VANCOUVER - There is no downplaying the turbulent year we have had. Even into 2021 the CoVID-19 pandemic continues to upend major aspects of our lives. While headlines are hailing the ‘light at the end of the tunnel’, it will likely not be until the end of 2021 or the beginning of 2022 that we begin to experience some sense of normalcy. Despite this, however, we all continue to be faced with important decisions that will inevitably shape our futures. For businesses, it might be about whether or not to invest in a new technology or to attract new talent. For individuals, it might be about identifying the right time to take on a new job or to buy or sell a house. While for local administrations, it might be about investing in a new public works project or how to allocate resources to best support the local community in a time of need. Regardless of the context, it is important to understand the forces that are playing out and how they might be affecting us.
Here are some of the indicators that I will be following in 2021 to help me make more informed decisions about the future. For the sake of reference, I have categorized them into three groups: Macro Level Indicators (national), Micro Level Indicators (local) and CoVID-19 Indicators. Depending on how one operationalizes these, however, they are likely to cut across multiple categories.
Macro Level indicators
1. GDP Forecasts vs Actuals – A pretty basic indicator that can help us understand the overall performance of the national economy, is to compare the current performance of the economy to that of the previous year. Is it growing or shrinking? This provides an indication of whether or not a country’s quality of life is improving. In the case of the CoVID-19 pandemic and the subsequent lockdown, we can also examine how the economy would have performed, if such events had not occurred, relative to its actual performance. Prior to the CoVID-19 outbreak, the Bank of Canada forecasted that the national economy was expected to grow by 1.6 percent in 2020; instead, it suffered an economic contraction of 5.5 percent. While forecasts suggest an impressive growth of 4 percent in 2021, one should not discount the structural damages or the legacies that CoVID-19 will leave.
2. Debt to GDP Ratio – The ‘Debt to GDP Ratio’ is a measure of a country’s public debt compared to its GDP. In this way it compares what a country owes versus what it produces providing an indication of how well a country is positioned to pay off its debts. As long as a country can continue to pay off its debts without hindering economic growth, it is still considered to be in good standing. Research by the World Bank found that when a country exceeds a debt to GDP ratio of more than 77 percent for a prolonged period of time it ends up slowing economic growth. The risk of rising interest rates would be another concern. According to a recent report by the Fraser Institute, Canada’s federal net debt-to-GDP ratio has increased from 32.7 percent in 2007/08 to an expected 54.9 percent in 2020/21. When provincial debt is included, the combined federal-provincial debt-to-GDP ratio increases from 53.1 percent to 91.6 percent over the same period. If not managed properly, this could have negative long-term effects on Canada's economic outlook.
3. The Phillips Curve – The Phillips Curve is a measure that reflects the relationship between inflation and unemployment. It suggests that with economic growth comes inflation, which in turn leads to more jobs and less unemployment. Many, however, have declared the Phillips Curve dead due to the occurrence of stagflation, which refers to the unique circumstances in which inflation continues to rise despite increases in unemployment. The danger here being that it is very difficult to fight inflation without raising unemployment. Whichever the case, it is a particularly useful metric to keep an eye on against the record levels of government spending to fight the CoVID-19 pandemic and the unprecedented lockdown measures which have led to record unemployment. As of writing, unemployment in Canada stands at 9.4 percent, down from 13.7 percent at its peak in May 2020 according to Statistics Canada. Currently, there are only minor signs that inflation is on the rise, despite the Government of Canada spending $322.3 billion to fight the pandemic.
4. Dependency Ratio and International In-Migration – Although not as bad as some countries, Canada is edging in a dangerous direction as a result of its aging population. This can be seen by the changing dependency ratio, which is a measure of the working age population (age 15-65) to that of the dependent population (age 0-15 and 65+). In 2008, Canada’s dependency ratio was at its lowest, with only 44 dependents for every 100 workers. It has since risen to 55 and is expected to continue along this trend. With the birth rate in Canada falling to 1.5 births per woman, international in-migration is our best chance at sustaining a growing labour force. The Canadian government has indicated that they intend to raise Canada’s immigration targets to more than 400 thousand in 2021 and continue to increase it over the next 3 years. Such levels have not been seen in Canada since 1913 and has not come close since then. The majority of these will be on economic grounds, meaning a boon for employment. At the same time, this will also increase pressure on the housing market.
Micro Level Indicators
5. Ratio of Basic to Non-Basic Employment – While all jobs play an important role in society, contrary to popular opinion, not all jobs are created equally. Evidence of this can be found in the Economic Base Multiplier. Basic jobs are those jobs that are in industries that the city is believed to specialize in (ie. manufacturing, healthcare, etc.). In that way, they sell the majority of their goods and services outside of the local community. They are thus referred to as export industries. Non-basic industries, on the other hand, are those industries that supply goods and services locally; meaning that most of what they produce is for local consumption (ie. restaurants, hair salons, etc). Understanding the ratio of basic to non-basic industries (or the economic base multiplier) is important as jobs created in the basic industry will naturally create a demand for further jobs in the non-basic industry. There is also something to be said about attracting external capital into your community, as opposed to recirculating existing capital.
