by Heidi Riley
The Atlantic Provinces Economic Council (APEC) held a Business Outlook Conference in Charlottetown in November. APEC shared its outlook for 2023, key indicators to watch, and how businesses can best navigate the risks ahead.
Some key economic issues
- With recession concerns escalating, what should Atlantic businesses do to prepare for 2023?
- How high will interest rates go to slow rising prices?
- Labour shortages are intensifying.
- Can we sustain the rapid population growth we have seen over the last few years?
- What can governments do to provide support over the next year?
APEC’s David Chaundy, President & CEO, hosted and moderated the session, and Fred Bergman, Senior Policy Analyst, presented APEC’s economic findings, predictions, and solutions.
“The Canadian economy has strongly rebounded from the pandemic,” says Fred. “However, in the near future, the GDP outlook is not as positive. Economic growth is likely to stall in early 2023 because of persistent inflation and higher interest rates, which will weigh on domestic spending and investment.
“APEC does not expect a deep recession such as the one in 2008/2009. In the second half of 2023, we expect inflation to cool and interest rates should begin to go down, which will lead to a pickup in growth.”
The Atlantic economy will outperform the rest of Canada in 2023, because of expected strong population gains. “However, the Maritimes will still face higher inflation and higher interest rates, which will cool consumption and investment over the next year.”
The Maritimes outperformed Canada last year partially because of stronger population growth in the region. Immigration to PEI has increased. From July 2021 to June 2022, a total of 3,436 international immigrants came to the province. Net interprovincial migration to PEI was about 2,200 persons this year. “APEC expects interprovincial migration to slow next year.”
The Maritime provinces led the country in population growth, and the Atlantic region increased by about 62,000 over the last year. In addition, PEI’s population grew by about 3.6 percent, and APEC forecasts that PEI’s population will grow by about 2.9 percent over the next three years. “Atlantic Canada still has an aging population and a low birthrate, so we need to keep attracting immigrants.”
High inflation and interest rates are top concerns for consumers. In June 2022, inflation was 8.1 percent in Canada, the highest rate in 40 years. The number went down to 6.9 percent in September but on PEI, inflation was at 8.4 percent – food prices were up 10.6 percent, and energy prices, which affect transportation and shelter, were up 24 percent.
The five-year fixed mortgage rate rose almost two percentage points in the past six months. “A rise in interest rates takes more than a year to make a dent in inflation. Pausing interest rates to see the effect on the economy is not a bad strategy,” says Fred.
The Bank of Canada is working to lower inflation to two percent per year, and it does not expect to reach that goal until the end of 2024. “Until then, we can expect interest rates to continue to climb. It is reasonable to expect that inflation will be back to two percent by the end of 2024.”
Atlantic Canada is a small economy, and reginal forecasts are severely affected by developments around the globe. “Global growth is predicted to shrink by about 3.2 percent this year and about 2.7 percent next year. Forces that weigh on the global economy include rising interest rates to combat inflation, especially in the US. Further rate hikes could cause a broad-based recession.”
Russia’s invasion of Ukraine is destabilizing the global economy. This has led to a severe energy crisis in Europe, and has driven up the cost of food, minerals, fertilizers, wheat, and energy prices. “If Russia halts gas supplies to Europe, energy prices will spike higher than they already are.”
In addition, frequent COVID-19 lockdowns in China affects their economy and creates global supply chain disruptions and hampers trade activity.
“As the world economy slows, there will be less demand for goods to be shipped, which will ease the current supply chain bottlenecks.”
COVID-19 measures have jammed up the flow of goods and services, but pressures on the supply chain started to ease in May of this year. “As consumer demand softens, transportation bottlenecks and supply chain disruptions should continue to normalize, which will bring down inflation a bit. It is important for businesses to consider using local supply chains and build their inventory.
“Inflation may ease faster than expected, which could lead to fewer interest rate increases. Unfortunately, for next year, growth may be depressed further than expected. Prices that are sensitive to the conflict in Ukraine could flare up. Extreme weather could hamper food production and impact food security.”
Predictions for PEI’s economy
PEI’s economy grew by four percent in 2022, and that growth is expected to slow to about two percent in 2023. PEI’s total exports increased by about 21.5 percent in the first three quarters of 2022 as compared to last year. “A recession in the US is expected to soften PEI exports next year,” says Fred.
This year’s provincial deficit is estimated to be $93 million. The province is facing increasing spending pressures, including $58 million in support to help offset higher inflation.
Fisheries and aquaculture – “During periods of high inflation, demand for some high-priced products like seafood may decrease, along with prices for those commodities,” says Fred.
Agriculture – US restaurant and bar sales were up about 18 percent year to date in August 2022, which drove up demand for French fry exports. “However, slower US economic growth is likely to cause softer growth in French fry exports this coming year.”
About 5,500 fewer acres of potatoes were planted on PEI this year, and production will likely decline up to 10 percent, which is still five percent above the five-year average. Potato exports to the US surpassed 2021 levels, after the import ban on table potatoes was lifted in March 2022. The export ban on seed potatoes is still in place.
