Quebec not only hopes to offset the impact of an economic slowdown in the U.S. but also to create jobs in all regions of the province with a spending jolt of $60 billion: $30 billion for infrastructure projects over the next five years, starting this year, and another $30 billion to expand the province’s hydro-electricity generating capacity.

A third shot in the arm — in the form of a $950-million income tax cut this year and the promise of another $250-million cut in 2009 — will also give the province a boost.

Premier Jean Charest’s Liberals were re-elected on March 26, 2007, on a promise to reduce income taxes by $250 million a year. A week before the election, Charest topped off his first $250-million tax cut by passing on a $700-million windfall from federal Finance Minister Jim Flaherty.

Charest and his finance minister, Monique Jérôme-Forget, have cast their worried eyes south to the U.S. — by far Quebec’s largest market, to which about 85% of its exports are destined. And given the still buoyant Canadian dollar and the global credit crunch, Quebec’s exports, which already took a hit in 2007, could decline further in 2008 if the U.S. slides into a full-blown recession.

The infrastructure spending to upgrade Quebec’s crumbling highway network, as well as its hospitals, schools and municipal projects, will ease the pain. Hélène Bégin, a senior economist with Desjardins Group in Quebec City, estimates this spending will add 0.25 of a percentage point to Quebec’s 2008 economic growth. And the province is prepared to speed up the infrastructure spending timetable and take other steps if the situation deteriorates.

That public money is needed because growth in non-residential investment by businesses in Quebec has been slow: 9.2% this past year, which lags the 12.6% average for Canada, according to the Institut de la statistique du Québec. The national average, however, is skewed by higher growth in the western provinces.

Economic forecasts still project positive growth for Quebec in 2008, in the order of 1.7%-1.8%. And even though Quebec’s Finance Department, which usually lowballs its projections, in December forecast 2.2% growth in 2008 and another balanced budget, Jérôme-Forget has revised her growth estimate downward to 1.8% in her pre-budget consultation document released in late January.

Exports from Quebec started to decline this past fall, yet the economy remained buoyant — thanks in large part to the strongest retail sales since 1998. What spurred Quebec’s shopping surge was a $1.5-billion injection of retroactive pay to 330,000 public-sector employees — mostly women — after the province settled pay-equity claims with its employees.

RETAIL SALES

As a result, retail sales in Quebec were up 4.4% in 2007, half a percentage point more than in neighbouring Ontario, according to a Royal Bank of Canada report. And Quebec’s retail sales will continue to be strong in 2008, with a 4% gain, according to RBC forecasts.

TD Bank Financial Group economists, on the other hand, expect only a 2.4% increase in retail sales in 2008 — one of the lowest rates in the country.

This past November, Charest announced a $620-million package to help Quebec’s manufacturing sector, including allowing corporations to delay paying corporate taxes in instalments and pay these taxes at yearend instead. This will leave manufacturers an extra $500 million in liquidity that they can use to modernize production capacity by taking advantage of the stronger Canadian dollar to buy new equipment in the U.S.

Quebec then called on Ottawa to do its share. But when emerging from a dinner at 24 Sussex Dr. in Ottawa on a chilly January night, Charest did not hide his disappointment that Prime Minister Stephen Harper had offered only $1 billion to the manufacturing sector — with about $217 million earmarked for Quebec — and made that money conditional on the adoption of Flaherty’s 2008-09 budget.

Charest first called on Harper to meet the premiers in November, when the C$ rose to US$1.10. The premiers were seeking quick help for the manufacturing and forestry sectors, as well as for workers in these industries who have lost their jobs. The C$ has been trimmed back since, hovering near parity with the U.S. greenback. But manufacturers whose competitive advantage was the lower C$ are still losing export sales.

The manufacturing sector in Quebec — particularly in clothing and textiles, newsprint, lumber and related forestry sectors — has shed 138,000 jobs in the past five years.

@page_break@A recession south of the border would shrink Quebec’s exports further. If that recession spreads to Canada, manufacturers — particularly those that counted on the favourable exchange rate for so long and failed to reinvest to increase productivity — will be hit harder still.

Forestry unions blame a lack of investment for the contraction of their sector. About 10,000 jobs have been lost in recent years as paper mills, sawmills and other forestry-production centres have closed. Guy Chevrette, CEO of the Conseil de l’industrie forestière du Québec, which represents the forestry industry, says the rationalization isn’t over. He predicts that 12,000 more jobs in forestry and forestry towns will disappear this year. Nor do forestry companies have money to reinvest in modernization now, he says.

Jean-Luc Trahan, who heads the Manufacturiers et exportateurs du Québec, says manufacturers that are reinvesting in their businesses will score productivity gains. But too many have neglected investment, becoming dependent on the cheap C$.

Every 1¢ appreciation of the C$ relative to the U.S. dollar costs Quebec manufacturers $440 million, Trahan says. Faced with a 15% appreciation of the C$, a manufacturer must realize that it has to “improve productivity by 15% overnight.”

Higher energy costs and globalization also have had an impact on manufacturing in the province. But “made in China” electronic products flooding into Quebec may contain computer chips made by IBM Corp. in its Bromont, Que. plant, Trahan points out. As well, Quebec companies outsourcing production keep the product research and development and marketing functions at home.

JUST-IN-TIME PRODUCTS

So, there are still 10,000 manufacturers in Quebec, providing 550,000 jobs, producing 20% of the province’s gross domestic product and paying for 75% of R&D in Quebec.