6. Proportion of Income Spent on Housing – The proportion of one’s income spent on housing is a useful indicator for determining the affordability or lack thereof of a community. In recent years, we have seen a significant increase in the cost of living, most of which is due to the cost of real estate, with less movement in terms of wages. This is a major reason why so many communities are becoming unaffordable and in many communities it is the primary reason the local population is getting priced out. This risks leading to a situation in which many businesses, especially those in the service industry, are unable to find staff. Urban economic research suggests that one should spend less than 33 percent of their income on housing, less than 16 percent on transportation and less than 13 percent on food. Unfortunately, with the rising cost of living, this is out of reach for many.
7. Housing Supply vs Housing Demand – Anyone that has taken a basic economics course will know how much economists parade their beloved supply and demand charts. This is for good reason. Supply and demand are useful indicators for understanding the pressure being placed on a particular market. When the demand for housing is high and the supply is low, prices will begin to rise. Likewise, when there is limited interest in a housing market, while supply remains high, prices will decline. While it is sometimes difficult to measure the supply and demand of housing within a specific market, new listings (and time on the market) can serve as a useful indicator for supply, while number of real estate requests can often be a useful proxy when it comes to gauging demand. Local real estate professionals will usually have a good handle on this.
8. Met vs Unmet Childcare – While it may not seem obvious, childcare provision is one of the most important socio-economic indicators for a community. It is also important for equality and quality of life. While many parents willingly decide to take time outside of their careers to raise their families, many are unwillingly made to do so as a result of a childcare provision deficit. Even in circumstances where childcare is available in a community, a shortage of supply can drive the prices up and make it unaffordable for many (think back to those supply and demand charts). In some cases, prices of childcare can exceed that of incomes. When this occurs, families face the difficult decision of whether or not to remain in the labour force. This is to the detriment of the overall economy and could also have negative implications for lifetime earnings. With an aging population distorting the dependency ratio, finding ways to prevent parents from unwillingly opting out of the labour market will be an important task for most communities.
9. Worker Productivity – While worker productivity is a common measure for an organization, an industry or a country, it is less frequently applied at sub-national levels. This is because such data is very difficult to attain. Where measures of Gross Metro Product or similar proxies can be applied, this can be divided by the local labour force to determine worker productivity. When examined over time, it demonstrates whether a community is becoming more or less productive. This can also be disaggregated by sector to demonstrate which sectors are becoming more or less efficient over time.
CoVID-19 Indicators
10. Impact of CoVID-19 on Employment – CoVID-19 has upended the entire economy. However, it has not affected all industries equally. Those jobs that can be performed remotely or from the safety of one’s home have been less disrupted, while those that require face to face interactions and close proximity have been drastically affected. Due to a lack of indicators, however, it has been difficult to assess the impact that CoVID-19 has had on employment at the local level. That being said, there has been fairly reliable data at the national level. By extrapolating the job loss figures from the national level to the composition of jobs at the sub-national level, one can arrive at an indication of the local level impact. For example, the national level data tells us that accommodation and food services was the sector most affected by the lockdown measures, declining by -50 percent during the peak of the lockdown; this was followed by Information, Culture and Recreation (-24%) and Other Services (-23%). Communities that have a disproportionate amount of employment in these sectors will have no doubt been affected worse than those less reliant on these industries. For an indication of the impact this has had on towns and cities across BC, check out our CoVID-19 Economic Impact Index.
11. Employment in the Fastest Growing Sectors – While it is important to have a solid understanding of the anchor industries in one’s community, it is also important to position a community and its businesses for the future. To do so, it is worth keeping an eye on those sectors that are growing the fastest as well as those that are shrinking the fastest. According to a recent report by the HR Firm Randstad, the industries poised to experience the biggest losses in 2021 are: food services, hospitality, travel, recreation venues, and airlines and airports. In contrast the biggest employment gains will be in customer service, delivery drivers, essential retail clerks, security analysts and architects and administrative assistants. As communities help to prepare their workforces for the jobs of the future, they will want to examine their workforce against the backdrop of both the winners and the losers.
12. Consumer Spending Patterns – Consumption accounts for nearly 60 percent of national GDP. It is therefore a useful, but often overlooked, indicator that can provide a snapshot of consumer preferences. Normally, when one studies consumption patterns there is a certain level of predictability to them. For example, consumption increases near the end of the month when employees receive their paycheque, while activities related to tourism are known to peak during the summer months when people have more time off. The impact of CoVID-19 and the subsequent lockdown, however, upended consumption patterns resulting in a 14 percent decline between the second quarter of 2019 (prior to the pandemic) and 2020 when the lockdown was at its peak. This is equivalent to 42 billion dollars being wiped out of the national economy (adjusted to 2012 constant prices). The biggest losers were in terms of entertainment (spending on cinemas declined by 98 percent), discretionary spending (clothing and footwear down 40 percent) and shared urban services (public transportation was down 40 percent). While the biggest winners were in terms of household items (food and beverages up 9.5 percent), digital relationships (online communications up 3 percent) and utilities (water, electricity and gas up 2 percent) as individuals spent more time at home.
While many of these indicators will depend on the availability and quality of data, they are all useful gauges for taking the pulse of the economy, and ultimately, for assessing the overall performance of a community. While this is not an exhaustive list, these are some of the more important indicators I will be tracking over the coming months, and I would encourage you to do the same. Should you have any questions or require a more detailed assessment of your community, please reach out to us directly.
Kyle Farrell is Managing Partner and Chief Urban Economist at Economic Pulse Analytics. He works closely with local governments to provide them with population, housing and employment forecasts to make more informed decisions about their future. He holds a PhD with specialized knowledge in Urban Economics and regularly consults for the United Nations.
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