by Heidi Riley
The Atlantic Economic Council conference in Charlottetown discussed the slowing growth of the Atlantic economy. But the good news is that the region will still outperform the rest of the country.
The Atlantic Economic Council (the Council) independent research provides regionally focused insights and ideas to support a healthy, inclusive and sustainable Atlantic Canadian economy.
At the conference, the Council’s economists also tackled timely questions such as:
- When will interest rates start to fall again?
- Will population growth continue to drive our economy forward?
- How much construction is needed to reduce the housing shortage?
- Should businesses in the region be concerned about the conflicts in the Middle East and in Ukraine?
Fred Bergman, the Atlantic Economic Council’s Senior Policy Analyst, provided an economic growth forecast for PEI, and described recent trends and future expectations regarding the economy in the region and across Canada.
Economic outlook for Canada and globally
Fred says the Canadian economy will likely avoid a recession in the near term. “However, we forecast Canadian real GDP growth will slow from about 1.1 percent this year to about 0.5 percent in 2024. Sustained high interest rates, weaker global growth, and heightened political conflicts around the world will take a toll on spending, investment, and exports on the Island and across Canada.”
Households should expect high price growth to continue for the foreseeable future. This will lead to a need for increased wages, putting upward pressure on inflation. The Bank of Canada may increase interest rates or delay rate cuts to curb inflation.
The escalation of the conflict in Gaza may drive up oil prices and cause major shipping disruptions such as in the Suez Canal. In our region, we expect the Atlantic provinces to outperform Canada this year and into next year due to stronger population growth here than in the rest of Canada.
How is PEI’s economy doing?
The Island’s exports are up over sixteen percent year to date in August 2023, and PEI is the only province with positive growth in exports in 2023.
French fry exports are trending upwards. Exports to the US are up about 34 percent year to date in August 2023. We expect a slightly slower US economy in 2024, so French fry exports are likely to slow down. The United Potato Growers of Canada says PEI potato production was down about one percent in 2023. Table potatoes are considered an essential food item, so even with high inflation, people will continue to buy them. Production was higher across the US and Canada, which is pushing prices down.
Bioscience exports are up about 42 percent year to date in August 2023. BioVectra’s new $90 million MRNA vaccine manufacturing facility is expected to boost exports further in 2024. The construction of the $50 million PEI BioAccelerator will raise PEI’s bioscience exports after 2025.
Tourism numbers on PEI have almost recovered from the pandemic and outperformed the rest of Atlantic Canada. Room nights sold in 2023 were up about 3 percent over the prior year, and up about 3 percent over 2019. However, high inflation and interest rates will leave less income for travel and may limit industry growth in 2024.
Confederation Bridge traffic increased about 26 percent year to date in July over 2022 and is up 9 percent over 2019 levels. However, ferry traffic is down about 32 percent in July 2023 from 2022, due to ferry breakdowns.
Air passenger traffic was up about 2 percent year to date in July 2023 over 2019. Traffic at the Charlottetown Airport is expected to reach 117 percent of pre-pandemic levels in 2024.
Economic forecast for PEI
On PEI, growth is expected to cool from about 2.7 percent in 2023 to about 1.4 percent in 2024. “Reasons for the slowdown across our region mirror what has been happening across the country. The main factor is that the full impact of the interest rate increases have not fully materialized yet and will not do so until 2024. This will result in slower growth, consumption, and investment.
“Population gains are supporting the growth of our region, and we expect the provincial and regional population will continue to expand.”
But a larger economy does not necessarily translate into improved economic well-being for every individual. Real GDP per capita growth has been lagging in our province, region, and country for some time, and this trend is expected to persist.
This situation is due to Canada’s productivity challenges due to such things as limited investments in machinery and equipment. “We cannot assume that growing our population will necessarily result in better economic prosperity. To achieve sustainable growth and higher living standards, we need more investment in new technologies, workforce development, and training.”
PEI’s population surge
PEI’s population grew by a record 6,600 people between July 2022 and July 2023. And there was an increase of 5,000 people the year before. “What is responsible for the surge in population? Immigration is the largest driver, with 3,100 people arriving on the Island in 2023. Net interprovincial migration, mostly from Ontario was at 1,600 people.”
