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Economic Gap Between Canadian Regions Narrowing

By Todd Hirsch Created: January 23, 2013 Last Updated: January 23, 2013
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There’s been a distinct difference in the rate of economic growth between Canada’s regions over the past several years. 

Momentum has clearly favoured Western Canada, particularly Alberta and Saskatchewan where energy, agriculture and natural resources have led the way. On the other hand, Central Canada has struggled with a loss of manufacturing and export struggles with the high Canadian dollar.

The stronger pace of growth has been the source of much pride here in the West—and the nastier side of people can even lead to childish gloating that we are doing better economically than Ontario or Quebec.

But new forecasts from some of Canada’s private sector economists are now expecting that gap to close. Certainly the West will continue to have a faster pace of growth than Central or Atlantic Canada, but the difference may start to be less pronounced. 

A distinct moderation in energy prices on the Prairies and cooling of the housing market in British Columbia have scaled back growth forecasts for the western provinces. At the same time, better-than-expected growth for the U.S. has upped the forecast for Ontario and Quebec.

This narrowing of the economic gap may not be welcomed by some Westerners who want to see other parts of the country suffer while we prosper. But it is a good development for three reasons.

 Interest Rate Policies

The first is that a more uniform rate of growth across the country makes it much easier for the Bank of Canada to do its job. 

The setting of interest rates is completely driven by rates of economic growth and expectations for inflation, but because we are 10 provinces (and three territories) that share one currency, there is only one trendsetting interest rate: the Bank of Canada’s overnight rate. 

The Bank runs into problems, though, when different regions are growing at wildly different rates. A juiced-up economy in the West, for example, could start to drive wages and inflation higher. But a sluggish economy elsewhere could keep inflation off the radar screen entirely. 

How does the Bank of Canada respond with sensible interest rate policies in that sort of environment?

Inter-Provincial Migration

The second reason why a smaller gap in regional growth rates is welcomed news has to do with the labour market. Because we live in one large country, workers are free (and sometimes expected) to move to where jobs are more plentiful. 

Alberta has been a recipient of thousands of inter-provincial migrants, and 2012 was certainly a banner year on that front. Saskatchewan, too, is seeing net gains in population from other provinces. This is generally positive, but if the pace of migration heats up too much, it starts to create other problems. 

The narrowing gap in economic growth rates is being driven by positive factors.

With thousands of people moving into Alberta cities and towns, it is often difficult to keep up in the provision of housing, schools, and hospitals. The apartment rental market can get out of whack, punishing people on fixed incomes. Even transportation is strained.

But there is another problem at the community level—cities and towns are hollowing out in other parts of the country as workers leave those regions. 

If the exodus becomes a stampede, entire towns and regions can fall quickly into economic chaos. This poses real problems for provincial and federal governments when the citizens left behind expect solutions to their economic decline. Sometimes there are just no solutions to offer.

Faster Is Not Always Better

The third reason why a more uniform growth rate across the country is beneficial relates to the federal government’s Equalization Program. 

People are split in their opinion of this system of wealth redistribution; but whether you love it or hate it, a more uniform growth rate is good news. 

If you are not in favour of the program, the better economic results in Central and Atlantic Canada and the moderating growth in Western Canada will automatically reduce the cash transfers from Ottawa to the have-not regions. 

And if you support the program, the narrowing gap in growth rates will temper the criticism and attack that equalization often sustains. The smaller gap could even suggest the program is working as it was intended to.

Fortunately, the narrowing gap in economic growth rates is being driven by positive factors. Somewhat slower growth in the West is actually a benefit in the long run—faster is not always better. And improved prospects for Central and Atlantic Canada is unequivocally good news. 

The more uniform economic growth rates are across the country, the easier it will be for all regions to get along.

Troy Media Business Columnist Todd Hirsch is Senior Economist with ATB Financial. Courtesy Troy Media

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