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Monthly Economic Letter

January 2019
Feature article

How to find the workers your business needs

Businesses in many parts of Canada are suffering from labour shortages brought on by a strong economy, an aging population and low workforce growth.

We recently published a study that showed about 40% of Canadian entrepreneurs are having difficulty finding the workers they need. Labour shortages are stunting the growth of many businesses, making them less competitive and jeopardizing the quality of their goods and services.

What’s more, our study found that the growth in Canada’s labour force is expected to stay close to zero for at least another decade as baby boomers retire. This means shortages aren’t going to get better anytime soon.

While labour shortage are challenging, there are strategies you can use to counter them in your business. Two of the most important of these is first to tap into underused labour pools and second develop an employee value proposition to make your company more attractive to both new hires and current staff.

How to access untapped talent pools

Women, recent immigrants, indigenous peoples and the disabled are underrepresented in our workforce. Indeed, Bank of Canada Governor Stephen Poloz estimated in a March 2018 speech that Canada’s labour force could expand by another half a million workers if these untapped resources were better integrated.

Table A compares the labour force participation rates1 of these groups. Note that the participation rates for all groups are significantly lower than the rate for men.

Increasing the participation of women

While the number of women in the workforce has increased steadily since the 1950s, the participation rate is still far lower than that of men.

Economic theory suggests access to low-cost child care and more generous parental leave benefits generally correlate with higher rates of labour force participation by women. It follows that providing access to subsidized daycare, flexible hours and the ability to telework will make your business more attractive to women with children, and parents in general.

These kinds of benefits might encourage stay-at-home parents back into the labour force. If you want to learn more about becoming a more attractive employer see the section below on developing an employee value proposition.

Recruiting newcomers to Canada

A series of government programs and organizations can help you recruit newcomers to Canada. The table below describes some of these in more detail. A more complete list is available in our labour shortage study.

Finding Indigenous employees

Canada’s Indigenous population is young and the fastest growing segment in the country. Over the next decade about 400,000 Indigenous people are expected to reach working age. To facilitate and promote indigenous employment, the federal government delivers labour market programs through organizations known as Indigenous Agreement Holders located across the country.

These organizations help indigenous job-seekers connect with employers and offer training and skills development programs. Contact your local agreement holder office to assess recruitment opportunities.

How to develop an employee value proposition

You can make your business more attractive to current and future employees by developing a formal employee value proposition (EVP). An EVP defines your company’s vision, the values it stands for and the reasons why a talented person would chose to work for your company. Setting up an EVP consists of three steps, which are briefly described below. (A more detailed description of EVPs is available in our labour shortage study.)2

  1. Understand how your employees perceive your business—Gather information about what employees value most about working for you and why they stay. You can get this information through surveys, exit interviews, feedback from former employees or informal conversations with your staff.
  2. Determine the key selling points of your business for employees—These could include formal skills development programs, advancement opportunities and a good work/life balance. Use this information to draft an EVP that aligns with your vision and strategic objectives for your business. A good EVP will differentiate your business from the competition.
  3. Communicate the message to existing and potential employees—Find creative ways to share your EVP with existing staff and potential recruits. Communicate your EVP throughout the hiring process, including by promoting it on your company’s website.
  4. Deliver on your EVP—Many EVPs fail to produce the anticipated results because they oversell certain attributes resulting in a gap between what’s promised and reality. Ensure that your senior management and other stakeholders are comfortable and capable of delivering on your EVP.

An EVP will help you market your business to employees in the same way you market your products and services to clients. It will help focus you retain top performers and attract new talent. It’s a low-cost strategy with the potential to yield excellent results.

Read the following story on Riverside Lobster, a leading exporter of live and cooked lobster in Nova Scotia, for examples of how one company is fighting its labour shortages with practical HR initiatives.

Riverside Lobster has a state-of-the-art processing facility and international markets willing to pay top dollar for all the lobster it can ship. The problem is that the company is short 30 workers a day on average at its plant in Meteghan River on Nova Scotia’s southwest tip.

Riverside sends buses up to 100 kilometres each day to pick up from their home communities. It also offers a medical and pension plans to help entice its 270 workers to stay put. However, with more than half of the workforce over 55 years old, the labour shortage is set to get worse, putting a brake on the company’s ambitious expansion plans.

That’s why Riverside is pinning its hopes on immigrants. Already it employs about 50 temporary foreign workers, mostly from Mexico and Chile. A longer-term solution is the Atlantic Immigration Pilot Program. It allow companies to hire skilled workers or international graduates who can apply to become permanent residents. Riverside Lobster hopes to bring in 100 workers over the next five years under the program.

Rural Nova Scotia also has a shortage of housing. So, Riverside owns and rents out units to foreign workers and their families at subsidized rates. And it’s planning on building—with government participation—up to 16 more subsidized rental units to house immigrant families. It’s also looking at opening a subsidized daycare close to the plant. The goal is to get immigrant families to set down roots in the community and keep the workers on the job.

What does this mean for entrepreneurs?

