Turbulent stability: Canada’s economy in 2007

by P. Cross*

More than usual, the year began with apprehension about the course of the economy. Thirty percent of Canadians believed the economy was already in recession at the start of the year.¹ Even in the heart of Alberta’s booming economy, one newspaper noted that “For many Canadians, recession is already a reality.”² Together with higher food and energy prices, this had analysts contemplating a return to the stagflation of the 1970s.³ This echoed uncertainties in corporate boardrooms: polls showed that 40% of CEOs in Canada believed a major economic downturn could be in the offing.⁴

In some ways, it appeared that these worries were well-founded. Global financial markets were repeatedly rocked by instability emanating from the US housing market. The soaring loonie hampered manufacturing, and also contributed to Canadian consumers threatening to cross the border en masse in protest against perceptions that lower import prices were not being passed on by retailers.

These anxieties are all the more remarkable for a year that ultimately saw steady growth in GDP, the unemployment rate plumbing a 30-year low, falling prices for non-energy goods, the housing and stock markets hitting record highs and consumer purchases in Canada posting their fastest gain in a decade. This resilience originated in the wealth emanating from our resource sector, the focus of much of this paper’s analysis and a major factor in Canada withstanding the slowdown in the US.

Financial and commodity prices were volatile …

Events in the real economy played out against the backdrop of continued rapid shifts in prices. The Canadian dollar exchange rate, aptly called “the most important price in the economy”⁵ because of its pervasive impact on spending and investment decisions, continued its five-year ascent to reach parity with the US greenback by the end of 2007, defying predictions it had passed its peak.⁶ The loonie’s 16.9% increase during the past 12 months was its largest since it started to appreciate late in 2002, and the most of any major currency.⁷

It is no coincidence that the loonie began to take off late in 2002 just as commodity prices started their historic climb. This price boom began initially in energy, before soon spreading to metals. While crude oil hit US$100 a barrel and gold topped US$800 an ounce last year, the largest increases in 2007 were for agricultural products such as wheat, corn and canola. These benefited from rising demand in emerging nations, the growth of ethanol use in gasoline in North America,⁸ and a series of poor crops in some major exporting nations.

Meanwhile, prices in global financial markets were exceptionally volatile throughout the year. A wide-ranging repricing of risk began over the summer, before spiking on August 9,⁹ pushing up interest rates for many borrowers around the world and causing some market segments to seize up (notably asset-backed commercial paper, or ABCP, as investors fled from anything tainted by the US sub-prime housing market). This was the first major test of a financial system using mortgage securitization to disperse risk outside the banking system and around the world, but without sufficient transparency about the underlying quality of assets to allay investor concerns about possible default risk during times of crisis, the result was the diffusion of uncertainty around the globe as well.¹⁰ The main effect on Canada was heightened volatility in the stock market, the shutdown of the $33 billion market in non-big bank ABCPs and higher risk premiums on short-term interest rates.

Overall, business credit growth was unaffected. Partly, this was due to the sma¹¹ exposure of banks in Canada to paper tainted by the US sub-prime market. As well, it reflects the very healthy state of corporate balance sheets, after years of racking up record financial surpluses.

Last year’s global financial crisis joined a long list from the past decade, including the Mexican peso crisis in 1995, the Asian contagion in 1997, the Russian debt default in 1998, which precipitated the meltdown of the giant LTCM hedge fund,11 California’s energy crisis early in 2000 that contributed to the Enron bankruptcy, the bursting of the dot-com bubble late in 2000, the 9/11 terrorist attacks, and the hurricane-induced shock to energy prices in 2005. The economy has shown its ability to absorb and adapt to most of these crises in financial markets.

… but the real economy was surprisingly steady

While many prices in commodity and financial markets were gyrating more than ever, growth in the real economy of output and employment has never been more steady. In the last four years, real GDP expanded by 3.1%, 3.1%, 2.8% and 2.7%: this yields a four-year standard deviation of 0.17 for growth, easily the lowest for any four-year period on record back to 1961 (the previous low was 0.57 from 1963 to 1966). The same holds true for total hours worked, which rose by 2.1%, 2.2%, 1.7% and 1.8% after 2003. Their standard deviation of 0.19 is the lowest for any four-year period in the labour force survey back to 1976 (beating the record of 0.25 for 1984 to 1987).

