A sluggish U.S. economy is not expected to have a big effect on Canada’s smallest province.

“Prince Edward Island may fare better than the other provinces in the wake of a U.S. economic slowdown,” says Jim Sentance, associate professor of economics at the University of Prince Edward Island in Charlottetown. “To some extent if you’re a ‘have not’ province, you don’t have as much to lose.”

Most of the P.E.I.’s economy, he adds, is not linked to the U.S.’s economy in a way that a downturn would hurt the province. Manufacturing, for example, is struggling across Canada in the wake of a lethargic U.S. economy, particularly in Ontario and Quebec.

Sentance notes that two-thirds of the P.E.I.’s manufacturing sector is in food processing, particularly potatoes. It is a product unlikely to suffer in a downturn. “You’re looking at things such as french fires,” he says. “People might buy more of them.”

The potato business is less vulnerable than others, agrees David Chaundy, senior economist with the Atlantic Provinces Economic Council in Halifax. But P.E.I.’s other exports, such as seafood, will be affected, he says: “Lobsters, however, are not an essential food.”

Although the U.S. takes the lion’s share of P.E.I.’s exports, that slice is slowly shrinking, having dropped to 75% from more than 80% in recent years, says Nigel Burns, manager of economic statistics and federal fiscal relations with the Provincial Treasury department in Charlottetown. “We are finding new international markets,” he says.

The good news for P.E.I. concerns its manufacturing sector. Last year, Royal Bank of Canada economists singled out the sector for its strong performance. “The most significant economic impact has been the turnaround in the manufacturing sector, in which shipments have jumped by 17% in the first quarter compared with a year ago,” wrote Craig Wright, vice president and chief economist for RBC, in a report. “The food processing sector, which makes up 65% of total shipments and 86% of non-durable shipments, has performed solidly. After bottoming out in the early part of last year, this sector has picked up with double-digit annual growth for the past nine months.”

While potatoes can be attacked by more than 100 diseases and pests, these threats are usually caught early and contained. P.E.I. has had no such significant problems for years. Should the worst-case scenario occur, however, McCain Foods Ltd., the largest processor, could bring potatoes in from New Brunswick and Nova Scotia.

Consumer spending and the labour market also give P.E.I. an economic boost. The former, says RBC economist Amy Goldbloom in Toronto, is holding up well; the latter is “fairly strong.”

“These will help buffet the province,” she notes.

On the consumer side, retail sales in P.E.I. for 2007 are up by an estimated 7.8%, the fifth consecutive year sales have grown. Growth in retail sales this year is expected to top 4%. The primary reason for the positive consumer outlook, says an RBC report, is healthy wage gains, which are supporting retail sales.

The P.E.I. consumer price index is also up for the fifth consecutive year, but that rise has been moderate. TD Bank Financial Group’s estimate for 2007 is down from 2006; and 2004’s was below that of 2003. Since 2003, the CPI has grown by an average of 2.6% and is expected to increase in 2008 by only 1.3%.

On the labour side, P.E.I. unemployment hovered at 10.3% last year, and is forecast to decline slightly this year to 9.9%.

P.E.I.’s real gross domestic product is a little harder to narrow down; it depends upon who’s producing the numbers. TD estimates the GDP for the Island in 2007 will have increased by 1.7% and will grow by 1.6% this year. The provincial government is more optimistic for 2007 and just slightly less hopeful for 2008, anticipating growth of 2.6% and 2%, respectively.

One of the reasons for the cautious optimism is growth in sectors both new and established. The aerospace industry has been flying high since it landed on P.E.I. roughly a decade ago. Today, it represents 25% of total P.E.I. exports and is the province’s third-largest industry, with gross sales of more than $275 million annually. Already employing slightly less than 800 people, it will need another 250 more over the next few years to meet demand, says Mark Booth, president of Aerospace P.E.I. and vice president of Atlantic Turbines Inc.

@page_break@P.E.I. is also banking on a new sector to help reduce the impact of a U.S. slowdown: financial services. This past spring AMVESCAP PLC, which operates as AIM Funds Management Inc. in Canada, announced it was opening a client service centre in Charlottetown that will employ up to 300 people.

Joining AIM are other international firms, including Ceridian Canada, a human resources company that has established a centre on P.E.I. to handle talent acquisition, payroll and other HR services. Ceridian expects to hire 40 employees during its first year and ramp up to 100 people within its first three years of operation.

However, the province is vulnerable on a number of fronts. The tourism industry, which experienced only modest gains in occupancy rates last year, may be hurt by a U.S. slump. Factors such as a strong Canadian dollar and new passport requirements, combined with a U.S. slowdown, could reduce the already small proportion of U.S. tourists. But, as Sentance notes, “U.S. tourism is not a huge part of the P.E.I. tourism market.”

Indeed, during the peak of 2007’s tourism season, 85.3% of visitors to P.E.I. were from other Canadian provinces, 9.8% were from the U.S. and the remaining 4.9% were from offshore countries.

A significant Achilles heel is capital projects — or the lack of them. Wright is predicting economic growth for the Island of slightly more than 1% in 2008 and 2009, primarily due to a lack of major construction initiatives.

“A slowdown in the construction sector,” he notes, “as well as a relative lack of major capital projects, will start to take its toll on the province’s economy.”

Construction starts dropped by 20% last year, Goldbloom says. When combined with a slower tourism market, she points out, “These will weigh on growth.”

Capital projects are expected to have generated roughly $818 million in 2007, a slight 3.8% increase over the previous year. This year, growth is also expected to be modest, at 4%. Over the past five years, annual growth in capital projects has been 5.1%. IE