The near-term outlook for the Nova Scotia economy is similar to a year ago. Then, the consensus expectation was that a combination of efforts to control inflation with higher interest rates by the Bank of Canada and the US Federal Reserve would sharply slow economic activity on both sides of the border, leading to a soft landing or an economic contraction (ie, a recession).
Although there is evidence that Nova Scotia’s growth has slowed to between +1.3% and +1.8% in 2022, the worst case scenario has so far been avoided, following a sustained strong gain of +6.2% in 2021. However, as inflation on both sides of the border remains above the +2% y/y target set by central banks and job creation rates in both economies remain high, interest rates are at risk of a hike. Economic activity in Canada and the United States will come to a halt in the middle of the year.
U.S. exports and record net migration fuel growth in 2022
Two main drivers contributed to Nova Scotia’s slow but still positive economic growth over the past year. First, NS’s exports increased by +5.7% y/y following a +11.5% gain in 2021, despite a market slowdown in the US accounting for 65% of its overseas sales. Electronics, and did 'Motor Vehicles and Accessories’. Second, after registering a modest +0.9% increase in 2021, net migration to the province from outside Canada (+25,900) and from other provinces (+12,217) accelerated sharply, boosting the province’s population by +2.6% in 2022.
An aging population is putting a strain on the labor force
Against high interest rates and slower U.S. growth, full-time employment in the Bluenose Province is up +2.6% year-to-date. Also, the province’s employment rate of 4.9% is higher than its seven-year average of 3.1%, evidence that demand for labor in the province is outstripping supply.
A recent paper by the Atlantic Economic Council (APEC) titled Where did all the workers go? highlights this shortcoming. According to APEC, despite strong growth in net migration, the number of people entering the labor force has been offset by the number of people retiring due to age.
Between Q4 of 2019 and Q3 of 2022, labor demand (that is, the sum of the change in employment and the change in job vacancies) outpaced labor force growth by +23,000. Given the possibility that the province’s labor supply will continue to lag behind its labor demand, this gap may further drag down the province’s growth in the near term. Industries experiencing severe labor shortages include shelter and food services, health and social assistance, and construction.
High interest rates hamper residential construction
Existing home sales in Nova Scotia are down just over -30% year-to-date, indicating that the positive effects of solid employment growth and record inflows from out-of-province have been outweighed by interest rates and steady increases. Affordability has declined over the past 13 months. Over the past six months, total housing starts (in units) fell by -44%. The same period a year ago.
However, looking further down the road, the outlook for residential construction is bright given the above-record influx of individuals into the province and the region’s low apartment vacancy rate.
Green projects brighten CAPEX outlook in 2024/2025
Based on Canada’s latest non-residential statistics Capital and Repair Expenditure (CAPEX) SurveyInvestment in Nova Scotia is forecast to contract slightly (-1.5%) in 2023, following a strong rise in 2022 (+21.1%). Despite this cloudy outlook, and the fact that no country has yet exported green hydrogen, the prospects for two major projects have recently been taken up.
First, on February 7 this year, the provincial government approved plans for the EverWind Green Hydrogen and Ammonia Plant at an estimated cost of $8 billion. Second, the Bear Head Energy Project, valued at $4 billion, recently received assessment approval from the NS Department of Environment and Climate Change for its green hydrogen and ammonia production facility. Helping these prospects are enhanced tax credits in the recent Union Budget.
Bottom line
After an estimated expansion of +6.2% in 2021 and +1.6% in 2022, we expect the effects of slower residential construction, a pullback in non-residential construction and slower growth in exports to boost Nova Scotia’s growth from +0.7. % to +1.5% over the next two years.
John Klingard has over 35 years of experience as an economist in international, national and regional research and analysis with leading financial institutions and media organizations in Canada.