Why is the real economy so steady even as certain prices fluctuate more than ever? Economists have generally pointed to the solid fundamentals underpinning Canada’s recent economic performance, including the rising terms of trade, surpluses in the government and current account, the efficient functioning of the housing market (in contrast to the speculative price bubble and poor risk management in the US), and low inflation and interest rates.

Another factor in the stability of the macro-economy is the sheer size of modern economies; at $1.4 trillion of GDP generated by 17 million working Canadians, the economy has the ability to absorb substantial shocks.

Yet despite its size, Canada’s economy has proved nimble at quickly shifting resources to where they are needed. Nowhere has this been more evident than in the rapid growth of investment in energy and mining, and the movement of people from eastern to western Canada since 2002.¹² These shifts will be discussed later in this paper.

Changes in prices such as equities, commodities and the exchange rate had little overall impact on consumer prices. In fact, the CPI rose in the past four years by 1.8%, 2.2%, 2.0% and 2.2%, yielding a four-year standard deviation of 0.17 (coincidentally, the same as for GDP). This also was the lowest since the early 1960s (when prices rose exactly 1.3% for four straight years).

In the past, periods of rising inflation were associated with weaker growth in GDP. This is shown in Figure 1, which plots the four-year standard deviations of growth in the CPI versus real GDP growth. The three periods of rapid upturns in inflation (ending in 1975, 1984 and 1994) were all associated with volatility and recession in GDP. Partly, this reflects the impact inflation has on interest rates. It could also be that periods of inflation lead to other distortions, including poor savings and investment decisions and masking shifts in relative prices, that prevented economic agents from efficiently re-allocating resources.¹³

Figure 1

Consumer prices—a dog that did not bark

Despite the sharp run-up in commodity prices, consumer price inflation remained steady at 2.2% last year. This stability is even more remarkable when considering the cocktail of factors that would normally have put upward pressure on prices; wages posted their fastest increase in a decade, productivity growth was negligible, retailers rebuilt profit margins, and the cost of food and energy soared on world markets.

It is no coincidence that the sharp rise in commodity prices and the exchange rate since 2002 accompanied stable inflation. The soaring loonie lowered import prices every year thereafter, which largely offset the rising cost of food and energy. Of course, the surge in commodity prices and the dollar were closely linked over the last six years, just as commodity prices were the driving factor behind the Toronto stock market over this period.

Canada’s rising loonie helped offset most of the upward pressure on prices. Food prices for consumers in Canada rose only 2.7% last year, as lower prices for fruits and vegetables (many imported) largely compensated for the rising cost of bread and other foodstuffs. And gasoline prices in Canada rose 46% between 2002 and 2007, less than half the 105% increase in the US thanks to the stronger loonie. This has saved motorists $19 billion in their potential gasoline bill over the last five years. More generally, globalization helped dampen inflationary pressures in developed countries, by increasing the supply of cheaper imports of manufacturing goods and boosting productivity.

Canada surpasses US growth

Canada’s real GDP growth of 2.7% in 2007 surpassed all the other major developed regions, including the euro-zone (2.6%), the US (2.2%) and Japan (2.1%). More significantly, growth in Canada was barely affected by the slowdown in the US, where GDP growth eased from 2.9% in 2006 to 2.2% last year. This was the first year growth in Canada surpassed the US since the recession in the US early this decade after the dot-com bubble burst. It is worth recalling how large the gap between growth in Canada and the US can be when the latter falters: in 2001, Canada’s GDP growth of 1.8% was almost triple the 0.7% in the recession-plagued US, while the 2.9% in 2002 was nearly double the 1.6% gain in the US. The widely-held myth that ‘Canada catches cold when the US sneezes’ was debunked years ago: so far in 2007 and 2008, we have barely sniffled while contagion spread in the US housing and financial markets.

