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JDI Roundtable on Manufacturing Competitiveness in New Brunswick

Province will have a long road to economic recovery

Herb Emery

The fast moving COVID-19 pandemic has taken us, in just two weeks, from living as usual to abruptly changing our daily lives to manage a health care crisis. There is a growing realization that the economic toll of the pandemic will be large. A common question I get asked is whether we are more exposed than other provinces, or places in Canada given the structure of our economy.

The Brookings Institute in the United States took an interesting approach to answering the question about the geography of the pandemic-related economics impacts. Brookings noted that in the U.S., consumer spending which supports 70 per cent of the economy is crashing in all communities as people avoid stores, restaurants, movie theaters, offices and other public places. Businesses are shuttering and layoffs are underway.

Canada, and New Brunswick, is not that different from the U.S. in terms our reliance on consumer spending to drive GDP. In fact, when exports stalled more than a decade ago, we relied on cheap credit to ride consumer spending even harder to stave off recession.

Now, even with near-zero interest rates, consumer spending is crashing because of COVID-19. Nearly 500,000 Canadians applied for Employment Insurance in the past week and we are likely to see even more in the coming weeks. Social distancing measures to combat COVID-19 are likely to last two months or more.

Brookings study noted that in the U.S., it’s not the case that all areas will suffer the same degree of economic stress given diversity of industrial structures of local economies. To show how this is the case, the authors took the five sectors identified by Moody’s as the most exposed industries to a COVID-19 related economic downturn and determined the relative importance of employment in those economically vulnerable sectors in U.S. cities.

Moody’s identified the five most vulnerable sectors to be mining, oil and gas, transportation, employment services, travel arrangements, and leisure and hospitality. Meanwhile, Brookings found that the places least likely to be affected by the COVID-19 economic recession are those places like “older, manufacturing-heavy industrial cities, agricultural towns, and some already-distressed places.”

While New Brunswick is highly trade-exposed among Canadian provinces, its industrial structure looks a lot like the places in the U.S. that Brookings Institute found to be the least vulnerable to a collapse in consumer spending. We have older, manufacturing-heavy industry in Saint John. We have agricultural towns up the St. John Valley and we have many communities already distressed, like in the northeast of the province.

It is worth noting that for already-distressed places, the lack of vulnerability reflects that there is not as much left to lose – so it’s not a silver lining. Clearly, their recovery will be even harder after COVID-19 than it was before. It also bears note that the broader public sector of health, education and public administration has a very large share of provincial employment compared to U.S. places and in comparison to other Canadian places.

Using publicly available Statistics Canada data for 2019 on employment, we can calculate the employment shares of the Moody’s five most vulnerable sectors for Canadian census metropolitan areas (CMAs), Canadian economic regions and for the 10 provinces to see how vulnerable New Brunswick and its cities may be to the COVID-19 recession.

These numbers are not directly comparable to the Brookings Institute statistics for the U.S. since our publicly available data only provided employment in broader groupings – for example, where U.S. numbers are available for transportation, Canadian statistics are available for the broader “transportation and warehousing.” Also, where the U.S. data can be narrowed to mining, oil and gas, for Canadian CMAs mining, oil and gas extraction is combined with fishing and forestry.

So the Canadian data will have higher employment counts in the five vulnerable sectors than the Brookings Institute had for U.S. cities and metropolitan areas. But this shouldn’t be a problem for comparing relative vulnerability across Canadian CMAs.

One also has to consider the influence of the much-larger role of the public sector for employment in Canada, particularly in health care. I have chosen to present employment in the five vulnerable sectors to total employment less employment in health care, education and public administration.

Among provinces, New Brunswick has the second-highest share of private sector employment in the five vulnerable sectors (27 per cent). Newfoundland and Labrador is highest with one-third of its private sector employment in the most vulnerable sectors. Nova Scotia (26 per cent) and Prince Edward Island (25 per cent) are slightly less exposed to the recession.

Among Canada’s CMAs, with 30.7 per cent of private sector workers in the five vulnerable sectors, Moncton is the third most vulnerable of 33 cities in Canada for which we have data. Slightly behind Moncton for vulnerability is Calgary (30 per cent), and then in fifth place, Saint John (28 per cent).

Economic vulnerability to COVID-19 is generally lowest in the cities in Quebec and Ontario, where the five vulnerable sectors account for 23 per cent or less of private sector employment.

If we look at economic regions of New Brunswick, then we can see that Fredericton-Oromocto (27 per cent) and Campbellton-Miramichi (26 per cent) are as vulnerable to this COVID-19 economic crisis as Saint John. Edmunston-Woodstock (23.5 per cent) has relatively low vulnerability to an economic downturn relative to the rest of the province, and comparable COVID-19 vulnerability to places in central Canada.

Why are we so vulnerable in New Brunswick? Most of the vulnerable cities and regions in Canada are those with mining, oil and gas as major employing sectors. New Brunswick does not have those sectors at this time as they have already been lost to economic forces and public policies like fracking moratoria. Yet New Brunswick cities still have high vulnerability because of high concentration of private sector jobs in transportation, accommodation and food services. We are also concentrated in business services, which includes employment services and travel arrangements.

The second contributor to high dependence on these vulnerable sectors for private sector employment is the generally weaker private sector employment opportunities. Among the 33 Canadian cities for which we have data, there is a clear correlation that the higher the share of public sector employment, the higher is the share of employment in the five vulnerable sectors of private sector employment.

In other words, higher reliance on public sector employment is associated with greater vulnerability to the COVID-19 recession. This does not factor in that public sector employment is also vulnerable to reductions in a severe recession, should the provincial and local governments encounter severe fiscal challenges.

New Brunswick’s economy was likely going to have a tough time through and after the COVID-19 pandemic simply because our major export market, the United States, will also be in recession. The vulnerability of our economy to reduced consumer spending due to COVID-19 represents a second “whammy” for the province. It is a sad irony that Moncton, which has proudly avoided becoming dependent on a single dominant employer like was in the past with CN, has not diversified its employment base. Moncton today is still highly dependent on the transportation sector, albeit with a larger number of small and medium-sized employers.

It is also surprising that a larger public sector is associated with greater vulnerability to the COVID-19 recession. What it likely reflects is the province’s reliance on the public sector for employment over an exporting sectors like manufacturing, and increased our reliance on imports of goods.

Since 2009 this approach to growing the economy has failed to grow GDP. It has failed to increase private sector employment. It has mostly increased imports and created a large amount of public debt. And sadly those outcomes leave us highly exposed to the negative economic impacts of COVID-19.

Unlike 2009 ,where New Brunswick had relatively manageable debt and borrowing room which allowed for an attempted path to recovery based on public spending and employment, this time that path won’t be available. That means that the path to economic recovery and growth starts by the provincial and local governments doing all they to get their businesses through this crisis and creating the conditions for them to grow.

Herb Emery is a Brunswick News columnist and Vaughan Chair of Regional Economics at the University of New Brunswick.

This article first appeared in Brunswick News publications – March 25, 2020

The JDI Roundtable on Manufacturing Competitiveness in New Brunswick is an independent research program made possible through the generosity of J.D. Irving, Ltd. The funding supports arms-length research conducted at UNB.