The New Global Normal: What it means for Canadian Competitiveness

Background Perspectives for the 4Front Atlantic Conference

By Kevin G. Lynch Vice-Chair BMO Financial Group

2K. Lynch

We are entering a new global normal … with “China soaring, India poised, Asia re-emerging” … where many advanced economies going through difficult economic, financial and fiscal restructurings … and all countries need to adapt to succeed.

Source: IMF, May 2011

1990

Country GDP

$US (B)

1. U.S.A

2. Japan

3. Germany

4. France

5. Italy

6. U.K.

7. Canada

8. Spain

9. Brazil

10. China

11. India

12. Mexico

5,800.5

3,030.0

1,547.0

1,248.6

1,135.5

1,017.8

582.7

520.7

507.8

390.3

313.7

262.7

2011

1. U.S.A

2. China

3. Japan

4. Germany

5. France

6. U.K.

7. Brazil

8. Italy

9. Russia

10. Canada

11. India

12. Spain

15,227.1

6,515.9

5,822.0

3,518.6

2,750.7

2,471.9

2,421.6

2,181.4

1,894.5

1,737.3

1,704.1

1,484.7

Country GDP

$US(B)

3K. Lynch

The new global context: structural trends and pivotal events are reshaping economies, societies, politics, expectations … and “the drivers of success” are changing for all countries.

_ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _

_ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _

_ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _

Globe is Restructuring

A new multi-polar world. The re-emergence of Asia: 50% of world GDP within decade. The great global financial crisis with lasting consequences. Geo-political risks rising; premium on security. Energy and commodities generating huge wealth transfers.

1.

Global Competitiveness is Changing

Nature of competitiveness changing: premia on a global perspective; and the quality of “national capital”: intellectual (i.e. innovation) capital, human capital and natural resources.

2.

Great Global Talent Hunt

Demographics: the West and China are aging … it puts an incredible premia on developing, attracting, and retaining skilled knowledge workers … multilingual, multicultural, entrepreneurial, and innovative.

3.

Information is New Global Currency

The 24/7 global digital universe is reshaping the value of information, how information can be used, how it can transforming businesses and markets, and its potential to reshape government.

4.

4K. Lynch

The economics of the new global normal are: … slow and volatile recoveries in advanced countries, many with large fiscal burdens and recovering financial systems … and rapid growth in dynamic emerging economies, many with inflation pressures and income inequality challenges.

2010 2011 2012

U.S. 3.0 1.5 1.8

Germany 3.6 2.7 1.3

UK 1.4 1.1 1.6

France 1.4 1.7 1.4

Japan 4.0 -0.5 2.3

Canada 3.2 2.1 1.9

China 10.3 9.5 9.0

India 10.1 7.8 7.5

Sources: Haver Analytics, IMF WEO Database, April 2011, IMF WEO Update, September 2011

Peak to Trough Decline in Real GDP During Great Recession

-6.4%

-5.4%

-6.6%

-4.1%

-3.9%

Chart TitleEuro Area

UK

Germany

US

Canada

Real GDP Growth: IMF Forecast

Previous Peak to Current Employment

Chart Title-1.8%

Canada 0.8%

US

1.3%

Euro Area

UK

Germany

-3.5%

-0.4%

Key Risks

• Sovereign Debt• Fiscal imbalances• Bubbles; inflating and deflating

• Inflation (Emerging Economies)

• Consumption/saving imbalances

5K. Lynch

In the new global normal, balance sheets really matter, for governments as well as households and businesses … with pervasive globalization, no government with market bonds is immune from fiscal risk … and economies benefit from the “national insurance” of fiscal virtue.

