Western Canada’s economy poised for a comeback

September 11, 2009

By Todd Hirsch
Senior Economist
ATB Financial

Todd Hirsch

Everything’s coming up roses, it seems.

This week, the Bank of Canada increased its economic forecast for the second half of the year. Not only has the recession technically ended, according to the central bank, but the economy may actually be springing back to life more quickly than first thought.

Prior to the recession, growth in Canada’s economy was heavily skewed towards the West, particularly Alberta. Real GDP growth in that province was close to 6% in 2006, and was heads-and-tails above the national average for most of the decade. The rate of growth in BC and Saskatchewan was turning heads, too.

In fact, growth in western Canada was so much above the national average that it was almost starting to be a problem. With wages, housing prices, and resource wealth rising so dramatically out West, there was a danger that the three western-most provinces would be the only remaining “have” regions of the country – something that would strain the political and economic balance of the country. There was even some pressure simmering on politicians in Ottawa to do something about the growing imbalance.

Then came the commodity price crash, and with it the stellar economic performances of the western provinces. The West, it turns out, was not immune to the global recession. Suddenly, it was the little engine that couldn’t.

So now, with prospects for growth in Canada turning around, will the West once again take its place as the country’s economic powerhouse?

Certainly Alberta’s economy has stabilized, at least as measured by housing prices, housing starts, and consumer confidence. But with natural gas prices remaining stubbornly low, it may be a while until Alberta regains its title as Fastest Growing Economy.

British Columbia is in the same boat. Growth over the past few years has been pumped up by real estate and construction leading up to the 2010 Olympics. But these are both running out of juice.

Saskatchewan remains the sole province that will actually avoid an outright economic contraction in 2009, and its government is still forecasting a modest budgetary surplus. Its commodity base is much more diversified than Alberta’s, and it hasn’t experienced the same kind of construction sugar rush – and crash – that BC has. The problem with Saskatchewan is its size. With only 3% of Canada’s GDP, it would take a Chinese-style growth rate to even give the national economy any sort of nudge in the right direction.

This week, the Premiers of these three western provinces met in Calgary on September 11 to discuss the post-recession era and what it will mean for their economies in 2010. Cynics are always quick to condemn these sorts of chats as a waste of time and money, since rarely does anything meaningful come out of them. But the purpose of these meetings should not be to enact sweeping kinds of change, but rather for the leaders to better understand each other.

This level of understanding is critical because western Canada will still be an engine of growth for Canada’s economy in 2010. Premiers Campbell, Stelmach and Wall need to work together on key issues such as commerce with the US, interprovincial trade barriers, and environmental challenges. Cooperation and coordination of policy is particularly important at this point in the economic cycle.

The good news for Canada is that while growth in western Canada will return in 2010, it will probably be consistent with growth elsewhere in the country. With the exception of Ontario (which faces bigger challenges in restructuring its manufacturing sector), growth in Atlantic Canada and Quebec will be modestly positive.

Runaway growth in one part of the country, coupled with stalled growth or recession in other parts, creates some very complex problems for provincial and federal government leaders. Extreme gaps in wealth between regions can even strain national unity.

As the crushing weight of the global recession gradually lifts, what the country’s economy needs is stable, balanced growth across its regions. Western Canada’s economy will mount a comeback in 2010 – strong enough to contribute to the national recovery, yet modest enough so that the problems of regional disparities are not made any worse.

Channels: the Calgary Herald, September 12, and published in the Vancouver Province, September 14, the Edmonton Journal and Canada Free Press, September 16, the Fox Creek Times and Grande Cache Mountaineer and the Rocky View Weekly, September 23, the Yorkton News Review, September 24, 2009