Figure 2

Canada’s steady growth last year despite the slowdown in the US sheds some light on the recent debate about how much Canada (and other countries like China) can ‘decouple’ from the US economy. To date the slowdown in the US has been largely confined to housing and autos, both of which contracted for a second straight year, and of course the financial sector. The majority of the US economy remained healthy, notably business investment and exports, which are key markets for several of our major industries (such as aerospace and wireless communications as well as industrial materials and energy products).

Figure 3

As a result, while Canada’s export earnings from forestry and auto products tumbled by 13% and 6% respectively, total exports continued to grow modestly for the fourth year in a row. Consequently, the share of forestry and autos in Canada’s total exports hit a record low of 22.9%, compared with their peak of 40.2% in 1987 (and 37.2% as recently as 1999). Subtracting out the import content of these exports leaves their share of value-added GDP at only 4.1%.

Commodity prices decouple from the United States

The overall gain in our exports in 2007 was driven by commodities, notably industrial goods (up 11%), agriculture (10%) and energy (6%), which accounted for exactly half of exports last year. Prices for these goods remained buoyant on world markets, as rising demand from emerging nations more than offset the weakness in the US. This decoupling of prices for most natural resources from the US economy gathered steam early in 2008, with commodity prices soaring 11% in January and February, one of their largest two-month advances ever despite the deepening gloom enveloping the US economy. Canadian exporters were quick to shift away from the slumping US market; while exports to the US fell 2% in each of the last two years, shipments overseas rose 13% in 2006 and 16% in 2007.

Figure 4

The IMF attributed the disconnect between commodity prices and the slowing US economy to sustained growth in emerging countries, “which have been responsible for the bulk of recent commodity growth.” While slower global growth may lower commodity prices, it said “the extent of easing may be small, given the current tight balances in some commodity markets.”¹⁴

Some of the unease Canadians felt early in 2007 may have reflected unusual weather patterns. The winter of 2006/2007 began with the unsettling absence of typical winter weather in many regions: despite a return to bitter cold later in the season, it was the second mildest winter on record in Canada, with temperatures 3°C above normal. Worldwide, it was the warmest winter on record.¹⁵ This makes the surge in energy prices even more remarkable, and helps explain why a return to more normal temperatures late in 2007 helped send energy prices to new highs.

Resources boost incomes

The year also began with widespread angst about a continuing slump in productivity growth. But by the end of the year these concerns were allayed, partly by higher prices for our natural resources. This served as a reminder of the two routes to higher incomes per capita: one is through the traditional path of higher productivity, which has faltered since 2000, increasing less than 1% a year. Instead, income growth in Canada was supported by our rising terms of trade. This resulted from higher prices for natural resource exports on world markets and lower prices for imports as the loonie appreciated.

Strong commodity prices supported higher domestic spending in Canada, even as revenues from exports to the US slipped. The resource boom directly boosted profits, which were the driving force behind the six-year surge in business investment. Energy and metal mining alone accounted for 60% of the growth of business investment between 2002 and 2007. Commodity prices were also the major factor behind the rising loonie, and the resulting drop in import prices was a boon to both consumer and business spending.

These income effects are captured by the growth of real gross national income (GNI), which adjusts real GDP for changes in our terms of trade and net external debt payments. Real GNI expanded 3.1% last year, versus the 2.7% advance in real GDP. This was the fifth straight year GNI surpassed GDP growth. Most of this extra income growth reflected our rising terms of trade last year, and supported strong domestic spending.¹⁶

Figure 5

Economists generally regard higher productivity as a more reliable and permanent source of income growth than gains in the terms of trade from higher resource prices. Commodity price booms are often viewed with skepticism, as they are perceived to be followed quickly by busts. But the current surge in commodity prices has already proven itself to be different. It has been ‘stronger for longer’ than any past cycle, and shows no signs of faltering. This makes the current boom the mirror image of the 1990s, which was the longest down cycle for commodities.¹⁷

The reasons for this ‘super-cycle’ in commodity prices remain a matter of debate. Prices stayed high, despite the slowdown in the US housing and auto markets, as demand remained robust from emerging nations (notably infrastructure spending in China and India¹⁸). Meanwhile, supply has been slow to respond to higher prices, notably for oil, metals and grains. Low-cost oil reserves appeared to be increasingly scarce, forcing production to shift to high-cost areas such as Alberta’s oilsands and helping send the futures price for oil above US$100 a barrel for the next decade. Drought in several large grain-producing areas such as Australia and Ukraine drove grain inventories to record lows.