The number of non-permanent resident workers surged in 2023, at about 1,300. The federal government has allowed more workers from other countries into Canada to help address labour shortages. The number of temporary foreign workers increased from 1,000 in 2022 to about 1,800 in 2023. Most of that increase is in seafood processing.
The number of foreign students is up about 460 from 2022 to 2023. UPEI has 300 more students, and Holland College now has a total of about 750 international students, double the number eight years ago.
Between 2017 and 2022, the Island led population growth in Canada, and over the last two years, annual population growth has hit an average of about 3.5 percent, or 6,000 people. Population gains are expected to continue. “We project PEI will add an average of 5,000 people or about 2.5 percent growth annually over the next two years.
“Immigration is important to sustain PEI’s aging labour force, and we expect this trend to continue.” Immigration surged in 2022-2023, due to the pandemic backlog being addressed. About 55 percent of immigrants to PEI over the last year headed to Charlottetown. In 2015, that figure was 90 percent. Immigrants are now more attracted to rural areas, which will help maintain the labour force in all parts of the province.
In the last year, 65 percent of the immigrants to PEI were under the age of 30. There were about 400 more K-12 students in 2022-23 than in the prior year. That puts a strain on the school system.
“We need to ensure we have enough housing, healthcare and schools to be ready for the growing population. More collaboration is needed between government and other stakeholders to minimize the negative impact of a growing population.”
Labour market changes
“Our labour market is aging and changing, influenced by current economic conditions like high inflation and interest rates.” Total employment on PEI is up about 4.9 percent year to date in October and is gaining steam. The PEI labour market did well in 2023, but the job market will cool in 2024.
“We forecast PEI job growth will be about 4.6 percent in 2023 before slowing to about 2.4 percent in 2024. The slower rate is due to high interest rates causing businesses to cool their hiring plans. The unemployment rate has declined since July 2023, but we expect it to increase from 7.6 percent in 2023 to about 8.1 percent in 2024 as the economy cools.”
Although the job market is softening, demand for new talent remains quite high. “We need people to replace retirees to help mitigate persistent labour shortages. PEI’s job vacancies trended up in 2022 and then started to trend down early this year. However, they are still above pre-pandemic levels, a trend that is expected to continue in 2024. The job market remains tight compared to recent years.”
The highest vacancy rates are in industries that offer jobs that are part-time, low wage, or seasonal. “The Temporary Foreign Worker program can help fill these positions, but we need to think about sustainable longer-term solutions. Investing in technology is vital to address job shortages and enhance productivity.”
Inflation has surpassed wage growth on PEI since early 2021. Purchasing power finally started to show some improvement in May 2023 as wage growth began to outpace inflation.” But we expect this trend to be short-lived. Wage growth will likely be subdued in 2024, given the cooling labour demand. Businesses may have less capacity to raise pay as they continue to operate under higher borrowing costs and the sluggish economy.”
Housing challenges and investment opportunities
Population growth stimulates investment and economic activity. It also comes with challenges, especially in the housing sector. There has been an annual average of about 1,200 housing starts over the last six years. Construction is not keeping up with population growth. Only about 1,300 homes were built in 2023, on par with 2022.
In Charlottetown, the rental vacancy rate is 0.8 percent and housing starts are down 28 percent, although more apartments are being built. The population is growing faster, but housing starts in Charlottetown are slowing down.
Construction activity is constrained by several factors. Higher interest rates, higher building costs and lower labour availability impact the rate single dwellings are being built. “The province needs more affordable housing to support the growing population. Removing the GST on new construction and limiting short-term rentals will hopefully open up more housing.
“Job vacancy rates in construction are well above the all-industry average. It will take time to resolve labour issues to get new housing units built.
“Over the last few years, the Island has had quite a housing deficit. We estimate that by next year, there will be 3,300 fewer housing starts than required.”
“We expect capital investments by the private and public sector including projects valued over $10 million to decline slightly but remain at an elevated level in 2024 as the province spends more on health, education and affordable housing.”
