P.E.I.’s strength is its diversified export base

Prince Edward Island’s economy displayed impressive resilience throughout the recession in the past year. And, as the recovery takes hold, residents of Canada’s smallest province are facing healthy prospects for employment and income growth.

P.E.I. is one of the few provinces that may register economic growth in 2009 once all numbers are finalized. Estimates for the province for 2009 range from a decline of 1.2% in gross domestic product to modest growth of 1%. Forecasts of GDP growth this year range from 1.5% to 2.2%, followed by growth as strong as 3.4% in 2011.

“Prince Edward Island has fared remarkably well,” says Sabrina Browarski, an economist with the Conference Board of Canada in Ottawa. “Prince Edward Island and the Atlantic provinces have largely been sheltered from the downturn in the U.S. and the downturn in global markets.”

A key advantage for P.E.I. has been continued strength in its increasingly diversified export base. Although exports of fish products dropped in 2009, shipments of processed potatoes, transportation equipment and aerospace products all increased at a time when most provinces saw their exports plummet. In fact, in the first nine months of 2009, P.E.I. was the only province to record an increase in merchandise exports.

“[P.E.I. is] not as export-sensitive in the industries that have been hardest hit by the recession,” Browarski explains.

Government stimulus was another major contributor to the resilience of P.E.I.’s economy. In November 2008, the provincial government launched a five-year, capital-spending plan worth $510 million, which amounts to more stimulus spending per capita than the other provinces, she says.

The spending is concentrated in health-care and transportation infrastructure, education and key growth industries such as aerospace, biosciences, wind energy and information technology. For instance, the stimulus plan includes $15 million toward the establishment of the new BioCommons Research Park — a biosciences research facility in Charlottetown that will eventually employ 500 people.

In addition, P.E.I. is partnering with the private sector in a $1-billion wind-power development plan, which is expected to provide a boost to the economy in 2011.

“The province is geared toward sectors from which growth is coming,” says David Chaundy, senior economist with the Atlantic Provinces Economic Councilin Halifax. “They are sectors with growth potential, because that’s where some of the growth globally is going to come from — and that’s where P.E.I. is trying to position some of its own advantage.”

Growth prospects are weaker for many of P.E.I.’s traditionally dominant sectors, such as agriculture, fishing and trapping. These industries have been facing challenges such as high energy costs, weaker consumer demand for discretionary foods such as lobster, and a strong Canadian dollar that hampers the competitiveness of exports, Chaundy notes: “They’ve been under challenge for a number of years now. We would not expect employment to be growing substantially in any of those sectors.”

Public spending helped limit job losses last year, as employment shrank by 1.2% in 2009, according to the Conference Board of Canada. This is a less severe contraction than was experienced in many other provinces.

P.E.I.’s capital budget is expected to create another 1,625 jobs in 2010-11, which is likely to contribute to a rebound in the labour market. In fact, a report from Royal Bank of Canada’s economics research department predicts that employment growth in P.E.I. will outperform the rest of the country this year: “Further growth in the province’s aerospace and bioscience industries should contribute to nation-leading employment growth of 2.1%.”

Wages also appear to be benefiting from P.E.I.’s resilience. Workers in the province, who earn an average annual salary of about $32,000, enjoyed healthy income growth in 2009 — thanks to two hikes to the minimum wage during the year, Browarski says. The provincial government increased the minimum wage to $8.20 in June from $8, then again to $8.40 in October.

Gains in public-sector incomes, however, may be more moderate this year. The P.E.I. government expects to record a deficit of $85.4 million in the 2009-10 fiscal year; and payroll spending is likely to be restrained as the province makes efforts to balance its budget.

“There’s going to be pressure to try to constrain wage growth in the public sector,” says Chaundy.

Meanwhile, P.E.I.’s housing sector has been thriving on a combination of low interest rates and rising incomes. P.E.I. was the only province in which housing starts increased in 2009. Preliminary data from the Canada Mortgage and Housing Corp. show a hefty 40% jump in housing starts — driven by a surge in multi-unit housing construction — during a year in which most provinces suffered large, double-digit percentage declines.

@page_break@Economists expect activity in that sector to slow this year, with interest rates likely to edge higher and an anticipated cooling in the development of multi-unit housing.

Beyond 2011, as P.E.I.’s capital spending tapers off, economists expect to see more moderate growth for the island province’s economy.

“We’re experiencing unusual growth in 2010 and 2011 because of the public assistance,” Browarski says. “The trend we’re looking at to 2013-2014 is more of a return to what’s sustainable and consistent with the potential that the economy can produce.”