The Aerospace sector benefitted from greater commercial traffic and military investments due to geopolitical unrest. “Next year, it is predicted that global air traffic will be at about 94 percent of 2019 levels before the pandemic.”
Bioscience exports will benefit from expansions at two plants. BIOVECTRA is investing $80 million in a biomanufacturing facility in Charlottetown to produce an MRNA vaccine. They will also be upgrading the facilities in Nova Scotia. “This should create about 125 new jobs in PEI and Nova Scotia, and another 225 co-op term positions.”
Bioscience employment on PEI reached 2,300 in 2022 and is forecast to reach 3,000 by 2025.
The Canadian Alliance for Skills Training in Life Sciences recently opened a biomanufacturing training centre in Charlottetown.
In March 2022, the bioscience manufacturing incubator opened, which houses six units to facilitate the production of bio-based products. This facility is already at capacity. Chinova BioWorks, a Canadian natural ingredient company, expanded its manufacturing space inside the bioscience manufacturing incubator.
Tourism is clearly on the mend. Year over year in July, room nights sold were up by 118 percent, and are now close to levels before the pandemic. Bridge traffic is up 210 percent. Air passenger traffic to the Charlottetown airport is up about 369 percent year to date to August.
“By next year, we expect the numbers will reach pre-pandemic levels. However, higher interest rates and inflation are likely to lead to less disposable income available for discretionary travel over the next year, both from Canada and internationally.”
“Price growth has outpaced wage growth, which is leading to a decline in real purchasing power that will continue in 2023. Households are facing higher borrowing costs, which is also dampening spending, and could lead to a decline in purchases of big-ticket items like furniture and appliances.”
In 2022, major project capital spending on PEI will reach a record level of over $770 million, up 11 percent from 2021. The provincial government capital budget for next year includes major investments in health, education, transportation, and affordable housing.
“For these major projects to go ahead, we need access to labour. With labour shortages, some of these projects could be delayed.”
Higher interest rates have slowed home price growth nationally. The average price of homes sold on PEI has been falling since August, although the average resale price is well above historical levels.
“Elevated borrowing costs will lead to almost flat housing prices and new housing starts next year. However, there are still a lot of people moving to PEI, and coupled with a lack of housing supply, home prices are likely to remain elevated.”
To relieve some pressures on the lack of rental housing, the PEI government is planning to create 465 social and affordable housing units in the next five years.
Labour demand is still outpacing labour supply. However, wage growth is not keeping pace with inflation. After adjusting for inflation, PEI wages in real terms are down about six percent in the last 12 months.
PEI plans to increase minimum wage to $15 per hour by October 2023. “There is a prediction that PEI salaries could increase by 3.5 percent next year, which is not enough to offset the loss in real wages this year.”
PEI’s employment growth is leading the country. In October 2022, employment numbers increased by 4,300 jobs, and the unemployment rate was 5.4 percent.
“APEC expects PEI’s employment growth to be about six percent this year, but next year, higher interest rates and economic uncertainty may cause employers to pull back on hiring plans. Employment is expected to grow by 1.2 percent in 2023.
“Some sectors are likely to see slower growth, such as construction and manufacturing, which should slow the demand for workers. However, that does not mean that labour shortages will disappear.”
There are over one million job vacancies nationally and about 54,000 in Atlantic Canada as of the second quarter of 2022.
Job vacancies in Atlantic Canada are nearly double what they were before the pandemic. “Although fewer employers will be expanding job numbers next year, we still need more people in the labour force to replace the number of retirements, which will continue to increase.”
APEC’s outlook to 2023
The Atlantic economy is expected to slow down next year, but not as much as in other parts of Canada. As US interest rates rise or fall, they will affect Canada’s economy and exports. If
Canada’s inflation rate remains higher than expected, the Bank of Canada will be more aggressive in raising interest rates.
Population growth is a key reason why APEC believes the Atlantic region will continue to see stronger growth than Canada as a whole. However, if population growth is more subdued, the economy will be weaker.
Canada needs to bring in younger people from other countries who will stay here to work, buy homes, and raise their families. There are too few people entering the labour market compared to those retiring. In 2020, for every 10 people retiring, there were only seven new entrants to the labour force in the Atlantic region. In 1990, for every 10 people retiring, there were 20 new entrants.
In order to increase labour force participation, Canada needs to attract and retain immigrants. We also need higher participation from underrepresented groups such as the Indigenous population, which is younger and growing faster than the non-Indigenous population. Partnerships with Indigenous businesses are important for communities on-reserve and off-reserve.
Atlantic Canada’s economic progress is greatly affected by global shifts, and we need global partners to grow sustainably. It is imperative to remember Canada’s commitment to reach net zero by 2050 may affect businesses and governments.
Lastly, we need to implement more technology such as automation and remote work to help address some of the labour shortages. However, there are challenges in adopting more technology, such as cyber security and efficient broadband access.
FOR MORE INFORMATION
about the Atlantic Provinces Economic Council, visit www.apec-econ.ca