Canada’s hottest economy is not where you might think it is

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Jordan Heath-Rawlings If I told you that the hottest economy in this country is out on the prairies, would you believe me? Of course you would. After all, the price of oil is up again. And every time that happens, Alberta booms and leads the way for the rest of Canada. This time, though, it’s not Alberta, it’s one province east. Unless you live in Saskatchewan, you probably don’t spend any time thinking about its economy. And most of the time, that’s just fine. But over the past couple of years, and sadly, thanks to the horrible things that have happened over the past couple of years, Saskatchewan has been growing and growing and growing. I swear this is not a commercial for the province. It’s just fascinating to watch how global events can create opportunities for one of Canada’s most frequently overlooked provinces. So how did it happen? Just how hot is the Saskatchewan economy? How is the province adapting to take advantage? And what does the future look like out there? I’m Jordan Heath-Rawlings. This is The Big Story. Jason Childs is an associate professor of economics at the university of Regina. Hello, Jason.

Jason Childs Hello. Were you surprised to see Saskatchewan show up in the venerated pages of the economist?

Jordan A little bit. We’re not usually on their radar. It’s an international newspaper, so for them to turn the lens on us was kind of interesting and kind of nice to see. They called you remote. Everybody got mad about that. Yeah, there was some grumbling about that out here as well. It was a little backhanded, but I guess if you’re writing from London or Toronto, we are sort of remote from there.

Jordan Fair enough. But they were there, or at least writing about it, to talk about the booming Saskatchewan economy. Now I want to rewind a little bit how recently with the idea of the economist writing about a booming economy in Saskatchewan have seemed unthinkable.

Jason Childs Well, the last few years haven’t been great. It’s been probably about six to eight years since the economy has been booming out here. We’re a commodity based economy, and so we go with the commodity cycle 2013. Things were really hot out here. Things were really positive. Oil was really high, and we were growing really quite rapidly. 2014 happened. Saudi Arabia radically increased production. Oil prices fell off a cliff, and things slowed down out here. So this isn’t new in terms of commodity cycles that were hot. Right now, it’s a commodity cycle, and that’s what happens out here.

Jordan How bad does it get at the bottom of that cycle before we talk about the top?

Jason Childs Well, it can get pretty bad. I mean, you had a period of time in the late 80s, early through the 90s into the 2000s where they’re running gag. Here was for the last person, please shut off the lights. You saw the population dropping, the economy doing very poorly and a lot of struggles. And that was probably as bad as it’s been since the 1930s.

Jordan So what changed, I guess maybe last year, maybe earlier this year, to start the spike back towards the boom times?

Jason Childs Well, again, it’s one of these commodity cycle stories where you see as we come out of the pandemic, demand for commodities start to rise, oil starts to pick up, potash starts to pick up, agricultural commodities start to pick up, and that’s going to generate a lot of activity and heat here. The other thing that happened to us last year is we’ve got hit with a drought and that really damaged yield. So agriculture usually accounts for about eight to 10% of the economy, depending on what’s going on in other sectors. Last year it only contributed about 4%. So the agricultural side of the economy got cut in half last year due to poor rainfall. And that really slowed us down and really hurt. Now we’re growing off that pace. So the big change was the commodities. How much is that a factor of just the weather? And how much is that also driven by geopolitics? I guess there’s a lot of stuff in Saskatchewan that is also typically coming out of eastern Europe, is that correct? That’s absolutely correct. So if you look at Russia’s big five exports, or its major exports, they’re almost all the same sort of commodities that Saskatchewan produces. So we’re talking oil and gas, we’re talking wheat, we’re talking potash. All of those things play a big role here, and they do in Russia and Belarus, places like that. So having those places cut off from the international marketplace really increases demand for what’s going on in Saskatchewan. The weather does play an important role out here too. Again, for the agricultural sector. We don’t know yet how it’s going to play out. The harvest is still under way out here. If you hear any background noise, it’s probably a combine going by or a crop duster going overhead. The yields look pretty good this year, we’ve had a fair bit of rain. The moisture levels are up, so that’s looking positive, but we don’t know until it’s in the bin. And if we get hit with an early frost or a bunch of rain all at once, what looks like a good harvest can turn out to be pretty weaker.

Jordan So far we’ve been talking commodities and you’ve mentioned agriculture can make up to about 10%. We’ve talked about oil and gas. Obviously you mentioned potash. What else is it that is driving the bus there?

Jason Childs One of the big things that’s happening is we’re seeing a lot of investment in processing. So typically the way it’s been historically in Saskatchewan is we grew the crops, they got put on a train, shipped out and processed elsewhere. Now we’re starting to see with transportation costs rising and things like that happening, we’re processing more and more of the crops here in Saskatchewan. So that’s happening. That’s really good. Manufacturing is actually really taken off between this year and last year manufacturing output and the problems grew by about 12%. So this is starting to be a much broader base store than simply commodities.

Jason Childs Is that good news for the future of the province? Because anything I imagine, again, that’s why we’re talking to an economist, I imagine anything that gets you off of that cycle and can provide a little bit more like permanent stability and infrastructure in an economy is a good thing.

