking back, this
period now appears to be a golden age for trade and technology:
coincidentally, it was the peak in demand growth for more educated
workers. Manufacturing revived, led by exports of telecom equipment
and autos, while computer systems design alone contributed half
of the 300,000 gain in professional, scientific and technical jobs.
Transportation and wholesale trade both posted gains of over 100,000
as the flow of tradeable goods expanded rapidly. Information and
recreation matched these increases, boosted by the spread of wireless
communication, specialty TV and gambling. Public administration
underwent a significant downsizing during the same period.
Table 1: Employment by Industry, 1989-2002 (change in 000s)*
|
1989-1993 |
1993-1999 |
1999-2002 |
|
|
|
|
Total |
-129 |
1,674 |
881 |
|
(-0.2%) |
(2.1%) |
(3.0%) |
Primary1 |
-38 |
-66 |
-59 |
Construction |
-118 |
81 |
108 |
Manufacturing |
-344 |
431 |
109 |
Transportation |
-43 |
124 |
11 |
Wholesale |
-7 |
120 |
18 |
Retail |
-7 |
88 |
164 |
Information and recreation2 |
-3 |
212 |
69 |
Accommodation and food |
40 |
140 |
79 |
Finance |
25 |
22 |
33 |
Professional and technical |
63 |
287 |
89 |
Management and business services |
33 |
164 |
84 |
Education |
76 |
74 |
33 |
Health |
125 |
88 |
163 |
Public administration |
68 |
-91 |
4 |
|
|
|
|
* Average annual percent change in brackets. |
1 Includes utilities. |
2 Includes other services. |
Since the bursting of the tech bubble – and the concomitant slowing of
trade with the world economy – job growth has been heavily dependent on
industries related to household consumption. Of the total increase of nearly
900,000 jobs since 1999, nearly half were directly attributable to construction
(largely housing), retail (led by housing-related items), accommodation and food,
and gambling and other recreational services. This does not include increases
in manufacturing, where growth shifted from the glamorous high-tech sector to
more pedestrian areas like food and furniture. Other high-flying sectors such
as transportation, wholesale trade and broadcasting and telecommunications also
came back to earth, along with professional, scientific and technical services,
where computer systems design in 2002 posted only its second annual job loss
ever. Meanwhile, health and education underwent a significant revival, fuelled
by a reinfusion of funding.
Only three sectors showed no change in their trend over these three periods.
The primary sector (including utilities) posted unrelenting declines. Accelerating
losses in agriculture accompanied moratoriums in fishing and cutbacks in logging.
Low prices for mineral products left mining jobs (outside of oil and gas) at
only half their 1989 level. The finance and real estate sector expanded only
marginally: excluding a burst of growth in securities trading late last decade,
there would have been no gain at all. Management and other business services
recorded steady growth throughout. A sudden drop-off for temporary help and
travel services in the last two years followed a decade of rapid growth, but
demand for business services remained steady.
These broad shifts in industry demand were reflected in detailed occupational
data. Jobs in the last three years have proliferated the most for sales (including
retail clerks and cashiers) and construction trades. Demand was also robust
for teachers and health workers, where a growing scarcity last year drove their
unemployment rates to the lowest of any group (as well, these were the only
groups that saw their unemployment rate fall last year, apart from machine
operators in manufacturing). Jobs in natural and social sciences posted steady
gains.
Occupations unique to primary industries continued a decade-long decline, leaving
them with the unenviable distinction of being the only occupational group
with double-digit unemployment (10.5%). Not surprisingly, the labour force
in this sector has been falling as people leave to look elsewhere for work
or retire: after edging down by 4% from 1987 to 1998, the exodus became a
flood, with the labour force plunging 12% in the next three years.12 The
only other sector where the labour force contracted in recent years was management,
off 4% since 2000, perhaps a reflection of buy-outs and early retirement.
Nevertheless, unemployment among senior managers jumped the most of any group,
to 3.5%, its highest rate since the 1991-1992 recession.
Both part-time and full-time jobs picked up last year. For part-time workers,
the 5.6% increase was the largest in almost two decades. The source of growth
in part-timers appeared to be about equally split between personal preference
(including school) and business conditions reducing the opportunity for full-time
work.
The increase in part-time work was one reason why average hours worked in the
economy fell 0.4%, despite the gain in overall employment. As well, the number
of people working long weeks of 50 hours or more fell for the second year in
a row, to 12.3% of all employment, the lowest since 1986. Just two years ago,
at the peak of the boom, this group represented a near-record high of 13.7%
of everyone holding a job. More peculiar is that working long hours decreased
despite a surge in people holding multiple jobs, up 10% after two years of
decline. The increase in moon-lighting was concentrated in services, notably
health care and education.
The widely-held notion of a loosening of the bond between employers and employees
was not evident in the aggregate data on labour markets. While temporary
jobs grew faster than permanent ones over the last five years, the gap last
year was the smallest (3.4% versus 2.2%, with seasonal jobs leading the increase
for temps). An overwhelming 87% of all jobs remained permanent, down only
slightly from 88.7% in 1997. This stability was reflected in average job
tenure, which after four straight declines, jumped to nearly equal the record
high set in 1997. Of course, increases in job tenure often accompany anxious
economic times, as people are reluctant to quit their job as hiring rates
tumble (for example, tenure jumped a record 5 months in the 1990-92 recession).
Product Markets
Firms rebuilt inventories in 2002, after reducing them in 2001 when sales slowed.
This swing in inventories accounted for almost all of the difference between
1.5% real growth in 2001 and 3.4% last year: excluding stocks, growth would
have been 2.9% and 2.6%. Much of last year’s upturn in inventories
originated among retailers, notably vehicle dealers where demand improved
the most. Manufacturers kept a tight rein on stock levels.
