Yukonomist: The Yukon’s summer economic outlook

Zooming in on the Yukon, there is one thing we can predict with certainty: government will grow

Summer is the busy season for the Yukon’s mining and tourism industries, so now’s a good time to check in on the territory’s economic outlook.

Let’s start with the big global picture before we zoom in locally.

According to the International Monetary Fund, global growth is still expected to be positive in 2019 and 2020, but slower than previously forecast. This is due to the effect of tariff increases by the US and China, as well as a bunch of not-so-good economic news from Germany, Italy, Turkey and other sizeable economies. More tariffs, a no-deal exit for the UK from the European Union or a slower-than-expected Chinese economy could all prompt further downgrades.

Deepening the worry is something economists call the “inversion of the yield curve.” Usually, interest rates are higher if you want to borrow money for five or ten years rather than just for the short term. Lately, however, this situation has been reversed in the US. While seemingly obscure, this phenomenon is often—but not always—a precursor to a recession.

Copper prices are also worth a look. Not only is copper important to many Yukon miners, but it is also a bellwether for the global economy since it is used widely in construction and industry. Indeed, one of the economics profession’s many lame jokes is that copper has an honorary degree in economics since it does so well at predicting economic growth.

A sizeable group of copper experts at mining companies and big Wall Street banks are positive on copper. Worsening grades and operational issues at some of the planet’s bigger mines are hurting supply, they say, and rising demand from India and electric vehicles bodes well for prices. Morgan Stanley, for example, forecast earlier this year that copper would rise 14 per cent in 2019. BMO’s March commodity price forecast sees a flatter, but still positive, trajectory for the metal.

This positive view for copper prices is not universal, however. On the demand side, others point out that electric vehicle production won’t ramp up for years and the Chinese economy may prove less resilient than hoped. Meanwhile, supply may go up because higher prices have prompted mining companies to accelerate plans for new mines.

The Yukon’s own Minto mine provides a local example to watch as this debate is resolved. Robust copper prices could see it eventually reopened, or not.

Looking at other metals, the BMO Metals and Minerals index was up in February, but still lower than in most of 2018. Gold was up and was one of the stronger metals, always good news for the Yukon. Our favourite precious metal was trading at US$1,288 per ounce earlier this week, up from averaging US$1,270 per ounce in 2018.

All of these minerals trade in US dollars, so the weakness of the Canadian dollar has multiplied the gains for our mines. The loonie was trading last week around 75 cents (US), a few cents lower than where it spent most of 2018.

The Canadian economy, like the global economy and copper, is seeing some mildly positive forecasts accompanied by increasingly loud worries that it might underachieve.

The IMF’s latest Canadian forecast calls for growth of 1.5 per cent in 2019, still positive but a bit lower than they were predicting a few months ago. The private-sector economists surveyed for the federal budget averaged growth forecasts of 1.8 per cent for 2019, again still positive but down slightly from their forecast last Autumn.

The Canadian yield curve has also inverted, and many are worried about high levels of household debt. As a percentage of the economy, Canadian household debt now exceeds the level seen in the US just before the financial crisis. Unlike the US back in 2008 though, our banks seem to be in good shape and Canadian consumers seem well able to pay their upcoming mortgages and credit card bills.

An unlikely, but possible, scenario has some kind of economic trigger—perhaps a fall in house prices or the ripples of a global economic slowdown—causing Canadians to cut their spending to pay back some debt. While good news for individual balance sheets, this could hurt the retail part of our economy from shopping centres to tourism operators.

Zooming in on the Yukon, there is one thing we can predict with much greater certainty than yield curves or copper prices: our government will keep growing. The latest territorial budget includes a cash deficit of about $50 million, which will stimulate our economy. It also includes the hiring of another 160 full-time Yukon government employees. Given how low Yukon unemployment is, this suggests more workers and their families will move here from Outside. This will boost the local economy and housing demand.

As for the private sector, the Yukon government’s economic forecast has a bullish outlook for the mining sector. Economic activity in the mining sector is broken down into exploration, development and production.

Exploration spending rose 10 per cent in 2018 to $186 million, the highest in more than five years. It’s too early to say what 2019 will look like, but many in the industry are hopeful.

Development spending was also high in 2018, as Victoria Gold ramped up construction at Eagle. If production at Eagle starts later in 2019, as hoped, we will see fewer construction jobs but more long-term operations positions.

As for production, despite the fact that Minto’s closure saw 2018 production fall to around $200 million, the lowest since 2007, new mines such as Eagle and Coffee are forecast to see this figure triple or quadruple over the next five years. Much depends on Goldcorp’s Coffee, where we are waiting to see what impact, if any, the merger of its owner with Newmont will have on the project.

The territorial government’s forecast for the tourism sector is also bullish, with visitor growth of four per cent per year forecast for the next few years. The lower Canadian dollar will help, but any wobbliness in the US or Southern Canadian economies will not.

Employment in the construction industry is also expected to continue to be strong, thanks to both government construction projects and new home construction.

Overall, it looks like we may enjoy the economic weather this summer in the Yukon, despite some gathering storm clouds on the global horizon. Of course, after this summer comes the winter, and that could be a different story.

Keith Halliday is a Yukon economist and author of the MacBride Museum’s Aurore of the Yukon series of historical children’s adventure novels. He is a Ma Murray award-winner for best columnist.