  1. Demographic factors and strong economic growth mean current labour shortages are likely to persist.
  2. If you are having trouble recruiting, think about pools of talent that tend to be underrepresented in our workforce including women, newcomers to Canada and indigenous peoples.
  3. Think about marketing your business to employees in the same way you would market your business to customers. Developing an employee value proposition will help you in this regard.

1. The participation rate is the number of labour force participants expressed as a percentage of the population 15 years of age and over. The participation rate for a particular group (age, sex, marital status, etc.) is the number of labour force participants in that group expressed as a percentage of the population for that group. Estimates are percentages, rounded to the nearest tenth.
2. Based on an approach outlined by Michael Page, a UK based HR consulting company. Michael Page, December 2016, “Create a great employee value proposition” https://www.michaelpage.co.uk/advice/management-advice/attraction-and-recruitment/create-great-employee-value-proposition.

Canadian economy at a glance

The economy will continue to grow but at a slower pace

As a new year opens, the Canadian economy looks poised to continue to grow in 2019 but at a slower pace due to the stronger headwinds it’s facing.

Chief among these is higher interest rates that will limit consumer spending and the growth of the housing market. At the same time, lower oil and other commodity prices will have an impact on business investment, especially in Western Canada.

A compensating factor will be stronger exports, but we still expect GDP growth to come in lower than the 2% achieved in 2018.

International environment remains positive

On the positive side, the economy will continue to benefit from a healthy international environment in 2019 with the world economy continuing to grow at a solid pace.

Growth in most major developed economies should accelerate modestly, reducing their unemployment rates. We expect the U.S. to lead the way once again with solid growth in 2019. This performance by Canada’s No. 1 trading partner, combined with a lower Canadian dollar, will support exports in 2019.

Business confidence in Canada remains strong despite the many uncertainties buffeting entrepreneurs. However, this confidence is unlikely to translate into a higher level of business investment.

Investment intentions weaken

Investment intentions for 2019 are lower than last year. A shortage of labour is limiting business growth and investment in Quebec, Ontario and British Columbia. Lower commodity prices are also having a negative impact on investment in Alberta, Saskatchewan and Manitoba. As a result, business investment, an important source of growth over the last two years, will not be as a strong contributor in 2019.

The impact of rising interest rates

The Canadian economy has been performing very well over the last two years and is running close to full capacity. The unemployment rate is now 5.8%, a 40-year low.

The Bank of Canada has slowly increased interest rates over the last 18 months to reduce the stimulating impact of low rates on the economy.

As rates have increased, Canadians are spending a larger share of their disposable income on interest, leaving less for consumption. On the other hand, the job market remains vibrant and employment is strong. The result is that consumption in 2019 will continue to rise but at a lower pace.

On the housing front, rising rates and new mortgage rules are putting a damper on the market. Housing starts plateaued in 2018 and will slow down in 2019 as will the number of houses sold.

Commodity prices are declining

Commodity prices have fallen during the last six months, limiting growth in resource producing regions of the country. Most importantly, oil prices have declined from $65 to $50 a barrel in the last six months. We believe this drop will be temporary and the price will go back to the $60-to-$65 range in 2019. However, lower oil prices will nevertheless hurt business investment.

The bottom line

After two years of solid growth, the Canadian economy is gearing down to slower pace in 2019. Interest rates are not likely to increase much in 2019, keeping the Canadian dollar in the low US75 cents range.

What does it mean for entrepreneurs?

  1. Opportunities for exporters remain enticing. U.S. demand is strong and the lower value of the Canadian dollar will favour exports.
  2. Retail sales growth is slowing as interest rates increase. Retailers should plan accordingly.
  3. As economic growth slows, interest rates will probably not increase as much as in 2018. That means it remains a good time to invest in your business, especially to offset the impact of a shortage of labour through the addition of equipment, machinery and technology.
U.S. economy at a glance

U.S. economy set for another strong year in 2019

The U.S. economy outpaced all other developed economies in 2018, growing by almost 3%. The coming year is shaping up to be another solid one with the 2018 tax reform continuing to support business investment and consumer spending.

The robust growth in 2018 came despite trade tensions, rising interest rates and weakness in the housing market. Stimulated by tax cuts, GDP growth translated into a red hot job market. The unemployment rate is now 3.7%, the lowest rate in 50 years.

The economy should continue to create jobs in 2019, pushing unemployment further below what US government considers to be a full employment level. Indeed, an increasing number of businesses are reporting difficulties in hiring employees, and wage growth is heating up. It’s now up to an annualized rate of 3%. Essentially, the U.S. economy is running at full capacity.

Consumer spending to boost growth

In 2019, the leading engine of growth will be consumer spending, stimulated by tax cuts and the strong job market. Business investment, which is also benefitting from tax relief, should be another strong contributor. Government spending and the housing market will play minor, but positive roles.

Still, the economy is facing some headwinds.

  1. As the job market tightens, many businesses are having difficulties finding new employees and this is hurting their ability to expand.
  2. Interest rates increased four times in 2018 to cool down the economy and should continue to rise in 2019. Higher rates should start to bite into consumer spending in 2019.
  3. Trade and political issues with China represent a risk for the U.S. economy and create uncertainty.