TOTAL Government Fiscal Balance: % of GDP (2011)

TOTAL Government Net Debt: % of GDP (2011)

Provincial Net Debt FY2011 (% of GDP)Provincial Budget Balance FY2011 (% of GDP)

Sources: Provincial budget balances and debt- Dept of Finance Fiscal reference tables; Federal Data: http://www.budget.gc.ca/2011/plan/chap5-eng.html (June 2011 update); IMF World Economic Outlook, September 2011

-1.5%

-1.0%

-0.8%

0.2%

-1.9%Canada: Federal

Nfld & Labrador 

P.E.I.

New Brunswick

Nova Scotia

34.6%

36.6%

36.2%

26.7%

34.3%

P.E.I.

Canada: Federal

Nfld & Labrador 

Nova Scotia

New Brunswick

-4.3%

-5.9%

-1.7%

-4.0%

-10.3%

-8.5%

-9.6%

-7.9%Greece

France

Germany

Italy

UK

USA

Canada

Japan

34.9%

81.0%

57.2%

100.4%

130.6%

72.9%

72.6%

153.1%

France

Germany

Italy

Japan

UK

Canada

USA

Greece

6K. Lynch

Fiscal reality today: governments need to confront both fiscal consolidation and fiscal sustainability … the fiscal double header for many western economies including Canada and most provinces.

FISCAL CONSOLIDATION

FISCAL SUSTAINABILITY

Cause (recession, stimulus) and Consequence (debt accumulation)

• Slow recovery

• Weak tax bases• Income support spending

• Unwinding fiscal stimulus spending

• Deficit-debt dynamics

Cause (slower structural GDP growth, demographics) and Consequence (structural deficits)

• Structurally weaker nominal GDP growth … i.e. tax bases (4% vs. 5 ½+ %)

• Lower Cdn Labour force growth (0.9% vs. 1 ½ %)• Lower Cdn Productivity growth (0.8% vs. 1 ½ %)• Lower Cdn Inflation (2% vs. 2 ½ %)

• Structurally higher spending growth in demographically sensitive areas

• Health, pensions, training …

S

RP

NT

I

AM

AT

R

H

NO

7K. Lynch

In this fiscal reality, economies need to increase longer term growth … and this requires embracing the “New Global Competitiveness” = globalization + human capital + innovation + natural resources … and Canada is no exception.

DISRUPTIVE IMPACT CONSEQUENCES AND OPPORTUNITIESCOMPETITIVENESS

DRIVERS

• Strong macro fundamentals “provide national insurance”• Market opportunities shifting to dynamic emerging countries • ITC offers transformative ways to go global from anywhere

Unbelievably inter-connected markets …Globalization

• TALENT HUNT goes global• Premium for multi-lingual, multi-cultural workforces• Address challenges posed by demographics—to the workforce,

pensions and healthcare

Aging populations, put premium on talent …

Human Resources

• Opportunities for producers of food, energy and minerals/metals • Technology and logistics lever resources

Emerging economies need resources to sustain growth …

Natural Resources

• Moving up the value-added curve requires continual innovation and productivity

• Innovation creates opportunity to shift the demand curve, the market curve, and the cost curve; or else, risk competing with low-cost suppliers on price

Innovation drives productivity gains and economic growth …

Innovation

8K. Lynch

A universal reality … productivity is core to a nation’s competitiveness and the standard of living of its citizens … AND, Canada is lagging.

0

1

2

3

4

1947- 1973

1973- 2000

2000-2008

4.0

1.6

0.8

Annual % Labour Productivity Growth in the Canadian Business Sector: 1947 - 2008

73.6%

70

75

80

85

90

95

100

1981 1984 1987 1990 1993 1996 1999 2002 2005 2008

US=100

Relative Labour Productivity in the Business Sector: Canada as % of US

–Paul Krugman (Nobel Prize Winner)

“Productivity isn’t everything, but in the long run, it is almost everything.”