For metals, a novel theory is that the recent upturn in prices marks a return to trend after a prolonged downturn in the 1990s.¹⁹ This slump was caused, according to this theory, by the implosion of the Soviet Union and other communist states in eastern Europe. These economies relied heavily on the production and consumption of industrial materials: when their own industrial demand collapsed, it unleashed their supply of metals onto world markets, depressing prices throughout the 1990s. In this view, metals prices are only returning to sustainable levels, rather than being near a cyclical peak.

In any event, no statistical basis exists to fear that mining output is more prone to the boom-bust cycle than industries such as autos and housing. Since 1981, metal and non-metallic mining had the same number of cycles in output as these other sectors, and the magnitude of these fluctuations was much smaller in mining. The relative stability of mining production probably reflects the long planning horizon for these projects and their large share of fixed capital costs, which encourages high output to service costs that would be borne even if output were slashed.

Not all resources participated in the recent boom in commodity prices. The price of forestry products was hammered by the ongoing slump in US housing demand and the steady slide in newsprint consumption. Livestock prices remained depressed, partly because the high cost of feed grains led producers to cull their herds. Natural gas prices slumped under the ongoing overhang of high inventories and increased supplies of liquefied natural gas (LNG) from low-cost producers in the Caribbean and the Middle East. At least for natural gas, prices began to rally at year end when colder weather boosted demand in North America just as high prices in Asia began to divert LNG supplies from North America.²⁰

Energy and mining drive the investment cycle

Business investment continued to expand steadily, up nearly 6% in volume. This was the sixth straight year of growth, normally a time when investment in past cycles began to flag. Instead of slowing, firms plan to step up capital outlays in 2008 (see Figure 6, which incorporates business investment intentions for 2008 as steady growth of about 6% for the next four quarters, since we have no data on their quarterly distribution).

Figure 6

Several reasons can be advanced for the ongoing strength of business investment into 2008. First, investment continued to surge in the energy sector, where prices remain at historically high levels. The oilsands remained the focal point of energy investment, offsetting the continuing drop in spending on drilling for increasingly scarce conventional sources of oil and the slump for natural gas (the latter has been plagued by the high cost of labour and materials in Canada, as demonstrated by the fact that drilling for gas remains near full capacity in the US despite lower prices early in 2007).

Energy investment elsewhere continued to expand. Utilities boosted capital outlays at a double-digit rate to meet increased demand for electricity. Pipelines grew even faster, as lines were built to carry some of the increased output from the oilsands to markets in the US, while new upgraders and refineries were required to process the crude bitumen.

Capital spending on metal mines rose 33% last year, faster even than energy, and firms plan another 33% increase in 2008. Investment in this sector has tripled since 2003, reaching $4.6 billion in response to the boom in prices, closely matching the surge in operating profits.

Profits generally helped boost investment in most industries. Corporate profits grew another 6% in 2007, with 18 out of 22 major industries posting higher operating profits. With corporate financial surpluses so high, the disruption to credit and stock markets last August appears to have had little effect on investment plans.

Finally, ongoing labour shortages and the rising price of labour relative to the price of capital give firms an ongoing incentive to invest more. The economy-wide price of labour (measured by average hourly earnings from the LFS) rose steadily even as the cost of capital levelled off after 2002. The cost of plant and equipment was essentially unchanged over this period, as an 18% drop in the price of machinery and equipment (mostly imported) offset the rising cost of construction (led by higher wages). As a result, the ratio of the price of capital to labour fell 15% in the past five years. Along with the resource boom, this may help explain the continuing vigour of business investment after so many years of growth.

Figure 7

The resource sector appears to be at the centre of several conundrums about the Canadian economy. Canadians often are apologetic (almost to the point of embarrassment) about their resource base,²¹ but defensive when foreign firms want to invest more here. The timidity of the Canadian view towards resources was a contributing factor to the foreign takeovers of iconic mining firms such as Inco, Falconbridge and Alcan. The acquiring firms apparently viewed the increase in metals prices as more permanent than Canadian firms and stockholders, and as a result were more willing to bid high prices for these assets,²² confident in the future value of these ventures.

