The financial crisis of ’08 – ’09′ shone a spotlight on Canada.
While so many other countries in the world, particularly the United States, suffered massive drops in employment, bank failures, housing market crashes, and widespread social unrest, Canada weathered the economic firestorms relatively unscathed.
But more than that, the crisis actually heightened Canada’s stature on the world stage. The Canadian banking system became a beacon of financial stability in a roiling sea, anchored by prudence, conservative risk management, and government-imposed restraints. Canada was hailed as one of the few fiscally responsible members in the G-7 club of profligate spenders. The Canadian housing market may have suffered a dip during the crisis, but it soon not only recovered, it came roaring back, bigger, stronger and crazier than ever.
And then, of course, there’s the oil patch. With seemingly diminishing growth in global petroleum supplies, unstable regimes where much oil actually is, and prices spiking beyond economic fundamentals would seem to warrant, Canada’s oil sands became increasingly attractive to foreign investors as a reliable, expandable source of energy in a politically stable region of the world. The oil sands, and other commodities, have generated so much wealth in fact that Alberta, B.C. and other provinces whose primary preoccupation is digging wealth out of the ground, have now become the main growth drivers of the Canadian economy––a role historically played by now ‘have not’ Ontario.
So, let’s recap Canada:
- high employment
- sound banking system
- booming housing market (though showing signs of stress)
- booming energy and commodities sector
Yes, Canada has a lot going for it. This list is by no means exhaustive, but one could say these are four pillars of the Canadian economy.
Having said that, I’m worried for Canada (at least in the short term). I’m worried because there are threats to Canada that can knock those four pillars out from under the economy.
Let’s take a quick look at each in turn.
Outside of the pubic sector, employment in Canada is highly dependent on foreign investment. Canada’s proximity to the world’s largest market just south of the 49th has historically served Canadians well economically. It has always been relatively easy for US companies to set up subsidiaries in Canada in order to serve local Canadian markets, or made goods for sale in the US. However, this foundation for employment has also always been rather tenuous. In the 1990′s, jobs in manufacturing were being lost as many US companies moved factories to Mexico. Then in the 2000′s China became the focus of cheap labor and more manufacturing jobs were lost to migrant Chinese peasants who populated the thousands of factory complexes springing up along China’s southern coastal regions.
But today I see a new threat to Canadian jobs. This threat is not coming only from low-cost, off-shore jurisdictions. Today there is a new low-cost jurisdiction which could prove more dangerous to Canadian jobs than either Mexico or China: the United States itself.
One of the macro trends playing out in the global economy is the global rebalancing of labor. Due to very large differences in living standards from region to region, labor costs vary widely. Now, as developing countries expand their economies, and living standards rise, labor costs in those countries will also rise. We have already seen a good deal of labor price inflation in China. So much so, in fact, that producers are looking to other jurisdictions for new pools of cheap labor.
Now, I contend that the whole of China, let alone the rest of the world, cannot rise to what we in the West consider a ‘middle class’ standard of living. There is simply not enough wealth in the world to achieve this. And at the same time, global wealth is being shared among more and more people. Therefore, if people in developing economies are capturing a larger share of real wealth, then people in developed countries will have to take relatively less of that share. This could very well mean a much lower standard of living than that which most people in Canada and the US have become accustomed over the course of the last century or so.
History shows us that global imbalances, while they may take some time to build, generally don’t get resolved smoothly, but rather they rupture suddenly, and often violently. A good analogy is earthquakes. The pressures in the earth’s crust that cause earthquakes can build up over a very long period of time, often going unnoticed until it’s too late.
I would argue that the financial earthquake of ’08, with its epicenter in the United States, was at least one phase of the resolution of the global imbalances that developed over the past three decades or so. But while Canada may have felt the shock because of its proximity to the US, this was America’s ‘earthquake’. As such, if the world is now in a period of readjustment (or rebalancing) arguably the United States is further along this path than Canada.
The economic evidence would seem to bare this out: housing prices in the US have corrected; the financial system collapsed and was recapitalized, and; labor costs have come down. I’m not suggesting that it’s all sunshine and lolly pops from here on out, but the US has already taken much of the pain associated with rebalancing (how much more there may be to go remains to be seen).
Aside from the many advantages that the US has––and which were not destroyed during the crisis, such as still having the world’s largest economy by far, an abundance of resources, deep, liquid capital markets, an educated work force, the world’s most powerful military, to name but a few––now the US economy has the advantages of lower real estate prices and lower labor costs, relative to Canada. (Of course, there are regional differences, which is why one area of the US I think will see a major manufacturing renaissance is the South which has historically been perennially depressed vis-a-vis the North.)
What the US experience did is create yet another imbalance for Canada to deal with. This new imbalance is not between Canada and far-flung foreign lands, but between Canada and our largest trading partner. Suddenly, that close proximity that served Canada so well in the past may become detrimental to Canadian jobs in the near future. In fact, it already is.
One of the most glaring examples of the shift of jobs to the US was the recent departure of Caterpillar from London, Ontario. The heavy equipment manufacturer moved its London operations to Indiana, where a recently-passed law makes it more difficult for unions to organize. At the same time, Caterpillar was reporting record annual profits. And Caterpillar is by no means the exception.
The throngs of American companies exiting Canada is becoming almost a deluge. Navistar International, Ford, and Rio Tinto Alcan are among others who have recently taken similar actions. The workers at Caterpillar’s London facility may not have been willing to accept the cost-cutting demands of Caterpillar. But how willing will other Canadian workers be to stand their ground the next time an American company threatens to ship out, and another, and another.
Barring some kind of miracle that renders Canada an exceptional destination for people and business, while the US economy enjoys a period of super growth, the only way a large imbalance in labor costs will get resolved is that Canadian labor costs must come down, at least in relative terms.
This can be a huge problem during a time of high and worsening inflation. Furthermore, Canadians are among the most indebted consumers in the world, thanks in large measure to our booming credit-fueled, decade-long real estate binge. With Canadians now burdened by record levels of debt (the fact of which BOC governor Mark Carney seems to take every opportunity to remind Canadians) an “adjustment” in the labor markets could be very painful for many Canadians indeed, and harmful to the economy. The irony is, a revitalized American economy, normally a good thing for Canada, could be one of the main causes of this adjustment.
To be continued.