Paradox: Canada has a larger productivity problem than the U.S. --- indeed, our Can-U.S. productivity gap “costs” us

$300B annually --- but U.S. has greater urgency in improving

productivity

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SECTORLabour

Productivity(2007)

Machineryand Equipment*

(2000-07 average)

ICT(2000-07 average)

AGRICULTURE, FORESTRY,FISHING AND HUNTING

86.4 70.5 79.1

MINING 88.0 80.0 31.2Mining, except oil and gas industry 47.3 57.0 35.1Oil and gas extraction industry 81.6 100.5 25.6

UTILITIES 62.7 51.0 73.6CONSTRUCTION 192.5 79.2 14.7MANUFACTURING 73.2 91.1 36.6

Wholesale Trade Industries 90.0 29.9 45.6Retail Trade Industries 75.6 70.4 72.1Transportation andWarehousing Industries

108.1 86.8 19.7

Information and Cultural Industries 46.6 82.8 98.5

FIRE** and Management ofCompanies Industries

72.1 105.4 72.2

Professional, Scientific andTechnical Services Industries

38.6 45.7 42.3

Administrative and WasteManagement Industries

107.6 39.9 49.9

Education, Health Care andSocial Assistance Industries

95.9 34.2 17.8

Arts, Entertainmentand Recreation Industries

39.0 39.3 128.7

Accommodationand Food Services Industries

72.2 28.3 47.1

Average for all Sectors and Industries 72.1 74.5 47.9

Canada-U.S. Labour Productivity and Selected Capital Intensity Comparisons (U.S. = 100)

GOODS SECTOR

SERVICES SECTOR

Canada’s productivity deficit versus the U.S. is both large and pervasive … most sectors have productivity levels considerably less than comparable U.S. sectors … and contributing to this, we invest much less in ICT and machinery.

Source: State of the Nation 2010 Report by the Science, Technology and Innovation Council

10K. Lynch

Innovation is the core to the new competitiveness because it alone has the capacity to create new products not compete on standardized ones and build new markets not fight for share in existing ones … BUT, Canada is not an innovation leader, particularly in the business sector.

Our public sector investments in R&D

spending as a % of GDP, delivered largely through

universities, are well above OECD averages,

and even the U.S.

But, the Canadian business sector ranked 15th among

OECD countries in business R&D expenditures. Canadian

business R&D spending is only 1% of GDP, well below the

OECD average of 1.6%; half the U.S. and a third of leaders like

South Korea, Sweden.

Business Sector R&D Expenditures% of GDP

0.9%

0.9%

1.0%

1.0%

1.1%

1.2%

1.2%

1.3%

1.3%

1.4%

1.5%

1.7%

1.8%

1.8%

1.9%

2.2%

2.5%

2.7%

2.7%Japan

Sweden

Finland

Korea

United States

Austria

Germany

Denmark

Iceland

Luxembourg

France

Belgium

Australia

United Kingdom

Canada

Netherlands

Czech Republic

Ireland

Norway

Source: OECD, Main Science and Technology Indicators. Volume 20

15th

“The first step in winning the future is encouraging

American innovation.” … “We need to out-innovate, out-educate, and out-build the

rest of the world.”

President Obama, 2011 State of the Union Address

11K. Lynch

Canada’s markets are “over-weighted” in mature, slower growing economies (many with structural fiscal challenges) and linkages are weaker to dynamic emerging markets.

Country

% of Canadian

Trade

Average GDP Growth Rate:

2010-2012

1. United States 74.9% 2.8%

2. United Kingdom 4.1% 1.7%

3. China 3.3% 9.8%

4. Japan 2.3% 2.5%

5. Mexico 1.3% 4.7%

6. Germany 1.0% 2.7%

7. South Korea 0.9% 4.9%

8. Netherlands 0.8% 1.6%

9. Brazil 0.6% 5.4%

10. Norway 0.6% 1.9%

89.6%

Canada's Top 10 Trading Partners () in 2010 (1% or more of Cdn. Exports)

Sources: Industry Canada; http://www.sse.gov.on.ca/medt/investinontario/en/Pages/coca_401.aspx; IMF WEO DatabaseNote: Numbers may not add to totals due to rounding.

