Housing, productivity, and retail sales
Housing, productivity, and retail sales
Some questions about the provincial economy
On last week’s Issues and Answers, Michael Connors asked me about the polls and if the federal Liberals were really a drag on the provincial ones as many think.
Well, yes, but only up to a point, was the reply.
If there was a direct link then we’d expect to see the provincial Liberals in exactly the same place as the federal Liberals, namely badly trailing the Pea Seas like Justin and his bunch trail the federal Conservatives. But they aren’t. Instead, the two parties provincially are close.
That suggests there’s something else going on that is driven more by provincial factors than federal ones. In other pieces lately, I’ve pointed to the failure of both parties to connect with voters as their shared problem..
Anyway, in the same way, there’ve been a few oddities in economic information lately that make you scratch your head. Retired economist Doug May pointed out on Twitter/X the other day that when you take out the effect of inflation, there’s been no noticeable increase in consumer spending in Newfoundland and Labrador despite a real growth in population. That’s the opposite of what you’d expect.
Finance minister “Siobhan Coady recently noted the growth in retail sales,” May said. “It seems to be quite pronounced and impressive over the past twelve months. When we account for inflation and consider a somewhat longer period, the growth is basically non-existent.
Then he added:
What is perplexing to me is that NL's population has grown markedly over the past three years, particularly over the past year and a half. You would expect that as the population grew, so would retail sales, even when adjusted for inflation.
There’s no obvious explanation.
Earlier in June, Statistics Canada released a new analysis of productivity across the country for the period 2019 to 2022. Newfoundland and Labrador had the largest decline in productivity in the period 2019 to 2022 (-3.5%) and in the single year 2022 (-5.5%) of all the provinces. Again, there’s no obvious explanation since the other energy provinces - all in western Canada - saw sizeable growth in productivity.
Then there’s housing.
Canada Mortgage and Housing Corporation forecast last year a need for 60,000 new units in Newfoundland and Labrador by 2030. That works out to roughly 6,000 a year or 500 a month. We have not been even doing 20% of that monthly target in the very best months over the past 18 months.
The problem is not a shortage of workers, although that would be an issue if the numbers of new starts grew. People are just not building houses.
CMHC’s forecast might be out of whack but there’s no doubt the population is up. A higher population would normally soak up the available homes and stimulate new construction. But instead, we are seeing what would generally be described as a balanced market for home sales: available inventory covers about six months of demand. Higher prices reflect that as well but again, if things were really booming, we’d expect higher prices, fewer months of inventory, and more home construction. We’re not seeing it.
There’s no clear explanation for what’s going on here and to be frank, these three observations might be isolated and unconnected. Might be, but I don’t think they are. Take the population, for example. The bits above the line (gain) in the picture above don’t balance or exceed the bits below the line (loss) which would lead some to believe that’s there’d be plenty of housing. That would seem to explain the anemic housing starts and the very good but also relatively ordinary home sales and prices.
What that explanation misses is that the population leaving is not directly offsetting the new people coming. People leaving Hermitage and a house won’t cause an immigrant to St. John’s to have a house unless there’s already one in St. John’s for them to get. The empty house is still in Hermitage. Demand isn’t the same everywhere, equally and proportionally to the population increases or decreases over the whole province.
We’d expect home sales to go up, prices to climb, and new starts in St. John’s where folks are coming. We have seen shifts that reflect that - Sin Jawns average home prices are higher than the province by quite a margin - but it’s not fitting with the boost in consumer spending Siobhan Coady was pointing out in. It looks more like what Doug May pointed to. Things are flatter when you take out inflation and in most places outside St. John’s the story is a lot less rosy.
For me, one plausible explanation would be the longer term trend that has used unsustainable government spending built on unreliable resource revenue and borrowing to replace sustainable economic activity driven by private sector investment. That would make these numbers a reflection of weakness or fragility in the economy as a whole. This started under the Pea Seas and once it became the norm, government became the only acceptable solution to any problem.
That would explain why the economic development bits of government have shrivelled and the government financial support they offer are subsidies, gifts, and give-aways instead of performance driven and diminishing tax incentives like the old EDGE program. There’s also no effort to streamline regulation, modernise government services that impact the economy, or do anything else that might lessen government spending even though it would spur private sector investment and lower private sector costs as a result.
Muskrat Falls (we pay so others play) is the norm and what isn’t talk of Gull Island is government lining up to subsidize risky and unprofitable ventures like the Come by Chance refinery or - most obviously - hydrogen. Always remember that Muskrat Falls was never in isolation. It was matched with chronic and sizeable annual overspending dating back to 2006 or so. That level of overspending - between $1.0 and $2.0 billion -continues unchecked.
This is a food for thought column. Nothing definitive. Nothing firm. Just an observation about some details. And you have to wonder about the continuity of thinking when you recall the astonishing number of cabinet ministers in 2016 who said roughly the same thing. They’d all been briefed to expect the economy would shed 20,000 jobs as Hebron and Muskrat wound down. And then forecasts of job losses within government to deal with tis financial problems would go in on top of that.
No surprise they all balked at that, some right away and some over time. And no surprise that the provincial government is today in profoundly worse financial shape than a decade ago and it was in serious trouble then.
This is a piece I’ll come back to but for regular readers, it’s something to ponder in the meantime.
Does ‘retail sales’ take online buying into account?