Productivity can mean working smarter, not necessarily harder, Trahan says. For instance, some Quebec manufacturers have an edge in just-in-time products, such as hockey sweaters and team souvenirs at playoff time. These manufacturers can respond quickly, adjusting their production as events unfold and the top teams emerge.

Local manufacturers and service providers can also tailor their production to the needs of their customers. They can partner with other Quebec companies, such as Bombardier Inc. and CAE Inc., that have a global reach but a local need for reliable, just-in-time suppliers. (For more on CAE, see page 44.)

Lean manufacturing means simplifying procedures to save time and costs while maintaining quality, Trahan says. And instead of being doomed, he believes, manufacturers adapting to the changing global marketplace can emerge from the present difficult conditions in a stronger position.

But in order to adapt, manufacturers require help from governments as well as investors, Trahan says, and this is getting more difficult. Manufacturers are feeling the credit squeeze triggered by the collapse of the U.S. real estate market and the non-bank asset-backed commercial paper fiasco.

Labour issues have also been an area of concern in Quebec. For one, Quebec’s low birth rate and its difficulty in attracting and retaining immigrants are factors behind a looming labour shortage. The Conference Board of Canada projects that if current trends continue, Quebec will face a shortfall of 363,000 workers by 2030.

However, Quebec has experienced a mini baby boom of sorts over the past five years. With a 15% increase in the birth rate in that period, compared with a 6.7% increase for Canada as a whole, Quebec’s birth rate is growing faster than that of any other province. Charest likes to credit his government’s generous parental leave program — it provides more money and time for both new parents than other provincial programs.

Another major labour issue concerning Quebec is its unemployment rate, which has been above the Canadian average — and significantly higher than that in neighbouring Ontario — for decades. However, this rate is improving considerably. In 2007, unemployment averaged 7.2% in Quebec and 6.4% in Ontario. The gap was even closer between Montreal, at 6.9% in December, and Toronto, at 6.7%, according to Statistics Canada.

This year, RBC economists expect unemployment in Quebec to average 6.8%, all but closing the gap with Ontario, where the jobless rate is projected to be 6.7% in 2008.

However, TD is less optimistic, projecting an unemployment rate of 7.3% for Quebec and 6.4% for Ontario.

Charest likes to boast that Quebec’s unemployment rate has fallen to its lowest in 33 years on his watch, even though most of the gains have been in part-time jobs. Quebec lost 43,000 manufacturing jobs in 2007, primarily in the clothing, food, wood and printing products industries, according to Statistics Canada. On the plus side, there were job gains in construction, utilities, accommodation, food services and other services.

Quebec has high-tech, pharmaceuticals and information technology companies that not only manufacture equipment but also develop software and provide IT services. Aerospace is also an important part of Quebec’s industrial base. And the push to develop small and medium-sized businesses that began in the 1970s as an alternative to mega-investments in cyclical resources is paying off.

The woes of Quebecor World Inc. and the sales of Alcan Inc. to Rio Tinto Group; BCE Inc. to Teachers Private Capital, the private-investment arm of the Ontario Teachers Pension Plan Board, Providence Equity Partners Inc. of R.I. and Madison Dearborn Partners LLC of Chicago; and the Montreal Exchange Inc. to TSX Group Inc. have created unease in Quebec. Provincial stalwarts such as Abitibi-Consolidated Inc., Domtar Inc., Molson Coors Brewing Co. and even the National Hockey League’s Montreal Canadiens all already have foreign ownership.

Nevertheless, Quebec’s economy is more diversified now than it was when the 1982 recession struck, killing jobs and pushing interest rates past 20%. Homegrown companies such as Canam Group Inc., Reitmans (Canada) Ltd., Cascades Inc. and Alimentation Couche-Tard Inc. have carved out their own niches. In addition, Montreal has become a world centre for video-game design as Ubisoft Entertainment and Electronic Arts Inc. have set up shop in the city.

The Charest government has evolved, as well. First elected in 2003 on a promise of five consecutive $1-billion income tax cuts that seemed too good to be true (and eventually proved to be so), the Liberals’ economic program called for laissez-faire economics and ending Parti Québécois interventionism.

The tax-cut program was disconnected from reality; and while subsidies and tax credits for business needed a cleanup, ending them abruptly proved unpopular, particularly in the outlying areas of the province in which elections are decided.

Charest still wants to bring Quebecers’ taxes in line with those of other Canadians, but the pace of change has slowed. Halfway through his first mandate, he recruited Raymond Bachand, an advisor to two PQ premiers, as his economic development minister.

Now with a minority government in his second mandate, Charest has abandoned the Thatcherite approach of his first mandate, in which he demonized the PQ and took on Quebec’s powerful unions. His more relaxed approach is paying off in growing voter approval.

Charest has a new mission: he wants to break down barriers to labour and professional mobility, pushing a bilateral agreement with Ontario and a larger arrangement with the other provinces. He also wants to sign a labour-mobility agreement with France when President Nicolas Sarkozy comes to Quebec City for the Francophonie summit in October. Such an agreement would mean the mutual recognition of diplomas and professional qualifications between Quebec and France.

And while a bilateral free trade agreement between Canada and the European Union doesn’t seem to be at the top of the agenda for Harper or Sarkozy — who is this year’s president of the council of the European Union — Charest is also promoting that concept. IE