The Economy and Demography Challenges and Opportunities for the oneNS Coalition Thomas Storring, NS Department of Finance and Treasury Board, 2014-09-16

What can I tell you?

Economics and Statistics Division informs the government on: – How the economic conditions and outlook for the province affect the

fiscal situation – How taxation and fiscal policies affect the economy

Economies of scope: – Spend our time in detailed examination of economic conditions in the

province – Understand what influences our economy; in the short run vs. in the

long run

Plan for today – Show you the important facts and how to interpret them – How the facts fit together to explain long run growth

2

Slower Economic Growth in NS…?

3

2.3

6%

4.5

0%

1.6

4%

3.6

2%

0%

1%

2%

3%

4%

5%

6%

7%

8%

Real Nominal

Growth 1990-2012 Compound average growth rate

Canada NL PE NS NB PQ ON MB SK AB BC

…Or Slower Demographic Growth?

4

1.3

1%

2.7

1%

1.8

8%

1.4

7%

1.5

8%

1.3

2%

1.0

8%

1.4

5%

1.7

9%

1.4

5%

1.0

6%

1.04%

-0.42%

0.49%

0.17% 0.10% 0.66% 1.21% 0.56% 0.35%

1.94%

1.47%

-1.0%

-0.5%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0% 1990-2012 Compound Average Growth Rate

Population

Real GDP per capita

NL: Net

Where does GDP come from?

5

Factors of Production Utilization Rate Productivity

Labour, Capital, Natural Resources

Share of factors currently employed

Output/income generated per employed factor of production

Accumulate slowly over time; can diminish

Fluctuates a lot in the short run, but stable around long run average

Grows slowly over time

Demographics Capital investment Resource exploration & exploitation

Business cycle Demand in key markets Shifts in tastes/preferences Fiscal/monetary policy

Technology, capital per worker, skills, trade, infrastructure, entrepreneurship

Significant influence on long run growth

Little influence on long run growth

Significant influence on long run growth

What is it?

Pace of change

What causes it to

change?

Influence on growth

Why do we focus on demography?

Labour is the most significant factor of production Share of nominal income generated by production (GDP)

6

0%

50%

100%

Canada NL PE NS NB PQ ON MB SK AB BC

Taxes

Capital Consumption of Fixed Capital

Capital Operating Surplus

Labour

Why do we focus on demography?

7

-3%

-2%

-1%

0%

1%

2%

3%

4%

0-17 18-64 65+ All

NS demographic indicators have been weak… 1990-2013, CAGR

Canada NL PE NS NB PQ ON MB SK AB BC

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1

1971

1975

1979

1983

1987

1991

1995

1999

2003

2007

2011

2015

2019

2023

2027

2031

2035

2039

…future looks worse millions

Actual 0-17 Actual 18-64 Actual 65+ Actual Total

Forecast 0-17 Forecast 18-64 Forecast 65+ Forecast Total

Why do we focus on demography?

-1000

0

1000

2000

3000

4000

5000

60001990/1

991

1991/1

992

1992/1

993

1993/1

994

1994/1

995

1995/1

996

1996/1

997

1997/1

998

1998/1

999

1999/2

000

2000/2

001

2001/2

002

2002/2

003

2003/2

004

2004/2

005

2005/2

006

2006/2

007

2007/2

008

2008/2

009

2009/2

010

2010/2

011

2011/2

012

2012/2

013

International growth replaces natural

Natural Change

Net International Change

-6000

-5000

-4000

-3000

-2000

-1000

0

1000

1990/1

991

1991/1

992

1992/1

993

1993/1

994

1994/1

995

1995/1

996

1996/1

997

1997/1

998

1998/1

999

1999/2

000

2000/2

001

2001/2

002

2002/2

003

2003/2

004

2004/2

005

2005/2

006

2006/2

007

2007/2

008

2008/2

009

2009/2

010

2010/2

011

2011/2

012

2012/2

013

Internal Migration: a Youth Issue

Net Interprovincial Change: All Others

Net Interprovincial Change: 20-34

Net interprovincial migration

8

Why do we focus on demography?

-1.2%

-1.0%

-0.8%

-0.6%

-0.4%

-0.2%

0.0%

0.2%

0.4%

0.6%

0.8%

NL PE NS NB PQ ON MB SK AB BC

Youth Internal Migration – Influence on Population Ages 20-34 as a share of overall population change

1990/1991 1995/1996 2000/2001 2005/2006 2010/2011 2012/2013

9

What can we do about demography?

