Western Canada and the Recession

A great deal has been discussed over the past few years about the westward shift of the Canadian economy, a shift that reflects the dynamic growth that has taken place within the four western provinces while the manufacturing economy based in Ontario[1] has struggled with a high Canadian dollar and intensifying global competition.

No matter what the indicator might be – housing starts and prices, GDP growth, employment, or in-migration – the western Canadian provinces have led the national field, and have collectively positioned themselves as the “engine” of the Canadian economy.

Although growth was evident across the four western provinces, with Saskatchewan and Manitoba overtaking Alberta in early forecasts for 2009, Alberta has been front and center in these discussions about the restructuring of the Canadian economy, discussions that were brought into bold relief last summer when the price of oil approached $150 a barrel and the Alberta government forecast a 2008/09 budget surplus of $8 billion to $12 billion.

Well, that was then and this is now. The recession’s battering impact raises interesting and important questions in its wake. Will the current economic downturn derail the westward shift of the national economy?

As the resource boom withers in western Canada, will we look back on the past decade as a temporary, if long, blip in the evolution of the national economy? Or might the recession itself be a brief interruption in a regional restructuring of the national economy that will continue to reinforce the West’s leading role? Perhaps of greatest importance, will the regional restructuring of the Canadian economy spur or hinder essential transformations within the resource-based western Canadian economy?

Now, to pose these questions may seem foolhardy given the tremendous uncertainty that surrounds the Canadian and global economies. The brutal reality is that we have very little idea how deep or long the recession will be, and therefore to speculate on the nature of the postrecession Canadian economy is to peer into an extremely clouded, if not opaque, crystal ball.

Nonetheless, the questions are important as governments wrestle with measures to combat the current economic malaise. If we don’t know where the economy might be once we begin to crawl out of the downturn, we may make the wrong policy choices in the meantime, directing our stimulus firepower at yesterday’s economy rather than at where the economy might be tomorrow.

It is therefore useful to contemplate the evolutionary trajectory of the national economy and its regional parts if we are to follow the metaphorical advice of Wayne Gretzky and skate to where the puck is going to be rather than to where it is.

Short- and Long-term Connection

There is no question that the current downturn has at least temporarily curtailed the westward shift of the national economy; the resource sectors based in the West have been hit, and hit hard. At the same time, there is also little question that continental and global demand for what the West has in abundance will return, just as it is certain that the competition Canada’s manufacturing sector faces will only intensify.

Thus, at a time when any economic projection seems unwise in the extreme, the odds look good that two, five, or 10 years down the road, the westward shift will resume. Yes, booms go bust, but so too do busts eventually boom. The western Canadian hewers of wood and drawers of water should come out of this OK, although we wouldn’t bet even a subprime mortgage when this will happen.

This, however, should not be seen as a prescription for complacency. Low productivity is far too common feature of resource-extraction industries, and international competition for unprocessed raw materials will intensify. Moreover, when demand picks up again, as it will, the demand will not be for the same products produced in the same way.

With luck, therefore, the recession will provide an opportunity to address productivity issues, to move western Canadian production up the value chain, and to develop further opportunities for the export not only of natural resources but also the accumulation and commercialization of expertise that has grown up around resource industries.

The recession may jar the West out of its resource dependency and help prepare the region for a long-term future in which the economic importance of resources will inevitably recede. This is a region with great educational institutions, leaders in research and development, strong connections to the growing economies of China and India, and cities that have the potential to be hubs in a knowledge-based economy.

With luck, the recession will serve as a wake-up call, and the resumption of strong commodity markets will give western Canadians some breathing space to address the ongoing challenges to both the West and Canada that go well beyond the current recession[2]. As we move to do so, we should also remember that today’s rough patch shows that Canadians are all in this together, that there are no regional sanctuaries.