Missing major export markets in dynamic emerging economies including: India, Brazil, South Korea, Taiwan, South Africa, Russia, etc.

Export Markets Import Markets

Country

% of Canadian

Trade

Average GDP Growth Rate:

2010-2012

1. United States 50.9% 2.8%

2. China 11.1% 9.8%

3. Mexico 5.5% 4.7%

4. Japan 3.4% 2.5%

5. Germany 2.8% 2.7%

6. United Kingdom 2.7% 1.7%

7. South Korea 1.5% 4.9%

8. France 1.4% 1.6%

9. Italy 1.2% 1.2%

10. Taiwan 1.0% 7.1%

80.5%

12K. Lynch

In the new global competitiveness, talent is key … and a well educated, entrepreneurial, multi-lingual, globally oriented and innovative work force is a competitive advantage.

How is Canada Doing? … Some Talent Indicators

(i) Education attainment results for International Student Assessment (PISA)

• Science• Math• Reading

(ii) Percentage of population with tertiary education

(iv) PhD graduates

(iii) Percentage of population with university-level education

8th place (OECD)10th place (OECD)6th place (OECD)

1st place (OECD); 49% of population

23rd place (OECD); 146 per million

16th place (OECD); 34% of population

(v) Universities in Global top 100• MBA schools in global top

100

4 universities (1 in top 20)

6 schools (none in top 40)

(vi) Multi-cultural and diverse population

Over 40% of populations in Toronto and Vancouver foreign-born …

13K. Lynch

Natural resources matter … Canada is one of world’s most secure, largest producers of natural resources … energy, minerals/metals, agriculture … and as global demand rises, so do global prices … and the incentive to better apply technology (innovation) and logistics to maximize returns.

Sources: Canadian Minerals Yearbook, U.S. Geological Survey (USGS), Food and agriculture organization of the United Nations (FAOSTAT) * latest year

Lentils 1st

Linseed 1st

Mustard Seed 1st

Dry Peas 1st

Barley 2nd

Canola 2nd

Blueberries 2nd

Cranberries 2nd

Mixed Grain 2nd

Wheat 8th

Potash 1st

Nickel 2nd

Uranium 2nd

Diamonds 5th

Zinc 5th

Lead 6th

Oil 6th

Copper 8th

Gold 8th

Iron Ore 9th

And, the second largest oil reserves in the world, and large shale gas reserves

Natural Resource Ranking*

Agricultural Resource Ranking*

Source: Bank of Canada

Bank of Canada’s Index of Real Commodity Prices in the Post-War Period

14K. Lynch

Global benchmarks for business productivity growth … an Economist* survey of 400+ global CEO’s identified three main drivers of productivity and the imperative of innovation … lessons for Canadian business.

* Source: EIU (Gearing for Growth: Future Drivers of Corporate Productivity, 2011)

Managing Human Capital

Making Strategic Corporate Choices

Maximizing Best-Available Technology

• Functional training• Flex time workers

• Pay for performance• Reward process innovation

• Introduce new products/services• Enter a new market

• Invest in operational R&D• Acquire strategic partners with complementary know-how

• Mobile working• Customer analytics

• Social media for client interaction• Collaboration software

TODAY: Areas for biggest payoffs

• Management training

• Cloud computing

TODAY: Choices with greatest impact

TODAY: Maximum impact today

#1

#2

#3

15K. Lynch

Branding matters: in a transforming and volatile world, brands reduce uncertainty … a clearer Canadian brand … and Atlantic Canada brand within it … would help business sell abroad, attract investment, entice immigrants, facilitate education/research alliances, and open markets.

Solid economic fundamentals, including lower debt and corporate taxes than the U.S.

Robust resources; both natural resources and human resources

A sound financial system, with strong financial institutions.