Jason Childs Diversification is important and it’s a really good idea so long as it’s real and organic diversification. The kinds of forced diversification that have been tried in other problems and in Saskatchewan, well, quite frankly, tend not to work very well. They tend not to laugh. Can you give me some examples of that? What is that? So I’m thinking of New Brunswick examples like shifting towards call centers away from fishing and forestry. Another New Brunswick example is the Brickland government in New Brunswick tried to get an automotive industry going in. I believe it was the it was just an absolute disaster. So what you need for diversification is really organic, stable stuff that’s going to grow up and rather than be transplanted, because the stuff that’s organic tends to be deeper rooted and more sustainable.

Jordan Do we know yet if the growth and processing is deep rooted and stable? Or is that you sort of wait and see if the commodities keep going up?

Jason Childs Well, we’ve got to wait and see. And either way, if commodity prices go up, the processing will work here. If commodity prices go down, the processing will work here. Anytime you can add value to the products we produce, that’s probably going to be a good thing. And with transportation costs being high and rising, that’s going to put extra pressure on the system to get us processing our own products rather than shipping out the raw material, including the waste. So one of the problems with shipping up raw materials like agricultural products or mining products is you’re shipping a lot of waste. And shipping works by volume and by weight. So if you can reduce that, it’s going to be cheaper to get the product out to market. So by processing, say, canola here, which is a huge crop, you’re going to see a lot less waste shipped out in the rail car. The downside is it’s really easy to ship canola seed. It’s a little trickier to ship the refined oil.

Jordan So given all of these advances and the boom in the cycle taking all together, how much growth are we looking at for the Saskatchewan economy this year? Or do we just not know because as you mentioned, the harvest is not fully in.

Jason Childs Yeah, we don’t know for sure, but the forecasts are looking somewhere between four and a half to 5% real GDP growth, which is substantial. It’s going to be a good year, it looks like.

Jordan And because of that, I saw the Premier recently announced plans to share some of that growth. Can you explain what’s happening?

Jason Childs Sure. So one of the things that happens when commodity prices pick up is government revenues pick up dramatically. So a lot of Saskatchewan’s provincial government revenue comes via resource royalties. So that’s oil and gas and potash particularly, those are the big drivers of that. And so this year we saw a nearly $2 billion swing in royalties coming into the provincial government. So it’s $2 billion more than we were expecting. It’s about 10%, a little more than 10% of the budget that was forecast. So what the Premier has done, and there’s a lot of debate around this, it’s kind of an interesting thing, is that everybody over 18 in Saskatchewan gets a check for $500. And the justification of the explanation that went with this is we’re the owners of the resource, that being the population. And this is your dividend check from the high commodity prices.

Jordan You mentioned that there’s been a debate about that. Is it a proper sharing of the wealth? Is it foolish? What are the sides to that?

Jason Childs I think it’s a political decision. Let’s be fair and honest. It’s going to be interesting to see how the NDP really tries to come out against the NDP being the opposition here. It’s going to be really hard to fight against because you’re putting money in people’s pockets and it tends to go pretty well politically. The downside of it is it’s a one and done. It’s not going to generate any advantages into the future. It’s not going to be a windfall that continues to pay off. So that’s $500. So it amounts to about 450,000,000 is what we’re talking about here. That’s going out to the populace. That’s not getting used for other projects or other ideas that are going to generate value into the future. And as an economist, I’m really worried about longer term effects and I really think that windfalls should be used to generate benefits going into the future. And the checks don’t do that. That’ll be fair. As part of this package, we’ve seen also a change to the PSD, the provincial sales tax get sort of pushed off the back. So we’re going to expand the provincial sales tax base. That’s not being done. And a fair amount of debt was paid off, was retired by the province, and that’s going to generate some value going forward.

Jordan How can a provincial government take advantage of, maybe not unprecedented, but certainly like a really nice, surprising boom time to ensure that you don’t see quite the same lows going forward.

Jason Childs Right. So when you’re dealing with commodity swings like this, I think it’s really important not to put it into program spending because that’s going to generate future deficits for you. If you put it into program spending, program spending tends to be permanent and you’ve got to find other funds to maintain that when the natural resource revenues or the windfall revenues aren’t there. So I think they were wise to avoid that. But at the same time, there are really two other ways you can generate benefits into the future financially. One is you can retire debt, and they’re doing some of that. I wouldn’t have minded them doing more, quite frankly. But politically, that’s not exciting, right? If we’re paying down debt, that means we’re not going to have to service that debt in the future. So next year our debt service costs will be lower. Good. But that’s not politically exciting. You don’t get the photo op of handing out a check. The other thing that I would have really liked to see this government do with windfall revenues, $450,000,000 goes a long way towards establishing a wealth fund or a sovereign wealth fund, not different from Norway’s. And that can generate revenue when commodities are on the downside of the cycle. So what you can do is you can invest that money and generate revenue year after year after year, and that’s going to create benefits going forward as well. The third thing you can do, which isn’t going to have the same financial implications or impact as you can build infrastructure, if you can guess correctly at the infrastructure you’re going to need or want into the future, windfall revenues can go there. The problem with that, though, is you have to maintain it, and it’s easier to build something than it is to find the money to maintain it. And so I’m glad to see we haven’t really gone down that road.

