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Twisted Economy: Canada Ditches Manufacturing, Builds Condos Instead

Twisted Economy: Canada Ditches Manufacturing, Builds Condos Instead
Flickr: wyliepoon

Call it a sign of the times.

StatsCan’s most recent data on employment show the number of jobs in real estate in Canada jumped 3.9 per cent in the past year, nearly five times the rate of overall job growth. Construction jobs grew 3.1 per cent.

Over the same period, the number of manufacturing jobs fell by 0.9 per cent, or about 14,000 positions.

It’s not just the latest numbers that look like this; it’s a trend that’s been developing for the past half decade at least. Canada is ditching its manufacturing jobs and replacing them with jobs building condos. Okay, that’s a simplification, but underlying it are some disturbing facts.

According to the National Household Survey that came out last month, the number of manufacturing jobs in Canada was just above 1.5 million in 2011, down from 1.9 million in 2006. That’s a decline of 3.9 per cent per year, on average, over that time. Roughly one in 25 manufacturing jobs in Canada disappears every year.

The share of total employment now working in manufacturing has dropped to an all-time low below 10 per cent since the start of the year (now just 9.7 per cent),” BMO economist Douglas Porter noted recently. “That’s down from more than 15 per cent at the start of last decade and barely half the level in the 1970s.”

Meanwhile, construction jobs have never been more plentiful. They now account for 7.6 per cent of all jobs in Canada — the highest proportion in records going back to the 1970s, and well above the long-term average of around five per cent.

It’s also a higher number than has ever been recorded in the U.S., even at the height of that country’s property boom a decade ago. And for some market observers, that's a big red flashing warning sign.

“Canada has brilliantly adopted the Chinese economic growth strategy — all real estate, all the time,” investment banker and Globe and Mail columnist Scott Barlow recently Tweeted.

“Won’t end in tears — different this time,” he added, presumably sarcastically.

The problem that Barlow (and others) sees is that booms don’t last. Even if this recent Canadian construction mania ends in a “soft landing” and not a crash, there will be no need to for such elevated levels of construction employment going forward.

Much of the current construction boom stems from the Bank of Canada’s response to the economic crisis of 2008-2009. In the space of a year and a half, then-Bank Governor Mark Carney dropped the base interest rate from 4.75 per cent to 0.5 per cent, slowly easing it back up a little to 1.25 per cent, where it has sat for the past three years.

That caused mortgage rates to drop through the floor, spurring a massive housing boom that lasted until last year’s slowdown in sales (and may well be continuing today).

And while that housing boom was largely responsible for keeping Canada’s economy afloat even as much of the rest of the world struggled (something current Bank of Canada Governor Stephen Poloz has acknowledged), the longer term result has been a distorted economy. Excessive amounts of money have flowed into the housing market, while other sectors, like tech and manufacturing, have seen investment suffer.

Some economists recognized early on that there was something unusual about Canada’s economic “recovery.” While in past recessions, exports led the way back to growth, this time around it was debt-driven consumption and housing investment that pulled Canada out.

But that now leaves Canada in a precarious position — an economy tilted towards debt-driven consumer spending and away from export-driven manufacturing. With Canadian consumers already in debt up to their eyeballs, this trend can’t continue much longer.

Unlike manufacturing and other sectors that rely on exports, construction jobs are primarily a function of population growth, not external demand. If the demand for oil goes up, the number of oil jobs can go up, and stay up. But construction jobs will always be tied to the demand for new buildings, which in turn will always be largely connected to population growth (and the need to replace old buildings).

Since population growth in Canada is stable, the proportion of construction jobs should also remain more or less stable — maybe going up and down somewhat during booms and recessions, but never actually becoming a larger part of the economy.

So this is bad news: We’ve become reliant for jobs on a sector that is severely bloated by historical standards and apparently has nowhere to go but down.

But wait, you might say — what about the booming oil and gas sector? Aren’t the jobs being created there making up for the lost manufacturing jobs?

Not even close. Canada’s energy and resources sector isn’t nearly as large as most Canadians think. (Sorry, Alberta.) Even after years of decline, manufacturing accounts for 1.5 million jobs, give or take, while after decades of boom times, mining and oil and gas all combined employ just 225,000 people.

It would take a lot more oilsands operations, strip mines and pipelines to make up that difference.

(Interestingly, the share of Canada’s economy that belongs to resources is actually smaller today than it has been at times in the past: 14 per cent today, compared to an average of 18 per cent between 1986 and 1996, for example.)

Construction, meanwhile, employs about 900,000 Canadians — fewer than manufacturing, but at least on a similar scale. It’s construction, not oil, that has been making up for lost manufacturing jobs and keeping the unemployment rate out of disaster range.

This is not a sustainable economic path. Nor are there any easy solutions here.

But if Canada is to shift towards a more sensible path before crisis hits, it should start with an attitude change. It’s time to stop thinking of construction and real estate as a bonanza that makes our other economic problems unimportant, and start thinking of it as what it is: An economic addiction that’s keeping us from getting on the real road to recovery.

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