The economy is going into a transition, not recession

After ten years of growth, the U.S. economy is entering a period of transition. Higher interest rates mark an end of expansionary monetary policy and last year’s tax reform will be phase out in 2020.

Consequently, the strong growth of 2018 and 2019 should slow down in 2020 to a more moderate level of less than 2%, but we see no recession on the horizon at this point. There appear to be no major imbalances, and while interest rates are increasing, the economy shouldn’t tip into recession.

The bottom line

After a year of strong expansion, the U.S. economy will continue to generate very solid growth in 2019, supported by favorable fiscal policy. As tax cuts are phased out and interest rates continue to rise, we expect a slowdown in 2020.

What does it mean for entrepreneurs?

  1. The U.S. economy will continue to offer great opportunities for Canadian exporters in 2019.
  2. The Canadian dollar should remain at a lower level in 2019 of around US75 cents. An interest rate gap between the two countries and lower oil price are putting pressure on our dollar. This is great for exporters, but importers in U.S. dollars are going to feel the heat.
Oil market update

Will oil prices firm in the new year?

Over the last few weeks, both global and Canadian oil prices have dropped sharply. Moreover, the gap between Canadian prices and what other producers are being paid widened. So, what should we expect for 2019?

Oversupply is driving lower global prices

World oil prices are volatile and influenced by geopolitical events. One such event was the November 4 imposition of U.S. sanctions on Iran. The prospect that those sanctions could remove up to 2 million barrels a day (b/d) drove up Brent and West Texas Intermediate (WTI) prices in September and October.

Then, in mid-November, prices fell as supply increased for four reasons.

  1. The U.S. provided more sanction waivers than the market had anticipated, resulting in greater supply. China, India, Turkey and Korea obtained waivers for Iranian oil purchases of at least 870,000 b/d, according to the International Energy Agency.
  2. Saudi Arabia and Russia pumped more oil, roughly 300,000 b/d more in October than in September.
  3. U.S. production is at a record high of 11.5 million b/d, up 20% compared to a year ago.
  4. Sentiment regarding global growth softened. Both the IMF and OECD have revised downward their growth forecasts for both 2019 and 2020, amid slowing trade due to tensions between the U.S. and China.

With the recent events, the world oil supply is simply too high for the demand, pushing WTI 35% lower since October.

OPEC and some non-OPEC countries meet in December and producers including Saudi Arabia and Russia agreed to reduce their output by 1.2 million b/d, which should help rebalance the market and support higher prices. The incentive is high for both countries to respect the reduction because they need higher prices to counter large budgetary deficits.

While Saudi Arabia and Russia are the leaders in managing oil supply, it’s important to remember the U.S. has become the largest producer of crude in the world. Nevertheless, if the OPEC reduction is respected, the world price should slowly increase in the coming months.

The Canadian gap widens

The price of Western Canadian Select dropped to under US$13 in mid-November, producing an unprecedented differential with world prices.

The poor performance in the past few weeks is the result of an ongoing shortage of pipeline capacity. Following an increase of 345,000 b/d in 2017, Alberta oil production increased by 400,000 b/d in 2018. As result, current production outstrips transportation capacity.

Faced with a record discount for its oil, the Alberta government announced on December 2 mandatory temporary production cuts of 325,000 b/d. The provincial government is also planning to buy 80 locomotives and 7,000 rail cars to boost rail capacity. These measures immediately boosted the price of Western Canadian Select higher, partially closing the gap with the world price.

Bottom line

The last few months have been difficult for the Canadian oil sector. However, the Vienna agreement should have a positive impact on world prices, and the actions taken by the Alberta government should reduce the Canadian discount in 2019.

Other economic indicators

The Bank of Canada maintains the status quo

The Bank of Canada maintained the overnight interest rate at 1.75 on January 9th. The Bank’s next decision regarding the overnight rate is scheduled to occur on March 6th. At the time of writing, most analysts expect two more rate hikes during 2019.

2018: A rough year for the loonie

The Canadian dollar continued to depreciate against the greenback in December. The loonie fell below 74 cents for the first time since May 2017 and closed the year just above US$0.73. This corresponds to a loss in value of 6.5 cents in 2018. Low crude oil prices and the increasing difference in interest rates between Canada and the U.S. is putting downward pressure on the Canadian dollar.

SME confidence tumbles in December

Small business confidence tumbled in December according to the Canadian Federation of Independent Business (CFIB) Business Barometer Index. The index lost 7.6 points since November and has reached 53.6, a low not seen since March 2016. Confidence among Alberta SMEs has deteriorated significantly, declining by 8.7 points between December and November following the drop in oil prices. Pessimism is widespread in virtually all sectors of the Canadian economy. The transportation sector is the only index that increased this month, while the other 12 sectors covered by CFIB all experienced a loss of confidence.

Credit conditions are stable

Effective interest rates for businesses and individuals remained unchanged in December, just below 4%. Although interest rates continue to rise slightly, credit conditions remain accommodative. According to the Bank of Canada's Senior Loan Officers Survey, there was even a general easing of business lending conditions in the fourth quarter of 2018. This easing is due to competition from financial institutions for loans to large corporations, while conditions for small and commercial companies have remained the same.

Key indicators–Canada