Capital investment is expected to fall by 2 percent next year but will remain near record highs. Electricity spending could rise as the construction of a new wind farm in Eastern Kings starts in 2024. Strong population growth may lead to an increase in these numbers if there is more new home building by the private sector, and public infrastructure spending may increase.
Housing investment is closely linked to interest rates, which depends on inflation. In September 2023, Canada’s inflation rate was 3.8 percent, while in PEI it was only 2.8 percent. “Our inflation rate tends to be lower than Canada as a whole when energy prices are subdued. In Charlottetown between May and September 2023, gas prices were about 18 cents per litre lower than the same time in 2022. Lower energy prices means lower inflation.”
Inflation on PEI has been trending downward since September 2022, but it is still well above the Bank of Canada’s target of 2 percent. About 50 percent of consumer products on the Island saw over 3 percent yearly inflation in September 2023. Gas prices are 12.9 percent higher. “We expect Island households to spend $1,850 more on food in 2023.”
The Bank of Canada expects national inflation to fall to around 2.5 percent by mid-2024 before reaching 2 percent by the end of 2025. Interest rates have risen 10 times since March 2022 and now stand at 5 percent, the highest rate in two decades. It can take up to 18 months for those rate hikes to fully permeate the economy. The Bank of Canada wants to see inflation near two percent before it begins to reduce interest rates.
“We forecast that rates will start to decline in the second half of 2024 as inflation goes down to about 2 percent. The Canadian economy is already showing signs of softening, with flat growth in the third quarter of 2023. We might even be in a very mild technical recession. Interest rates are not likely to return to pre-pandemic levels any time soon but may wind up at about 3.5 percent. Even in a few years we will still be paying more for debt.”
Households, businesses, and governments are all feeling the squeeze. Per capita, retail purchases are forecast to drop 0.4 percent in 2023 and 1.5 percent in 2024. Survey data confirms that consumers are buying fewer items that require financing, such as cars, home electronics, and appliances, due to high interest rates. This will contribute to a decline in real per capita spending. However, PEI households are in a much better position than other provinces outside the Maritimes. The province’s net disposable income ratio was 134 percent in the second quarter of this year, versus 188 percent for Canada as a whole.
Effect on small businesses
“We estimate that almost 1,400 businesses will permanently close on PEI in 2023, up about five percent from 2022,” Fred says. “Business debt is expected to rise in 2024 due to high interest rates and a weaker economy.” Other causes for closures are an aging labour force and no succession plan. The Federal government recently extended the Canada Emergency Business Account (CEBA) loan repayment deadline. About 62 percent of Atlantic Canada companies say that repaying their CEBA loan will jeopardize their business. On PEI, 21 percent of businesses are unable to take on more debt.
Federal and provincial government finances
Strong population growth is boosting tax revenues, but it is also raising demand for public services such as healthcare and education and is putting pressure on the capital budget. The provincial government plans to deficit spend in the next few years as it focuses on healthcare improvements and housing initiatives. Over this period, the deficit will be over $60 million per year. However, the province had a surplus of over $14 million in fiscal year 2022-23.
Meanwhile, the federal government expects its net debt ratio will decrease to about 40 percent in 2027. PEI’s debt ratio is expected to decline to about 29 percent by 2025, so PEI has a much lower net debt to GDP ratio and is in a better financial position than the federal government.
Governments are grappling with higher debt servicing costs due to higher interest rates. On PEI, debt servicing costs are projected to rise by 14 percent or $20 million in 2023.
“We are seeing a slowdown in Atlantic Canada, and other countries are facing the same issue. The International Monetary Fund (IMF) forecasts that global growth will slow from 3 percent in 2023 to about 2.9 percent in 2024. Before the pandemic, the rate was 3.8 percent.”
Factors hindering the recovery include the war in Ukraine, tight financial conditions, and the withdrawal of fiscal support after the pandemic. Rising inflation expectations may require higher interest rates around the globe. And there is the escalation of geopolitical conflict such as the recent crisis in Gaza.
FOR MORE INFORMATION
about the Atlantic Economic Council, visit www.atlanticeconomiccouncil.ca