The Yukon economy has been thriving, thanks to booming federal transfer payments and a global surge in mineral prices.
To rephrase C.S. Lewis’ description of the magical land of Narnia, in the Yukon it’s mostly winter but always Christmas.
But tougher times are likely coming, as they always do. The difference this time is that we’re not facing a plain vanilla national recession, but something more ominous: the global “credit crunch.”
This crisis of confidence in financial markets is rippling worldwide, with house price collapses in the United States, bank crises in Germany and stock market wobbles nearly everywhere.
Some people are already suffering. Poor hedge-fund manager John Devaney had to sell his 42.6-metre yacht for the fire-sale price of US$23.5 million.
He’s also had to put his second home in Aspen up for sale (but is holding on to his Renoir … so far). The 15,000 employees of investment bank Bear Stearns watched in horror last month as the shares in their pension fund fell to $2 from a high of $159.
(The shares have since performed what the nice people on Wall Street call a “dead cat bounce” and are back up to $10.)
Here in the Yukon, however, you probably haven’t noticed anything except headlines. So far.
Other than an unexplored valley in the New Guinean jungle, there are few places more insulated from global capital markets than the Yukon.
Our government gets 89 per cent of its revenue as transfers from other governments. We aren’t reliant on any big manufacturing or exporting industries.
Even the $36 million in Yukoners’ money frozen in asset backed commercial paper is only one third of our cash hoard.
So the short term looks good. In the longer term, however, there are four ways the global economic crisis could have implications for you and your yacht here in the Yukon.
First of all, our transfer payments from Ottawa are based on a formula that includes government spending and economic conditions in the rest of Canada.
The most recent International Monetary Fund forecasts don’t include a recession for Canada, but growth is expected to slow through 2009. In the US, the conference board’s consumer confidence index is at a five year low.
An economic slowdown will eat into provincial and federal tax receipts, and will eventually flow through to us through the formula. It will also mean that the federal government will have less cash to throw around on special one-time initiatives like the recently announced Building Canada program.
Secondly, the mining industry: In 2007 it invested an estimated $140 million in the Yukon.
However, it is already more difficult for mining companies to raise money to continue at this pace.
The torrid rise in commodity prices appears to have stopped.
The Economist commodity index is up 155 per cent since 2000, but actually down slightly in the last year. The London Metal Exchange futures prices suggest a 10 per cent fall in copper over the next two years.
Meanwhile, it is harder to raise investment capital in the stock market. For example, the TSX Venture Composite Index is down about 25 per cent from its peak.
Investors are less keen to buy risky new mining stocks, especially since many have discovered that the allegedly safe commercial paper in their portfolios was as risky as a Kazakh gold mine.
Then there’s tourism. We can expect fewer visitors if the global economic crisis continues, especially at the higher end of the market.
If people have seen their stock market portfolios or house prices fall 10 per cent or more, they are more likely to stick close to home.
Finally, there’s us and our fear. Even if the three factors above are relatively muted in the Yukon, if we hear enough bad news we are likely to reconsider our own spending plans. That means fewer kitchen renovations and fancy lattes on Main Street.
In turn, that means less revenue for local businesses and fewer jobs. President Franklin Roosevelt was worried about this effect during the Great Depression when he said, “The only thing we have to fear is fear itself.”
Unfortunately, he first said it during his inaugural address in 1933 and it took nearly a decade for optimism to recover.
Each of these four “transmission mechanisms” has a different timing. The transfer payment formula has rolling averages so that it may take several years for bad news to arrive. Fear, however, is instantaneous.
The other thing to worry about — and economists like to worry — is that these transmission mechanisms reinforce each other.
This is bad for the Yukon. For example, a fall in mining share prices means less capital gains tax revenue for Ottawa.
If a Canadian bank loses $300 million in its commodities portfolio, $100 million in Ontario and Ottawa tax revenue disappears from our formula calculations. The commodities trader will take his family to Niagara Falls for vacation instead of Dawson City. And so on.
So how worried should Yukoners be?
We remain relatively sheltered overall. But some of us are more exposed than others. Has your financial adviser got you invested in risky stocks?
Have you borrowed money to build condos or open a new store? Do you rely on the mining industry for work? Does your organization depend on government grants?
Is your government job a term position? Have most of your eco-tourist clients been investment bankers from Bear Stearns?
Some contingency planning might be in order.
And if you do have a yacht, sell it now while the prices are still good.
Keith Halliday is a Yukon economist and author of Aurore of the Yukon and Yukon Secret Agents. His next book Yukon River Ghost appears in May.