For the last several weeks, one of the major themes I've been reporting so far as Canada's economy is concerned is the phenomenon of two economies within one nation. One economy is B.C., Alberta, Saskatchewan and Newfoundland and Labrador and those provinces are booming. The other economy is in central Canada, mostly Ontario and Quebec. The conventional thinking is that the economies in those provinces are suffering because of the high dollar and their greater exposure to U.S. markets. (The U.S. economy is definitely slowing but did it shrink in the first quarter of this year? We'll find out Wednesday morning when the U.S. Bureau of Economic Analysis releases GDP numbers for the first three months of 2008.)
But today, along comes Statistics Canada with its review of provincial and territorial accounts for 2007. Overall, Canada's real gross domestic product — the sum total of all the goods and services produced by working men and women in this country — rose 2.7 per cent in 2007 compared to 2006. Now that's not a knock-the-ball-out-of-the-park number but that's a pretty good year. In fact, 2.7 per cent growth was the average rate of growth for our economy over the last five years.
Now, Newfoundland and Labrador actually did knock it out of the park with provincial GDP growing 9.1 per cent in 2007 compared to 2006. (see chart, left, courtesy of StatsCan) Everyone else was between 1.6 per cent and 3.3 per cent growth. That would be Alberta at 3.3 per cent — definitely an above-average performance but given record-high oil prices, etc., etc., 3.3 per cent was all it could do? In fact, growth of 3.3 per cent was Alberta's worst year since 2003.
And what about poor beat-up Ontario? All it did was see its GDP rise 2.1 per cent — pretty good considering everyone (including me) had just about written off the province's manufacturing-based economy. Heck, Québec's economy expanded by 2.4 per cent. No wonder Jean Charest is now that province's most popular politician.
Here's Merrill Lynch's chief Canadian economic strategist, David Wolf, on this latest data:
More timely indicators generally suggest that regional reconvergence in Canada extended into 2008. Job growth in Western Canada dropped to 2.5% y/y in Q1, lowest in nine quarters, from a peak of 4.3% a year ago. Job growth in Central Canada, by contrast, has generally picked up, hitting an 18-quarter high of 2.2% y/y in Q4 before edging back down in Q1 (see Chart 2). Even inflation has eased out West, in fact by more than in Central Canada – we calculate that the average CPI inflation rate across the four Western provinces was 2.3% y/y in Q1, down from a peak of 3.6% in Q2 2007 and the lowest rate since Q2 2005, while the 1.5% Q1 rate in Central Canada was in line with the recent range (see Chart 3).
In our work, we are primarily concerned with the Canadian aggregates; regional divergences are interesting largely to the extent that they may complicate the interpretation and projection of what's happening to the economy as a whole. Our main point here is that those divergences don't look particularly complicating at this point, in contrast to the conventional wisdom. To be sure, the recent divergence between commodity prices and the US economy suggests that Western Canada's lead over Central Canada may start to widen again – but not likely in such a way as to invalidate the message in the national data.