INST Committee Report

 If there is a silver lining in current economic forecasts, it comes from the non-tourism, small business sector, which retains relatively optimistic expectations for the future.

The Committee can only hope that this sentiment will soon diffuse throughout industry and the economy get back on track.

The economic impacts were also felt in the stock and financial markets but, for reasons of brevity, the Committee draws only from Canada’s largest and dominant market, the Toronto Stock Exchange (TSE). The TSE index took a downturn immediately upon the resumption of trading on September 17. On September 10, the TSE index stood at 7344.7 and on September 17 it closed at 6908.0, a drop of 436.7 points or 6%. Since that time the index fell further but as of closing time on November 15 it had rebounded to 7292.9. The October employment report for Canada, and particularly that of the United States affected Canadian stock values. In fact, the U.S. employment figures for October were worse than expected and probably outweighted the better-than-expected Canadian figures, and thus exerted downward pressure on the TSE index.

The most recent Statistics Canada labour force survey showed unemployment levels virtually unchanged in October, but down 13,000 from May 2001 when labour market conditions began to weaken. Although overall employment over the month has changed little, an increase in part-time work (+28,000) was offset by a similar decline in full-time employment (-26,000). The unemployment rate thus edged up 0.1 percentage points to 7.3%.

Economists polled by Reuters expected the report, on average, to show the economy shed 26,400 workers in October, with the unemployment rate rising to 7.4% from 7.2% in September. Forecasts ranged from 10,000 to 50,000 jobs lost in October. These figures were better than expected, however, the Canadian dollar continued its long-term slide vis-à-vis the U.S. dollar. Currency traders’ rush to the "safe haven" U.S. dollar has resulted in a series of record lows since September 11, with the dollar closing at 62.77¢ U.S. on November 15.

The U.S. unemployment rate in October, on the other hand, was much higher than expected. The unemployment rate jumped half a percentage point to 5.4% from 4.9% in September, representing a loss of 415,000 jobs. This is the highest rate since December 1996. Twenty-five to thirty percent of those losses can be attributed to the massive layoffs in the airline industry.

The Consumer Confidence Index in the U.S. dropped sharply following the events of September 11 and at one point stood at 85.5, down from 114 in August. This is the lowest level since February 1994.

The Consumer Confidence Index is an important economic indicator because it measures the strength of the demand side of the economy. Paul Krugman, Princeton University economist and New York Times columnist, draws comparisons between the "Great Depression" and the effect of September’s terrorist attacks on the U.S. economy:

Although the United States has experienced a greater decline in travel and consumer confidence than has Canada or Europe, the same argument applies to the Canadian economy.

Moreover, due to the large role U.S. demand plays in the Canadian economy, Canadians should be concerned with this large decline in consumer confidence in the U.S.:

These economic blows did hit Canada and they likely outweighed any additional export potential the country enjoyed from a weak Canadian dollar, as investors sought a "safe harbour" in U.S. dollar-denominated securities. However, the latest news on the U.S. consumer confidence front is encouraging. The ABC/Money Consumer Comfort Index, which is based on a scale of -100 to +100, had risen to +1 by October 3. It sat at -4 on September 9, which was its lowest since March 1997. The index is based on ratings of the economy, personal finances and the buying climate. By October 3, 46% of Americans rated the economy positively (it was 43% before the attacks), 43% rated the buying climate positively (up from 40% before the terrorist attacks) and 62% rated their personal finances positively (a slight gain since September 11). These changes are slight, but they are significant. Indeed, this survey suggests that by early October consumer confidence in the U.S. had not lost ground to that which prevailed on September 11.