Commodity output slow to respond to prices

As well, the natural resource sector helps explain why increased investment was not reflected in higher productivity. To paraphrase Robert Solow’s famous quote²³ about computers and productivity, one can see the effect of the commodity boom everywhere but in the statistics on output and employment. Profits, investment, exports and sales of resources all soared in recent years, but output and employment in the primary sector grew at only about the same rate as the overall economy. This gap reflects how the commodity boom was largely a price phenomenon.

Since 2002, the volume of output in the resource sector (farming, fishing, forestry and mining) rose just 11%, less than the 14% growth for the overall economy. Meanwhile, employment in resources rose 13.6%, implying a drop in output per employee.²⁴ The gap between employment and output growth was driven by mining, where jobs jumped 25% between 2002 and 2007 but output rose only 9%.²⁵

Clearly, the commodity boom was the leading source of higher investment in recent years, with resources contributing two-thirds of its growth since 2002. However, much of this investment was in less-productive assets (such as the oilsands) or the reopening of abandoned sites that suddenly became profitable again after prices soared.

The lower productivity of these sources is reflected in various measures of physical output. Despite the attraction of record prices, the volume of crude oil output rose just 18% after 2002, only slightly more than economy-wide growth. And notwithstanding the recent surge of investment in metal mining, the volume of production of copper, zinc, iron ore, gold and silver all continued to decline (nickel was one exception). Of course, the sluggish response of the supply of many commodities simply reinforced the boom in their price—as did steadily growing demand despite higher prices. The inelasticity in both supply and demand fuelled the surge in commodity prices.

Manufacturing restructures

Manufacturing output edged down 1% for the second straight year, leaving it slightly higher than in 2002 just before the loonie began its ascent. While manufacturers maintained steady production over the last five years, they slashed payrolls to boost productivity (although these gains were offset by lower productivity in other sectors like resources).

Manufacturing sales by industry in 2007 showed almost exactly the same pattern of increase or decrease as seen on balance since 2002. Clothing, forestry products and autos all continued to post large declines, while small drops were seen for printing, beverages and tobacco, rubber and plastic, and computers and electronics. These losses were offset by rapid growth for petroleum, primary metals, aero­space, machinery, metal fabricating, non-metallic minerals and chemicals. Food, furniture and miscellaneous manufacturers con­tributed modest gains. Since 2003, shipments in the 10 expanding in­dustries have jumped 32%, while in the 9 contracting industries they have fallen 14%.

The persistence of these sectoral patterns of growth over a five-year period strongly suggests that they represent how manufacturing will emerge from its re-structuring in response to the higher dollar. This is buttressed by the pattern of manu­facturing investment intentions for 2008: petroleum, chemicals, primary metals, the capital goods industries and food all intend to expand, while forestry products, clothing, autos, printing, plastics and rubber and beverages and tobacco all plan to spend less. These patterns in investment will reinforce the trend of output in the future.²⁶

Figure 8

Household spending accelerates

Households shared in Canada’s rising income and wealth. Nominal labour income expanded 6%, matching the growth in profits, due to both higher employment and an acceleration of wages as labour markets tightened. Meanwhile, record high stock and housing markets boosted the net wealth of Canadian households by 7%. With low inflation, most of these gains in income and wealth reflected increases in real purchasing power.

The growing income and wealth of Canadians translated into in a 4.7% gain in the volume of consumer spending in 2007, its largest annual increase since 1985 (excluding net travel abroad, spending in Canada rose the most since 1997). Flat-screen TVs continued to fly off the shelves of retailers. Auto sales set a new record of 1.686 million units. Despite high gasoline prices, sales of trucks rose while passenger cars fell slightly, lifting the share of trucks in all vehicle sales to a record 49.2% (passing the previous high of 48.2% in 1998 when gas prices plunged). This helped boost gasoline consumption a further 3.6% last year, despite record high prices at the pump. Another measure of the growing purchasing power of Canadians was a sharp increase in travel abroad, especially to overseas vacation destinations than short shopping trips to the US: travel overseas rose 9.8%, while trips to the US were up 6.1%, including a 3.3% increase in same-day auto trips.

