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Nova Scotia’s Two-Gear Economy: The Shape of Things to Come

July 25, 2013
Glen Hodgson
Senior Vice-President and Chief Economist
Forecasting and Analysis

The Nova Scotia economy is operating at two very different speeds—a modest pace for the Halifax region and a much slower speed for the rest of the province. This two-gear economy will present mounting challenges in the years ahead. Governments will be stretched to provide comparable public services and economic opportunities to the slow-growth areas, while relying on the city population for revenues. And breaking out of this box will not be easy.

I recently had the chance to speak to business leaders in Halifax. While studying the performance of the provincial and city economies, based on our detailed provincial and city economic forecasts, I was struck by how much Nova Scotia has become a two-speed economy—one speed for the Halifax region and a much slower one for the rest of the provincial economy.

Halifax’s economy is operating at normal speed, growing by around two-and-a-quarter per cent in 2013 and two-and-three-quarter per cent in 2014, which is comparable to the performance of many other Canadian cities outside Western Canada. Like nearly all large Canadian cities, the Halifax economy is based largely on a mix of private and public services. These provide a more stable economic platform through the business cycle, compared with a local economy that depends on resources or manufacturing for growth and employment. We expect Halifax to continue to have healthy (if not robust) population and employment growth. And thanks to international immigrants and people arriving from other provinces and cities, Halifax is expected to attract a net inflow of people. A growing population base will be good for sustained, if modest, economic growth.

In contrast, the economic outlook for the province as a whole is tepid, with growth forecast to be 1.5 per cent or less this year. Given that the Halifax region represents over half of the province’s economy, some simple arithmetic reveals that the growth prospects for the rest of Nova Scotia are not rosy. The economic fundamentals—growth in population, employment, and private consumption—for the rest of the province are weak. Population and employment growth are essentially flat over the next five years and private consumption will be correspondingly weak.

The Nova Scotia economic outlook does have some upside growth potential, driven in particular by offshore natural gas production and resulting sales. Successful development of the Deep Panuke gas field would mean a significant jump in output for the resource sector. Natural gas prices in North America are creeping higher due to more North American energy users switching toward natural gas, and there is potential for the development of liquefied natural gas (LNG) export facilities in the province. But in too many other respects, the province-wide economic outlook is not robust, a reflection of the underlying aging demographic forces at work.

The challenge ahead for Nova Scotia’s provincial government is pretty obvious. It will be stretched to provide comparable public services and economic opportunities to the slow-growth areas, while relying ever more on the city population for revenues. There will be recurring pressure to rationalize and even downsize public services, such as health care and education, in the slow-growth areas—and, indeed, to shift resources into the Halifax region to serve the still-growing population base there. The politics and policy of this resource shift will be complicated and will not unfold in a straight line.

Can anything be done to boost the growth potential for the Nova Scotia economy outside the Halifax area? As we have described previously for other Canadian regions, long-term economic growth is driven by the combination of three factors: labour force growth and human capital deepening; investment in physical capital; and, most importantly, business innovation and productivity growth.

To raise the province’s long-term growth potential, governments and businesses in Nova Scotia would have to examine policies and practices in all three areas. They would likely need to make fundamental changes to things like their strategies for attracting immigrants and fostering business innovation. Governments would need to get leaner and focus more on efficient service delivery.

In short, the two-speed Nova Scotia economy faces mounting challenges ahead, but those problems could be met with a shift in thinking, policy, and behaviour in favour of renewed economic growth. All economic actors in the province should have a role to play in that rethink and renewal.

 

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