There has 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, where rising prices for energy, agricultural and resources have fuelled a boom. Meanwhile, central Canada has struggled with the loss of traditional manufacturing and exports, due in part to the high Canadian dollar.

Ontario and Quebec’s combined economy is, of course, much larger than that of western Canada. Still, it is the rate of growth —  not the absolute size of the economies themselves —  that has caused a problem lately. Real GDP growth rates of 4-5 percent in full-throttle Alberta and Saskatchewan contrast with sluggish rates of closer to 1-2 percent in the industrial heartland of central Canada.

But new forecasts from some of Canada’s private-sector economists are now expecting the gap in the rate of real GDP growth to shrink. A 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 US has upped the forecast for Ontario and Quebec.

This narrowing of the growth rates between western and central Canada is a good development for three reasons.

The first is that a more uniform pace of growth across the country makes it much easier for the Bank of Canada to set policy. The setting of interest rates is completely driven by rates of economic growth and expectations for inflation, but because we are ten provinces and three territories sharing one currency, there is only one trend-setting interest rate: the Bank of Canada’s overnight rate. The Bank therefore runs into problems 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?

The second reason why a smaller difference in regional growth rates is welcome news has to do with the labour market. Because of the benefits of labour mobility within Canada, workers are free (and sometimes expected) to move to where jobs are more plentiful. Alberta is receiving thousands of interprovincial migrants, as is Saskatchewan.

This is usually a positive matching of available labour to jobs, but when the pace of migration overheats, it creates other problems. Faster growth is not always better growth. With thousands of people moving into Alberta cities and towns, it gets harder to provide adequate housing, schools and hospitals. The apartment rental market can get out of whack, punishing people on fixed incomes. Roads and transportation systems creak under the strain. At the same time, the provinces that lose workers face a diminished revenue stream, even as they must continue to provide services to the citizens who remain.

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, love it or hate it, a more consistent rate of growth between regions is good news. The better economic results in central and Atlantic Canada and the moderating growth rates in western Canada will automatically reduce the cash transferred under Equalization’s formula system, which should make the program a bit more acceptable to those who hate it. On the other hand, the narrowing gap in growth rates could even be suggestive that Equalization is working as it was intended to, which should please those who value and support the program. If nothing else, more uniform regional growth rates should temper the general criticism and attack on the Equalization system.

For the sake of community stability, efficacy of monetary policy and acceptability of the Equalization program, the more uniform economic growth rates between regions is a good thing. The current moderation in the growth rates in the West may cause some grumbling out here. But it also carries a silver lining for the health of our federation.

Todd Hirsch
Todd Hirsch is the Calgary-based senior economist with ATB Financial and author of The Boiling Frog Dilemma: Saving Canada from Economic Decline.

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