10

0

100,000

200,000

300,000

400,000

500,000

600,000

700,0001971

1977

1983

1989

1995

2001

2007

2013

2019

2025

2031

2037

Added Internal Migration

2014-2039 Added Migration 0 to17 years

2014-2039 Added Migration 18to 64 years

2014-2039 Added Migration 65years and over

0

100,000

200,000

300,000

400,000

500,000

600,000

700,000

1971

1977

1983

1989

1995

2001

2007

2013

2019

2025

2031

2037

Added Fertility

2014-2039 Added Fertility 0 to 17years

2014-2039 Added Fertility 18 to64 years

2014-2039 Added Fertility 65years and over

0

100,000

200,000

300,000

400,000

500,000

600,000

700,000

1971

1977

1983

1989

1995

2001

2007

2013

2019

2025

2031

2037

Added Immigration

2014-2039 Added Immigration 0to 17 years

2014-2039 Added Immigration18 to 64 years

2014-2039 Added Immigration65 years and over

Neither of these has happened recently on a sustained basis.

Replicating baby boom is difficult

Labour, Capital, Natural Resources Share of factors currently employed Output/income generated per employed factor of production

Is that it? Demography is our destiny?

Factors of Production Utilization Rate Productivity

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Accumulate slowly over time; can diminish

Fluctuates a lot in the short run, but stable around long run average

Grows slowly over time

Demographics Capital investment Resource exploration & exploitation

Business cycle Demand in key markets Shifts in tastes/preferences Fiscal/monetary policy

Technology, capital per worker, skills, trade, infrastructure, entrepreneurship

Significant influence on long run growth

Little influence on long run growth Significant influence on long run growth

What is it?

Pace of change

What causes it to

change?

Influence on growth

Greater population of working age More capital investment (physical & IPP) Find & exploit more resources

[Not a determinant of long run growth]

Find/improve technology embodied in capital Increase capital/worker Increase resources/worker Increase skills per worker More effective trade Better infrastructure Greater entrepreneurial skill/attitude

What can be done about it?

Capital Stock and Natural Resources $2002 per worker, 2000-2013

12

0

100000

200000

300000

400000

500000

600000

700000Industrial Sector 16.4% of NS workers

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

0

20000

40000

60000

80000

100000

120000Non-Industrial Business Sector 53.7% of NS workers

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

NS: 69% of national average, and falling…

Much higher concentration in energy-producing provinces

NS: 85% of national average, but rising…

Higher concentration in Western energy-producers

What does this tell us?

Increasing the volume of capital employed per worker can substitute for declining labour inputs to production – Added benefit of newer vintage technologies

NS has lagged national averages in both industrial and non-industrial businesses – Comparison against winners of the resource lottery are inappropriate – (Until we find our own winning ticket)

Business capital investment can grow quickly, but it depends on how businesses make their choices – Factors that matter: natural resource endowments, access to clients’ markets, cost of

inputs (labour, materials), foreign exchange rates, financing & interest rates, taxes… – Factors that matter: natural resource endowments, access to clients’ markets, cost of

inputs (labour, materials), foreign exchange rates, financing & interest rates, taxes – compared against everywhere else

13

Trade and Natural Resources (More to come…)

NS trade situation: exports 63 per cent of Canadian average – NS exports less internationally than other Provinces, even accounting for winners of the energy lottery – NS imports are similar to other Provinces (94 per cent of Canadian average) – Interprovincial trade is bigger than international trade for NS

Why do economies trade? – Exporting surplus output of our specialties allows us to import – What do we import? Things that are cheaper, better or more varied than we could make for ourselves – Being a big importer does not preclude positive trade balance (add value to imports or import productive

capital equipment)

How does trade contribute to long run growth? – Specializing and concentrating production in areas of competitive advantage improves productivity – Import the things we don’t produce as well as our specialties, so we can focus our resources where we

are most productive

Like capital investment trade depends on how businesses make their choices – Factors that matter: natural resource endowments, access to clients’ markets, cost of inputs (labour,

materials), foreign exchange rates, financing & interest rates, taxes… – Factors that matter: natural resource endowments, access to clients’ markets, cost of inputs (labour,

materials), foreign exchange rates, financing & interest rates, taxes – compared against everywhere else

14

Skills and Education 2013 – share of population aged 15+

15

0%

5%

10%

15%

20%

25%

30%

35%

40%

No degree, certificate ordiploma

High school graduate High school graduate, somepost-secondary

Postsecondary certificate ordiploma

University degree

Canada NL PE NS NB PQ ON MB SK AB BC

What does this tell us? NS has more high school dropouts, comparable portions with post-secondary education (more weight to certificates & diplomas).