The September 11 terrorist attacks had several immediate impacts on the Canadian economy. Air carriers experienced the first impacts with the grounding of aircraft immediately following the attacks. According to the airline, the two-day shutdown cost Air Canada $100 million and forward bookings are off more than 30%. Analysts are expecting Air Canada to post a loss of $100 million in the third quarter and $250 million in the fourth, according to Thomson Financial/First Call. John Lecky, the Chairman of Canada 3000 Inc., had predicted Canada’s second-largest carrier could run out of cash by Christmas unless it receives loan guarantees from the federal government. The federal government had offered $75 million in loan guarantees to Canada 3000 under the condition of it being able to prove solvency so that Canadian taxpayers are not left exposed. The offer was put on hold until an acceptable and workable business plan emerges. However, the airline has since filed for bankruptcy.

One industry official described to the Committee the situation for the airline industry this way:

The Committee was told of the similarities and differences between today’s situation and the situation of ten years ago during the Gulf War. At that time, traffic had dropped precipitously to almost 30% of what was considered normal within a couple of weeks and it stayed that way for about two or three months before it climbed its way back up again. This time, however, "we have seen the same sort of precipitous drop, in some markets even greater, but we’re not seeing any recovery. And we don’t know how long this is going to last" [Cliff Mackay, Air Transport Association of Canada, 47:9:20].

The downstream industry effects are equally discouraging:

The slowdown in the air transport sector has already been felt in the upstream market by companies such as Bombardier. The transportation giant has laid off 3,800 workers, 2,685 of them in Canada. Boeing has announced layoffs in Winnipeg and Arnprior, Ontario, which will see 723 workers (or about one-third of the current labour force) lose their jobs by the end of 2002.

Tourism, like the airlines, has been ravaged by the so-called "fear economy." There is a direct correlation between the slowdown in airline bookings and bookings in Canadian hotels. One industry expert outlined to the Committee the financial impact on his industry of the September tragedy:

The losses, however, extend beyond hotel businesses and include restaurants, bars, convention centres and tourist operations.

The border delays caused by increased security also exacted a large cost on businesses reliant on trade with the United States. In the wake of the attacks, the delays at major border crossings were as much as 18 hours. In the era of "just-in-time" inventory management, almost any unexpected delay can impose costs on shippers. For example, the Ford Motor Company engine plant in Windsor, Ontario, supplies engines for a plant in Michigan. Four hours after an engine leaves the assembly line in Windsor, it is in a vehicle in Michigan. With the long delays at the Ambassador Bridge border crossing between Windsor and Detroit, both the engine plant in Windsor and vehicle plant in Michigan had to be shut down.

The financial impact of the delays were quantified as follows:

The importance of the Windsor-Detroit corridor to the manufacturing sector, particularly the automotive sector, cannot be overstated. Thirty-four percent of Canada’s trade with the United States crosses the Ambassador Bridge. It is estimated that $300 million in auto-related goods cross one of the region’s three border crossings each day. This figure represents nearly a third of those crossings’ daily volume. As a result, border delays can have an adverse effect on the manufacturing sector:

These and other September 11 problems have exacerbated the pre-existing cyclical downturn such that forecast production activities and employment levels in manufacturing for the remainder of this year are not encouraging.

Clearly, these effects will continue in the mid-term if there is a lingering threat to human security.

The retail trade is very susceptible to declines in consumer confidence. Simply put, reduced consumer confidence means reduced spending and fewer retail sales. The evidence so far points to a general downturn in retail sales following September 11, despite non-discretionary item sales having returned to the norm quite quickly. So discretionary spending continues to be depressed and the retail sector is unsure when it will return to normal.

Spending behaviour for discretionary items is more complex than that for non-discretionary items. The retail sector is finding that music sales are down but home electronics sales are doing well. People are also shopping less often but spending more with each trip. Always known as a thrifty people, Canadians are now more focused on purchasing sale items. Retailers often count on customers who frequent their store to purchase a sale item to also purchase other non-sale items. This has been true in the past. Nevertheless, perhaps as a sign of cautious attitudes towards the future economic climate, people are increasingly buying only the sale item for which they came and are then leaving the store.

The outlook for the retail sector is not good in the short and medium term: