Is It “Go West Young Man” All Over Again?

Mario Lefebvre Director Centre for Municipal Studies

The last few years prior to the recession, say from 2004 to 2008, a significant growth trend emerged within Canada. Economic growth in cities located west of Ontario was systematically faster than in cities located in Ontario, Quebec and Atlantic Canada (referred to as Eastern Canada from here on in). And it’s not just a story about two Western cities holding top spots in the economic growth rankings of Canada’s urban centres. We are talking about complete domination, where all Western cities are posting faster economic growth than Eastern cities.

At that time, this trend appeared to be attributable to the slowdown in manufacturing activity. Given that the share of manufacturing output to total output is larger in Eastern Canada than in Western Canada, and that the country’s manufacturing sector was pummelled prior to the global recession due to a variety of factors (the dollar rising to parity, the rise of China and India, ballooning oil prices, etc.), it was not a surprise that Eastern Canada’s economy was not performing on par with that of Western Canada.

Cities in both Eastern and Western Canada struggled in late 2008 and early 2009, as the global recession took hold. But with the beginning of the recovery in the second half of 2009, Canada’s manufacturing sector seems to have come to life. But let’s be candid—The Conference Board of Canada does not anticipate that the manufacturing sector will make any kind of giant leaps forward over the next few years. Nevertheless, growth has resumed and even the battered automobile and parts industry is rebounding. In fact, the latter development, combined with the $1.6 billion Windsor-Essex Parkway project, is lifting growth in the Windsor census metropolitan area (CMA) to the extent that it is anticipated to lead all urban areas in economic growth in 2011.

But this is where the expected resurgence of Eastern Canada comes to an abrupt end. The trend observed in the second half of the 2000s of a shift in growth toward Western Canada is expected to resume. It is principally attributable to four factors, which are not mutually exclusive. They are:

1. Western Canada is home to a large portion of Canada’s commodities and given the rise of China and India, Canada’s commodities will remain in high demand for the foreseeable future, sustaining economic growth in Western Canada. Again, there are commodities produced in Eastern Canada, but as a share of total output, the primary sector is much more important in Western Canada. 
2. Strong demand for Canada’s commodities will keep the value of the Canadian dollar relatively high vis-à-vis its US counterpart, which will remain an enormous challenge for the country’s manufacturing sector (largely located in Eastern Canada). 
3. The country’s demographic patterns have changed significantly and nowadays, with the exception of the Toronto CMA, faster population growth is found in Western Canada. And this trend is not going to change any time soon. Even cities such as Winnipeg, Regina and Saskatoon, which used to show very modest population growth just 10 years ago, are now posting population growth faster than the national average. And population growth is a key ingredient to economic growth, since it is population growth that dictates housing requirements and consumer demand. 
4. To top it all off, provincial governments located in Eastern Canada are burdened with higher debt-to-gross domestic product (GDP) ratios. All six provinces in Eastern Canada currently have ratios that exceed 30 per cent. Out west, only Manitoba comes close to that at 26 per cent. We therefore expect provincial governments in Eastern Canada to tighten their belts over the near term as they restore fiscal balance. True, provincial governments in Western Canada will do so as well, but the extent to which they need to do so is less pronounced. Moreover, Eastern Canada is home to much of the federal government, which is not in great fiscal shape either and which is also forecast to keep a lid on spending over the near term. The resulting belt-tightening exercise from both the federal and provincial governments will have a negative impact on overall economic growth in the Eastern portion of the country.

The combination of the four factors outlined above will undoubtedly create a gap between the projected economic performances of Western Canada vis-à-vis Eastern Canada. This trend will in fact be the continuation of what was observed in the second half of the 2000s. A legitimate question would be: when will this shift westward in economic growth stop? This is a tough question to answer. But it is fairly safe to say that for the coming five years or so, Eastern Canada could become familiar with an old statement: Go West young man!