Research and Development $ per capita 1990-2011

16

0

100

200

300

400

500

600

700Canada

NL

PE

NS

NB

PQ

ON

MB

SK

AB

BC

Business Sector

0

100

200

300

400

500

600

700

Canada

NL

PE

NS

NB

PQ

ON

MB

SK

AB

BC

Higher Education

0

100

200

300

400

500

600

700

Canada

NL

PE

NS

NB

PQ

ON

MB

SK

AB

BC

Gov’t/Non-profit

Innovation Spending Share of enterprises, 2012

17

0%

10%

20%

30%

40%

50%

60%

$0 $0-$50k $50-$150k $150-$500k $500k+

Process Innovation

Canada Atlantic Quebec

Ontario Alberta MB+SK+BC+Terr

0%

10%

20%

30%

40%

50%

60%

$0 $0-$50k $50-$200k $200-$1000k $1000k+

Product Innovation

Canada Atlantic Quebec

Ontario Alberta MB+SK+BC+Terr

What does this tell us?

NS has the worst business R&D in the country – But among the best higher education R&D

– It is not necessary to develop the technology to improve productivity

– Imported technology also enhances productivity (albeit for lower

risk, lower return)

Expenditures on process and product innovations are lower

among Atlantic companies – So neither in-house nor imported innovations are apparent

– Particularly for product innovations; not finding the next ‘new thing’

18

Productivity Growth and Gaps

19

-5%

0%

5%

10%

15%

1997-2002 2002-2007 2007-2013

Agriculture, Forestry, Fishing Productivity growth, CAGR

Canada NL PE NS NB PQ ON MB SK AB BC -1.0%

0.0%

1.0%

2.0%

3.0%

1997-2002 2002-2007 2007-2013

Business Sector-Services

-6.0%

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

1997-2002 2002-2007 2007-2013

Industrial Production 17.4%

0

40

80

120

160

200

240

Industrial

production

0

10

20

30

40

50

60

Business

sector, services

0

10

20

30

40

50

60

Agriculture,

forestry, fishing

Productivity $2007 chained per hour

What does this tell us?

What is productivity? – It is the effectiveness with which the production sector combines labour, capital

and natural resources to generate valuable output, measured as real GDP per hour worked

– It represents: capital/technology per worker, skills, entrepreneurship, innovation (product & process), trade, resources

NS productivity gap has been hard to close – Not closing organically even with limited labour supply growth – Sectoral composition of productivity is hard to shift – Weak investment, research/innovation, trade underpin weak productivity – Potential role of entrepreneurship, but difficult to measure

What can we do about it? – There are no direct channels to improve productivity, it’s indirect – More skills in the labour force, more advanced technology in production, more

valuable outputs, find/import cheaper inputs

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What does ALL OF THIS tell us?

Our demographic challenge is like a glacier – immutable, but slow. – Influence on population is limited; overwhelmed by baby boom retirement – Attracting and retaining youth will help; but it depends on all the other long run

determinants of economic growth – Place priorities on capital investment, innovation, skills, trade, entrepreneurship – Get those right and the rest will follow

We don’t have same natural resource endowments as other provinces – (Yet) – Some economic gaps will not be closed; that’s an issue for the Federation

Most of these decisions are made by individual businesses (and households) in response to market conditions, prices, business cases – Government has some, but not overwhelming influence on these variables – Business cases must ultimately determine where production takes place; a bad

business case propped up by crutches is still a bad business case…. – …unless the business case is impeded by crutches that exist elsewhere.

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The Bottom Line

Think about the time in the future when you aren’t going to have those inexpensive, well-educated baby boomers on which to rely for our production and income… Businesses: How can you make the business case for investment, training, trade and innovation to cope with this? Communities: How can you turn our attitude towards entrepreneurship and competition while adjusting to the changes that are coming? Governments: How can you contribute to the real foundations of business cases (without building crutches for bad ones)?

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