Jordan How much of this sudden growth could just go away in the blink of an eye if the war in Ukraine ends in Eastern Europe, starts to return to stability? I guess what I’m trying to get a sense of, I know it goes in cycles, but also is this cycle more precarious maybe than others?

Jason Childs There is an element of it that is definitely precarious with Russia, and particularly in terms of Belarus being cut off from the international markets or their access being reduced more accurately. That’s shifted a lot of demand our way, and that’s driven up our prices. So if we suddenly see an outbreak of peace in the Ukraine, those commodity prices are going to slide. So we’re going to see oil return to maybe $70 or $80 a barrel. If we get an outbreak of peace, we see potash prices fall back from five, $600 a ton to maybe $350. It’s hard to project potash prices. They’re tricky. So a lot of the revenue, a lot of the activity could slow down. That said, a lot of this growth isn’t just commodity driven, right? We haven’t been able to radically increase our production of oil overnight. We haven’t been able to radically increase our production of potash. So a lot of these projects, and this is why I was kind of grumpy with The Economist article. A lot of these projects and things that are happening here have had a long lead time to get here. So things like the Jansson Lake Mine, it’s one of the biggest potash mines in the world. If it’s not if not the biggest, I’ve been able to pin that down. Massive mine just outside Saskatoon. It’s now slated to begin production, and that was announced about six months a year ago. We’ve seen billion dollar investments across the province, in particular Federated Co-Op, which is the upgraded refinery facility in Regina. They’ve partnered with a couple of companies, and they’re going to be doing a $2 billion investment in canola processing and biodiesel. So these are things that don’t just happen instantly. They take a little bit of time. Another thing that’s going on is helium. Remarkably enough, Saskatchewan based helium producers just signed a contract with a space exploration company that was unnamed in the news release, which I thought was kind of odd.

Jordan So there’s lots going on here, and it’s got a longer tail than The Economist article made to suggest. Do you think the rest of Canada understands what’s going on in Saskatchewan right now? I mean, the coverage that I’ve seen of The Economist write up was kind of, and I’ll admit it to myself, was kind of surprising that this kind of boom had been building up without anybody really paying attention, because we’re talking about Alberta and Ontario all the time.

Jason Childs Yeah, we tend to fly under the radar here, and it’s a little bit of, oh yes, gas ones there too. Unless we’re getting into a fight with the federal government, we tend not to get noticed very much. Unfortunately for the news cycle, we tend to fight with the federal government right now. Whether it’s our administer writing letters to the federal government saying, get your inspectors off private property without asking permission first, or fighting over the carbon tax. Right. That tends to be about where we land in the news cycle, this has been going on. There’s been a lot of really positive things happening in Saskatchewan for probably ten or 15 years now, and it tends to get forgotten. I mean, we’re not that big population wise. We’re about 1.2 million people or so, compared to Alberta’s, which is over four in Ontario, which is what now about 10 million people. We’re here, but we’re not that big.

Jordan The last question I want to ask you is, just purely as an economist, looking at what’s happening in Saskatchewan, are there applicable lessons here for other provinces?

Jason Childs I think one of the big lessons, and this has been a big shift in Saskatchewan since about the time I came back here in 2008, is trying to foster a positive environment for investment. And that’s something that’s been worked on. We can debate how successful it’s been. I think it’s mattered. An investment, nonresidential investment particularly, is going to be the basis of what our economy needs to do in the future. It’s going to be that basis for sustained and prolonged growth. We’re still going to be subject to the commodity cycle. That’s still going to matter. But one lesson is if you don’t have investment, you don’t have growth. And that’s a pretty basic lesson. But it seems to be lost on a lot of policymakers across the country, that we have an environment that doesn’t seem like it’s open for investment, doesn’t seem like it’s open for business, and has a real hard time attracting meaningful growth. Right? So we’re seeing the federal government, particularly having to engage and stump up its own money, which is our money, taxpayers money really, to spark some investment in different sectors, particularly Ontario and the automotive sector. We’ve seen it over and over again in Quebec. We’ve seen it in different places across the country, these sort of government projects or government funding falling into private sector projects. And that always makes me a little nervous.

Jordan Jason, thank you so much for this. I really needed this primer on the Saskatchewan economy.

Jason Childs Well, thank you and for checking us out.

Jordan Jason Childs of the University of Regina. That was The Big Story. For more you can head to the Bigstorypodcast CA You can find us on Twitter at thebigstory FPN. You can talk to us anytime via email. Hello at thebigstorypodcast CA. And of course, you can call us and leave a voicemail. 416-935-5935 the Big Story is available in your favorite podcast player. It’s also available via smart speaker. Just ask it to play the big story podcast. Thanks for listening. I’m Jordan Heath-Rawlings. We’ll talk tomorrow.