The housing market in Canada continued to expand, in marked contrast with the deepening slump in the US. Existing home sales hit another record, again defying predictions of a slowdown, and household wealth in housing rose 9% (versus a 4% drop in the US). Spending on renovations also grew vigorously, while new home construction was stable for the second straight year.

Regional differences continued to narrow

It has become commonplace in recent years to characterize Canada as divided between a booming resource economy in the west and a slumping manufacturing sector in the east. In 2007, this was more a falsification than a simplification. Regional differences in job growth were less pronounced than in recent years. For the first time since 2004, every province posted higher employment. While Alberta continued to lead with a 4.7% gain, growth accelerated in every other province. The largest upturns were in Quebec, which nearly doubled to 2.3%, and Nova Scotia, which rebounded from a drop in 2006.

The unemployment rate fell to a record low in all three regions, at 6.7% in central Canada, 4.0% in the west and 9.2% in the Atlantic region (and much lower in its urban areas). BC, Quebec and New Brunswick all posted their lowest unemployment rates on record back to 1976, while Newfoundland, Nova Scotia, Manitoba and Alberta were all within a whisker (0.2 points or less) of their all-time lows.

The convergence of regional growth was reflected in a narrowing of provincial differences in unemployment. The dispersion of provincial unemployment rates (as measured by their standard deviation) fell to 3.0 last year, the lowest ever except for 1983 (when 8 out of 10 provinces were plagued by double-digit rates coming out of the 1981/1982 recession).

Figure 9

The population shift in recent years from eastern and central Canada to the west helped level these regional differences in unemployment. These migration flows slowed in 2007, however, partly because inter-regional differences in unemployment were less pronounced.

Another measure of the tightening of labour market conditions across the country was a drop in the duration of unemployment in every province except Nova Scotia. The average spell of unemployment in Canada fell to 14.0 weeks last year, its lowest since 1976, and down from 16.1 weeks in 2002 when the loonie started to rise (the all-time high was 25.7 weeks in 1994). The length of unemployment spells fell to record lows in Alberta, Newfoundland, PEI, New Brunswick and Ontario. Ontario posted the largest decrease, from 13.3 weeks in 2006 to 11.6 in 2007. While manufacturing job losses multiplied in Ontario, these workers evidently either found jobs in other industries or moved elsewhere to find work. This is in marked contrast with sharp increases in unemployment spells during previous slumps in Ontario’s manufacturing sector in the early 1980s and early 1990s.

Western Canada again led job growth, thanks to construction, manufacturing and widespread gains in services. Alberta’s natural resource sector continued to be the fastest-growing in the country in 2007. Meanwhile, job losses in central Canada’s factories were more than offset by growth in construction and services (notably business services).

While western and central Canada have experienced tight labour market conditions in the past, this was the Atlantic region’s first experience with labour shortages. In Nova Scotia, 16% of manufacturers reported shortages of unskilled labour were hampering production last year, more than Alberta’s 15%.²⁷ Shortages of unskilled labour in the Atlantic region were far higher than the 2% reported in central Canada. Skilled labour shortages in the Atlantic region were also at least twice as high as the 6% reported in central Canada, although still below the scarcity reported by the prairie provinces.

Rural areas and small firms led job growth

The revival of Canada’s resource base has been reflected in the rejuvenation of rural Canada in recent years. According to the labour force survey, job growth in rural areas was the fastest of any of the urban and rural agglomerations since 2004 (10% versus 6% in cities and a drop in small towns). This increase was led by growth in construction, trade and mining, which is often done in remote areas. The upturn in rural jobs occurred despite a small dip in agricultural jobs, which could well be reversed in 2008 after grain prices took off.

