In recent months, the clouds of an impeding economic storm have become visible on the horizon. Some Canadians have been feeling quite smug about the mortgage and liquidity crisis of our neighbor to the south and believe that it will not affect us due to our stronger banking and credit system. The strength of the Canadian dollar for a while seemed to confirm this assumption. In fact, for about a month or so it reached and then surpassed parity with the US dollar.
It is now an accepted fact that the high Canadian dollar has not been good for our economy, given the heavy reliance on exports. In fact, when combined with other global competitive forces, it has been outright devastating for the forestry and manufacturing sector. Despite all of this, there still is a strong believe that Canada would be able to ride out any recession happening in the U.S., on the basis of the strong demand for our commodities from emerging economic power houses like China and India. This assumption is based on the belief that we and the rest of the world have somewhat disengaged from the huge U.S. market. This assumption is being tested in early 2008 in the stock markets around the globe. They do not think so and have already anticipated a recession taking place in the U.S. and spreading around the globe in 2008, with a drop of around 10% in the value of stocks in the first two-three weeks of the year.
Obviously this state of affairs did not happen overnight, but it has been brewing for years given the irresponsible conduct of banks in the U.S. and around the world. They are giving loans to people and organizations that would not qualify if the basic tenet of matching risk and reward would have been followed. There has already been sufficient coverage of this issue in the media so I will not dwell on it.
What does all of this mean for Canada and specifically northwestern Ontario? It means that if there is a global slow-down the demand for commodities like minerals and oil will drop accordingly. As it is already happening in the U.S., once consumers start feeling the pinch of an economic crunch they start spending less (consumer spending in general account for around 2/3 of the gross domestic product), which drives the economy into further contractions. I believe that the negative impact on the economies of the western Canadian provinces will take up to six months or maybe a year to materialize given there is already substantial pent up demand for these products. However, as demand slows down, prices for commodities will start dropping and exploration for minerals will slow down as well.
How will northwestern Ontario cope vis-à-vis the rest of the country? Our region has already been in a prolonged economic transition and has managed to hold its own. Obviously, when compared to other high growth regions in Canada, we do not seem to fare well (relatively speaking), but it all depends on what we compare it to. Take for example house affordability. If you live and work in any major Canadian city, the recent price increases have placed a home outside the reach of most families unless both parents work and take on a substantial debt load. As consumer spending in recent years has relied more and more on growing home equity, any drop in house prices will mean financial troubles ahead. House prices in our region have remained fairly stable (except some smaller centres experiencing major lay offs in forestry) with some upward trend in the larger centres like Thunder Bay, due to some pent up demand from previous slow years. Given the slow growth of recent years and stable prices (i.e. no housing bubble to burst here) I do not expect any major changes in house values in our region during a recession.
Another reason for being optimistic about our region’s ability to handle a recession is our resolve to find long term solutions to our major challenges. One such challenge has been our isolation, but given the substantial investments made into our telecommunications infrastructure, health care and research, we are well positioned for the future. We can now reach into international markets and compete on a level playing field in any area of the knowledge-based economy like biotechnology and life sciences, information technology, education, etc. As the world will continue to require innovative solutions to complex problems (i.e. cancer research by Genesis Genomics being marketed around the world, new innovative programs by our educational institutions to meet world-wide demand for life long learning, etc.), our region is well poised to take advantage of such changes.
These changes also include getting the most out of forests through the use of new technologies to meet the demands of a changing market place. Recent investments in this area and new sources of energy that are more cost effective (co-generation) will allow some new mills to re-open and remain competitive. Green energy like bio-mass, solar and wind power, also offers our region great potential and the flexibility to remain energy independent.
Manufacturing has been a difficult area to expand, but recent moves to a Made in Canada content will bode well for companies like Bombardier. Smaller manufacturing companies are also joining forces to form consortia that will allow them to generate sufficient critical mass to be able to compete internationally. It is always better to keep our own workers here and export the product than the other way around. Public sector jobs will continue to provide some stability and new opportunities as baby boomers start retiring in a few years.
Last but not least, there is tourism, one area that has a great potential in the future as aging baby boomers want more of a natural experience and not necessarily a specific destination. We have both, with our clean water, clean air, and world class natural beauty that will be a beacon for generations to come, not only for tourists but also for ourselves. If we play our cards right, all of the above more than anything else, have the potential to provide Northerners with a quality of life second to none, anywhere in the world.
Frank Pullia is Principal of Pullia Accounting & Consulting and a Councillor in the City of Thunder Bay. He can be reached at 807-767-6579 or via e-mail atfrank@frankpullia.com.