The steadiness of GDP excluding inventories was reflected in final domestic
demand, where real growth of 2.6% was virtually the same as the year before.
While housing soared 16%, by far its fastest increase since 1987, this was
largely offset by the steepening drop in business investment. Growth in consumer
spending on goods and services was little changed at just under 3%, despite
the surge in vehicle sales.
External trade remained sluggish for a second straight year, weighed down
by falling demand for machinery and equipment on both sides of the border.
Export volume recovered only a fraction of its drop the year before, while
earnings fell for a second straight year as prices fell for a wide range of
commodities. Imports fared slightly better, boosted by strong demand for autos
and other consumer goods.
Unusual weather had a large effect on important sectors of the economy. A continuing
warming trend accompanied a worsening drought in western Canada. This slashed
the wheat harvest to just 15.45 million metric tons, one-quarter of 2001
and just over half of the 26.8 million harvested in 2000. Poor weather in
central Canada also dampened the vegetable crop, notably corn. The impact
on food prices was mixed, as increases for bread were offset by the accelerated
slaughter of livestock (to avoid the cost of feed). Overall, food prices
rose 2.6%, less than the year before.
Elsewhere, the trend to warmer weather produced variable results. For housing,
where demand strained the industry’s capacity limits all year, the mildest
winter ever at the start of the year probably boosted overall output. Utilities
made up for low heating demand in the winter when record-breaking summer heat
sent demand soaring.
Another important point of divergence between Canada and the US began with
September 11. While the terrorist attacks triggered large declines on both
sides of the border in industries ranging from air travel and accommodation
to gambling, almost all recovered fully in Canada within three months. The
only exception was same day visitors from the US, but this was partly offset
by more overseas visitors, who shunned the US. The recovery of these industries
in the US was almost non-existent, and layoffs in the airline, aerospace
and travel industries remained an important source of their job loss in 2002.
Nowhere was the divergence between Canada and the US more pronounced than
in manufacturing. Both countries suffered losses in 2001, due to the initial
impact of the slump in technology investment and the terrorist attacks. But
growth quickly resumed in Canada, with this sector raising payrolls 2.2% last
year. This was the mirror image of the US, where manufacturers cut payrolls
another 5% during 2002, tumbling to a 41-year low.
While a number of factors contributed to this growing gap, a leading explanation
appears to be the exchange rate. While off slightly in value last year, the
US dollar remained near record-high levels, fuelled by hefty capital inflows
at the peak of the stock market surge. One of the casualties was the Canadian
dollar, which fell to an all-time low of 63.7 cents against the US greenback,
before rallying at year-end.
Conclusion
The fall-out from the worldwide slump in stock markets after the bursting of
the tech bubble dominated global economic trends last year. Business investment
in Canada fell for a second straight year, while spending cuts by firms around
the world pulled down our exports. The cyclical slump in trade and technology
has eroded the advantage held by more educated workers throughout most of the
1990s. Still, growth in Canada was sustained by rapid gains in household spending,
buoyed by low interest rates, tax cuts and a healthy job market. Strong gains
in consumer-related jobs supported overall growth, especially for women who
increasingly have an advantage in education over men. Labour markets also were
increasingly affected by the aging of the baby boomers, who appear to have
different behavioural patters as retirement approaches than previous generations.
Notes
1 Further down the development scale, Mexico and South Korea were slightly
faster at 32% and 39%. Source: OECD Main Economic Indicators, February 2003.
2 The actual growth rates for real GDP were 5.4%, 4.5%, 1.5% and 3.4% in Canada
from 1999 to 2002, versus 4.1%, 3.8%, 0.3% and 2.4% in the US.
3 J. Stiglitz, “The Roaring Nineties”, p.82 in The Atlantic Monthly,
Oct. 2002.
4 The East Asian crisis began with the collapse of the Thai currency in July
1997 and spread to Malaysia, Korea, the Philippines and Indonesia. The Long
Term Capital Management crisis was triggered by the decline of the Russian
ruble in July 1998. See J. Stiglitz, p. 83-84.
5 See p.101-105 in R. J. Shiller, “Irrational Exuberance”, Princeton
Univ. Press, 2000.
6 The Bank of Canada, “Financial System Review”, Dec. 2002, p.
5.
7 In the UK, a £3.2 billion drop in investment between mid-2001 and 2002
accompanied a swing from net borrowing of £3.8 billion to net lending
of £2.3 billion (p.5, Economic Trends, Office of National Statistics,
February 2003). In the US, net corporate borrowing fell nearly $200 billion
in 2001: data for 2002 are not yet available. 8 Each has its own distinct behaviour; public sector workers retire earlier,
but have shown the largest rise in recent years, from 57.8 years in 1998
to 58.4. The self-employed retire the latest, remaining above
65 years throughout. The private sector has show the smallest increase in
recent years, up only 0.2 points since 2000 to 61.3.
9 Both these trends were evident in the US, where the employment rate rose
for those 55 to 64 years, the only group to post an increase: their duration
of unemployment was 20.6 weeks, versus an average of 16.6.
10 The real surge in part-time work has been among youths, where it doubled
from 21% of all jobs in 1976 to 45% in 2002. This was led by young women,
consistent with their increasing emphasis on educational attainment.
11 The trend was even more marked in the US, where the employment rate for
college grads tumbled 2 points and the unemployment rate rose 1.3 points
in the last 8 quarters, although this was in line with the deterioration
for other
groups.
12 These are from the data on occupations in jobs unique to primary industries.
The broader data on the labour force in all primary industries shows a drop
of 16% since 1998, after a 4% dip in the previous decade. While large compared
with the labour force in primary occupations, this exodus had little impact
on other major aggregates, equivalent to less than 2% of the blue collar
or less educated workforce.
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