With the sources of growth swinging from exports (which are dominated by large firms) to domestic spending, job growth followed suit, shifting from large to small firms. Employers with fewer than 100 employees added 185,000 jobs, accounting for two-thirds of all employment gains last year (evenly split between employers with 20 to 99 employees and those with fewer than 20). Meanwhile, the largest firms (with over 500 employees) added only 46,000 jobs, their smallest gain since 2004. Most of this expansion reflected increases in the public sector.

The growth of small firms was by driven strong demand for construction, where firms with fewer than 20 employees increased employment by nearly 30,000. Business services (which includes consultants) were next. Meanwhile, the largest firms were slowed by losses for manufacturers with 100 to 500 employees or over 500 employees. Manufacturers in the 20 to 99 size group also shed jobs, but this was offset by gains in trade, real estate, and business services.

Full-time positions dominated job growth for the second year in a row. And those people still working part-time increasingly cited personal preference not economic necessity. The number of people working part-time due to poor business conditions fell for a fourth straight year, to account for less than one-third of those working part time. Instead, the most common reasons for working part-time were going to school, personal preference, and caring for children.

Another measure of the tightness of the labour market was a sharp increase in the number of people holding more than one job. Over half of the growth of multiple job-holders last year was in Ontario, followed closely by Alberta and BC. Quebec and the Atlantic provinces, where unemployment rates remained above the Canadian average, saw little change in multiple job-holders.

Labour shortages and the aging population

Canada’s labour shortages last year were driven primarily by its strong economy, not a shrinking supply of labour. But as noted in an article in the June CEO,²⁸ this experience with labour shortages may be a foretaste of a longer-term trend as the boomer generation rapidly approaches traditional retirement age. The population aged 25 to 44 shrank for the tenth consecutive year, as boomers moved into higher age groups without an offsetting influx of younger people. In particular, the number of people aged 60 to 64 expanded by 114,000 last year, the most of any segment of the population. This marked the first time that the largest increase in any age cohort was this old (in many cases, eligible to draw CPP/QPP benefits). The sharpest acceleration in recent years has been for people aged 65 to 69 years, whose numbers had been dwindling as recently as 2002 but jumped by 45,000 last year.

With the population aging rapidly and labour shortages mounting, one of the most encouraging trends was the increased willingness of older workers to stay in the labour force. After hitting a low of 23.7% in 1996, the participation rate of people 55 years and over rose every year, hitting 33.3% in 2007. This increase was initially led by people aged 55 to 64 years, which rose from 47.1% in 1996 to 60.1% last year (not far below the 67 % rate for youths 15 to 24). The participation rate for people 65 and over jumped from 6.0% in 2000 to 8.9% in 2007, including a hike of 0.6 points last year.

Conclusion

The Canadian economy displayed several divergent trends last year. Domestic demand accelerated, while export growth was slow. Within exports, shipments to the US fell but rose to overseas markets. Manufacturing was nearly evenly divided between expanding and contracting forces. The price of commodities took off, but the volume of resource output stagnated. Consumers faced higher prices for services and gasoline but the cost of goods fell. Despite continued gains in business investment, productivity remained moribund.

Many of these divergent or even contradictory trends originated in the commodity price boom, which entered its sixth year in 2008. Higher commodity prices fuelled the record rise of the exchange rate since 2002, helping to lower import prices just as the strong domestic economy raised the cost of services. Even as US demand faltered recently, overseas markets for our resource exports remained robust. While business investment strengthened steadily, this was often in less-productive resource assets, which hampered productivity growth.

Unlike past cycles, the six-year old commodity price boom shows no sign of petering out early this year. Just the opposite has occurred, with January and February posting one of their largest back-to-back gains ever. And the main impulse for the increase has shifted from energy and metals to grains.

Thanks largely to the money earned from resources, Canada defied the conventional wisdom and was able to overcome several obstacles to steady growth. These hurdles included the slowing US economy and the credit squeeze in global financial markets. Longer-term, the inter-related problems of the aging of the population and low productivity growth were increasingly evident in 2007. This makes Canada’s recent economic stability all the more remarkable. The stress in the US financial sector will be a challenge to this stability in 2008. Canada’s ability to further diverge from the US economy likely will hinge on whether commodity prices stay high and the Fed’s moves to counter the turmoil in the financial system.

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Notes