Will the U.S economy affect business, workers in Canada?

by Brian Smeenk

Wall Street has seldom been in such disarray. There are bank and insurance company failures the likes of which we haven’t seen since 1929. The credit markets have been in disarray for months. The federal government rescue packages will significantly affect the deficit. Many are predicting a recession in the USA. How has this and how will it affect business and employment in Canada?

Although the Canadian and U.S. economies are inextricably linked, you’d never know it by looking at recent statistics. Despite the fact that American investors have historically been central to helping generate economic activity in Canada, there seems to be little evidence so far that the financial and housing market problems in the United States have slowed the Canadian economy.

The big question, of course, is whether this will change now, with the latest financial institution crises in the United States, like those that hit Lehman Brothers, Merrill Lynch, and AIG.

Some recent statistics
According to the federal government’s most recent Statistics Canada reports, following a decline in July, employment edged up by 15,000 in August. The unemployment rate remained unchanged at 6.1 percent. Since the start of the year, employment has increased by 87,000 (+0.5 percent). While this was a much smaller increase in employment compared to the 221,000 (+1.3 percent) of the first eight months of 2007, it seems almost remarkable given what’s been happening in the financial markets.

In August, there were employment gains in Saskatchewan and Ontario, partially offset by losses in Nova Scotia and Manitoba. Employment was virtually unchanged in the other provinces. For the first eight months of 2008, employment gains have been in Ontario and the western provinces. Again, this is surprising to this writer, having regard for the fact that Ontario is Canada’s manufacturing base, much of it in the automotive industry.

There was a slight increase in manufacturing employment in August. So far this year, this industry has declined by 14,000 (-0.7 percent), a smaller decrease compared to the same period in 2007 (-76,000 or -3.6 percent).

The wage growth numbers are also surprising. Statistics Canada reports that the year-over-year hourly wage growth for August was 3.8 percent, lower than the 4.9 percent increase observed at the start of 2008, but still pretty healthy. What’s more, August’s average hourly wage growth was slightly above the most recent increase of 3.4 percent in the national Consumer Price Index.

Construction leading the way so far in 2008
The most recent government reports note that employment in construction was up by 19,000 in August, continuing the strength seen over the past few years. August’s gains bring employment in this industry up 86,000 (+7.4 percent) over the first eight months of 2008, making it the fastest growing industry.

Most of the increases have been in Ontario, British Columbia, and Alberta. According to the most recent Building Permits Survey, the value of building permits has increased in 2008, with all of the growth in nonresidential construction.

Where do we go from here?
Despite these hopeful signs, you won’t find any shortage of pessimists in Canada’s business community these days. The credit crunch in the United States investment community is affecting business here. This is perhaps most clearly visible in the recent falloff throughout September of stock prices on Canadian exchanges. The fall of share prices has affected companies in many sectors, including those as distinct as natural resources and financial services.

It is also more difficult to raise funds for new ventures or expansions. There are fewer mergers and acquisitions occurring. There is a fear that demand for Canadian goods and services in the United States, always Canada’s biggest export market, will fall dramatically.

The rosy statistics outlined above do seem to mean that the Canadian economy so far this year has fared better than the American economy. And that will likely continue according to many economists. But these statistics do not mean, in this writer’s view, that Canada will be spared the economic fallout of the dramatic events of last week on Wall Street.

We will likely see, at least, significant retrenchment by Canadian business. And, if American buying is cut back drastically, we may also see significant business failures in Canada. Or failures of American companies that have operations here.

What this means for Canadian employers
Here are some tips for Canadian employers to help navigate the current economic situation.

• Ensure you have a flexible workforce.
• When adding staff, ensure that you do not build in too many long-term commitments.
• Learn how to ensure that your employment contracts or policies give you flexibility, rather than adding rigidity.
• Ensure that you have the ability to downsize efficiently and inexpensively.
• Get legal advice about how to minimize the requisite notice periods and severance costs.
• If you are unionized and are facing layoffs or closures, get good advice about what needs to be done, while again maintaining the maximum amount of flexibility.

Good employment contracts and policies should help your business be more efficient during challenging times, not less so.

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  Brian Smeenk, Fasken
  Brian Smeenk is a Toronto partner in Fasken's Labour, Employment & Human Rights Group. He is also editor-in-chief of Northern Exposure and a member of the Employers Counsel Network. Since 1981, Brian's practice has focused on management-side labour and employment law. He represents both private sector and public sector employers, including many multi-national companies, in all aspects of labour relations and employment law and appears before tribunals and courts at all levels.