Public-spending cuts are keeping a lid on economic growth in Prince Edward Island, and even though sectors such as aerospace and tourism are expected to perform well in 2013, economists are predicting a relatively weak year overall for the island province.
Economists estimate that P.E.I. registered moderate growth of about 1.6% in 2012 – a level lower than the national average, but higher than most other Atlantic provinces.
“P.E.I. is coming off a good year,” says Fred Bergman, senior policy analyst with the Atlantic Provinces Economic Council (APEC) in Halifax. He attributes the economic growth primarily to strength in exports – particularly in the aerospace industry, in which exports surged by almost 192% in 2012. “That’s pretty phenomenal growth.”
Although export activity is expected to remain elevated, the aerospace sector is unlikely to repeat the banner year it had last year. And combined with substantial pressure on public spending, economists suspect that 2013 will be a slightly weaker year for P.E.I. For instance, APEC predicts gross domestic product (GDP) growth of 1.4% this year. Says Bergman: “We’re expecting a bit of a slowdown, but nothing dramatic.”
The latest provincial budget forecasts a deficit of $75 million in 2012-13 and $34 million in 2013-14. As part of the plan to balance the budget by 2015, the P.E.I. government has cut spending in most departments, reduced its capital budget by about 20% and announced plans to eliminate 300 public-sector jobs over three years.
P.E.I.’s transition to the harmonized sales tax (HST), which takes place April 1, is expected to have positive implications for public finances. Bergman believes it will transfer certain administrative costs from the province to the federal government and will generate new revenue, as services that weren’t previously taxable will be taxed under the HST.
Despite this extra cushion of support, however, the P.E.I. government is following through with hefty cutbacks across the board.
“Basically, public finances are not going to contribute to the bottom line at all,” says Natalia Ward, economist with the Conference Board of Canada in Ottawa. “Private-sector investment will increase this year and next; however, it will not be enough to offset the pullback from the public-sector side.”
@page_break@ Construction is the sector likely to be hit hardest by the retreat in capital spending – and this will be exacerbated by weakness in the housing market. Housing starts are expected to plummet by 17.4% in P.E.I. this year, according to Bergman, as population growth slows and demand declines.
Ward agrees: “The construction industry will not play its traditional role in helping to lift GDP growth in the next couple of years.”
Other sectors, however, could offset some of this weakness. Fishing and agriculture – including the province’s signature potato business – are poised to benefit from growing demand from the U.S. as that country’s economy shows gradual improvement.
The aerospace sector also continues to carry momentum, thanks in part to the added production capability of two plants that opened in 2011.
“We’re still seeing some upside potential on aerospace exports,” Bergman says, “but maybe not to the degree of growth that we saw last year.”
Tourism in P.E.I. had a solid year in 2012, with a record number of cruise ships visiting the island during the summer season.
“The increase in the number of tourists was so significant,” Ward says, “that a lot of the businesses in Charlottetown decided to increase their shopping hours.”
She expects tourist traffic to pick up even more this year: “That will be good news for the accommodation and food services [industries], as well as amusement and recreational services.”
These and other sectors could help generate some employment growth in P.E.I., but, again, public-sector cuts will weigh on the job market. The province has one of the highest jobless rates in the country, at 11.2% in 2012, according to the Conference Board. That’s expected to decline to 10.8% in 2013 and 10.2% in 2014, but Ward says, the declining rate is mainly being driven by a lower labour-force participation rate.
“Gains in employment,” she says, “are going to be quite restrained in the next two years.”
Population: 146,105
GDP 2011 ($bil.): 4.9
GDP % change: +1.6
2012-13 deficit ($mil.): 79.6
Estimated net debt ($bil.): 1.9
Median after-tax income,
all families: $44,700
household disposable income/capita: $23,879
Figures are from latest available reports/estimates
Sources: conference board; Government reports
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