Nice + “Other” Brand Characteristics:

?Branding of Canada by Canadians

Opportunity:Nice

Canadians

… or …

Branding of Canada by

Others

Financial Crisis Oil SandsSeal HuntWall Street

JournalRisk:

THE WALL STREET JOURNALJanuary 12, 1995

Bankrupt Canada?Mexico isn't the only U.S. neighbor

flirting with the Financial abyss. Turn around and check out Canada, which has now become' an honorary member of the Third World. In the unmanage-ablility of its debt problem. If dramatic action isn't taken in next month's fed-eral budget, it’s not inconceivable that Canada could hit the debt wall and, like Britain in the 1970s or New Zealand in the 1980s, have to call in the International Monetary Fund to stabi-lize its falling currency.

The Canadian dollar’s problems were finely detailed in the Journal yesterday by reporters Michael Sesitand Suzanne McGee. Additionally, Canada has the second-highest ratio of debt to GDP of any industrialized economy. only Italy surpasses it. But Italy finances most of its debt through domestic borrowing, while Canada ran a $30 billion balance-of-payments deficit last year. About 40% of Canada's national and provincial debt is held by foreigners. They should worry that 35% of all federal revenues now go to service the debt.

Ed Neufeld, who until last year was Chief economist for the Royal Bank of Canada, says the moment of truth will come next month when the Liberal government presents its budget. Finance Minister Paul Martin has been making noises about a radical pruning of government expenditures. "We don't have much time," Mr. Neufeld says. "If Canada has to go cap in hand to the IMF it will represent the worst finan-cial crisis in the country's history."

Thankfully, some of Canada's 10 provinces have been showing It's pos-sible for governments to get out of the tax and debt trap and survive politi-cally. Saskatchewan has closed many marginal rural hospitals. New Brunswick has abolished the school board bureaucracy and Imposed tough workfare requirements.But the most impressive perfor-mance is in Alberta, where former Cal-gary Mayor Ralph Klein was elected

premier in 1992. He has slashed gov-ernment spending 20% by simultane-ously taking on every special interest from subsidized businesses to health-care providers. Some 40,000 of Al-berta's 90,000 welfare recipients have been removed from the rolls or placed in training programs. As a result, Al-berta's provincial debt has been cut by 80% at the same time that Mr. Klein's Conservative government has risen to a 61% approval rating.

The economy there has responded well to the medicine. It grew by 4% last year, while unemployment has fallen to 7.4% from 9%, Premier Klein predicts that the provincial govern-ment's share of GDP will fall to 14% from today’s 18% by 1997. He hints he plans to cut income taxes before the next election. "The U.S. is talking about achieving a balanced budget in 2002," He says. "As a province we plan to be deficit-free long before then, and already paying down our debt." Inspired by Alberta's example, the Ontario Conservative Party re-cently endorsed a plan to reduce gov-ernment spending and cut the top rate of income tax in the province to 46% from 52%.

On the federal level there are dozens of budgetary white elephants long overdue for a diet if the Liberal government has the proper will. The Fraser Institute, a Vancouver free-market think tank, recommends pri-vatizing the Canadian National Rail-way and Canada Post along with end-ing transfer payments to taxpayers with above-average incomes. Short of that, there are massive savings to be had in trimming other federal programs.

What's clear is that Canada can no longer dawdle over its debt and tax burdens. It has lost its triple-A credit rating and can't assume that lenders will be willing to refinance its growing debt forever. Before Canada "hits the wall" it must put on the brakes and take its government in a new direction.

THE WALL STREET JOURNALJanuary 12, 1995

Bankrupt Canada?Mexico isn't the only U.S. neighbor

flirting with the Financial abyss. Turn around and check out Canada, which has now become' an honorary member of the Third World. In the unmanage-ablility of its debt problem. If dramatic action isn't taken in next month's fed-eral budget, it’s not inconceivable that Canada could hit the debt wall and, like Britain in the 1970s or New Zealand in the 1980s, have to call in the International Monetary Fund to stabi-lize its falling currency.

The Canadian dollar’s problems were finely detailed in the Journal yesterday by reporters Michael Sesitand Suzanne McGee. Additionally, Canada has the second-highest ratio of debt to GDP of any industrialized economy. only Italy surpasses it. But Italy finances most of its debt through domestic borrowing, while Canada ran a $30 billion balance-of-payments deficit last year. About 40% of Canada's national and provincial debt is held by foreigners. They should worry that 35% of all federal revenues now go to service the debt.

Ed Neufeld, who until last year was Chief economist for the Royal Bank of Canada, says the moment of truth will come next month when the Liberal government presents its budget. Finance Minister Paul Martin has been making noises about a radical pruning of government expenditures. "We don't have much time," Mr. Neufeld says. "If Canada has to go cap in hand to the IMF it will represent the worst finan-cial crisis in the country's history."

Thankfully, some of Canada's 10 provinces have been showing It's pos-sible for governments to get out of the tax and debt trap and survive politi-cally. Saskatchewan has closed many marginal rural hospitals. New Brunswick has abolished the school board bureaucracy and Imposed tough workfare requirements.But the most impressive perfor-mance is in Alberta, where former Cal-gary Mayor Ralph Klein was elected

premier in 1992. He has slashed gov-ernment spending 20% by simultane-ously taking on every special interest from subsidized businesses to health-care providers. Some 40,000 of Al-berta's 90,000 welfare recipients have been removed from the rolls or placed in training programs. As a result, Al-berta's provincial debt has been cut by 80% at the same time that Mr. Klein's Conservative government has risen to a 61% approval rating.

The economy there has responded well to the medicine. It grew by 4% last year, while unemployment has fallen to 7.4% from 9%, Premier Klein predicts that the provincial govern-ment's share of GDP will fall to 14% from today’s 18% by 1997. He hints he plans to cut income taxes before the next election. "The U.S. is talking about achieving a balanced budget in 2002," He says. "As a province we plan to be deficit-free long before then, and already paying down our debt." Inspired by Alberta's example, the Ontario Conservative Party re-cently endorsed a plan to reduce gov-ernment spending and cut the top rate of income tax in the province to 46% from 52%.

On the federal level there are dozens of budgetary white elephants long overdue for a diet if the Liberal government has the proper will. The Fraser Institute, a Vancouver free-market think tank, recommends pri-vatizing the Canadian National Rail-way and Canada Post along with end-ing transfer payments to taxpayers with above-average incomes. Short of that, there are massive savings to be had in trimming other federal programs.

What's clear is that Canada can no longer dawdle over its debt and tax burdens. It has lost its triple-A credit rating and can't assume that lenders will be willing to refinance its growing debt forever. Before Canada "hits the wall" it must put on the brakes and take its government in a new direction.

16K. Lynch

Canada has enormous strengths that have served us well, built one of the highest standards of living in the world, and one of the most civil societies.

Solid public finances

Actuarially balanced public pension plan

Competitive corporate taxes (12 percentage pts. less than U.S.)

Stable, secure financial system (rated #1 in world by WEF)

Well educated, diverse population

Huge natural resource assets

Stable institutions

Universal safety nets and public services (education, health, …)

17K. Lynch

In the new global normal, Atlantic Canada can win … provided it builds on its strengths, not rests on them … embraces the new global marketplace strategically, and tackles its weaknesses, particularly productivity and innovation …

Atlantic Canada has many strengths: the key is to understand our comparative advantages, and lever them globally

Changing world brings opportunities as well as risks: markets and market opportunities are shifting; Atlantic Canada needs to adjust well and early

Need to fight the tyranny of “short-termism” and “status quo-ism”: the status quo is not a strategy for the future in a dynamic, changing environment

Sustained productivity improvements will take national effort, and sustained corporate focus on global markets, talent, and innovation

“Innovation is the oxygen that fuels the star runner …”

And, we need to avoid complacency risk … Atlantic Canada has the potential … BUT … we need to compete to win