Economic Impact of the 50% Reduction Scenario

Economic Impact of the 50% Reduction Scenario

The economic implications of a partial shutdown of the Detroit Three’s production are also severe. A 50% reduction in production in 2009 would lead to employment in Canada falling by 157,400 with 141,100 of those losses coming from Ontario (see Table 6). In that year, Ontario would lose over 2% of all jobs in the province. In terms of GDP, the losses are proportionally higher because of the high value of goods produced by workers in the automotive sector.

The economic losses rise sharply over the next five years. Employment in Ontario falls by about 269,000 a year – a 3.8% decline from baseline levels – while nationally, employment collapses by about 296,000 workers a year.

Just over a third of the first year employment losses are in the manufacturing sector but significant job losses also occur in the wholesale and retail trade sector, information and professional services, and finance, insurance and real estate. Nearly all sectors experience significant job losses over the next five years. Again, the construction sector experiences the largest proportional losses with employment levels nearly 5% lower than in the baseline each year. This sector is affected by a decline in new construction activity by business and a slump in new housing construction.

The general implications for Canada’s economy are provided in Table 7. The trends are similar to those observed in the 100% Reduction scenario. The rise in federal net borrowing in this scenario is about $7 billion a year and about $2 billon a year for the provinces. Once again the economy partially recovers after 2014 – helped by the depreciation of the dollar, lower interest rates, and lower production costs – but the decline of the Detroit Three permanently reduces employment and output in Canada.

Table 6

Table 7

Summary

The economic consequences of either a partial or total shutdown of the Detroit Three are stark. Either scenario is sufficient to push Ontario into a deep recession while the nation may barely escape one in the 50% Reduction scenario. The initial job losses of between 157,000 and 323,000 (depending on the scenario) quickly rise to between 296,000 and 582,000. The job losses continue to mount after the first year because the weaker economy depresses investment, discourages immigration and puts the breaks on new housing leading to a negative economic spiral that is eventually halted by lower interest rates, a falling Canadian dollar and lower production costs.

As large as these impacts are, it is quite likely that the job losses presented in this analysis are conservative because they ignore any negative impact on exports (outside the auto parts industry) from weaker US and overseas demand arising from the Detroit Three’s failure on their economies and depressed commodity prices. The study also ignored possible negative impacts from: retired auto worker pensions, foreign vehicle producers’ shut-down due to lack of parts, or an even deeper impact on the auto parts industry.

1 This assumption means that the foreign produces will not add new or expand existing plants beyond those already announced. It does not mean that production at these plants would be unaffected by the closure of the Detroit Three, they would adjust production to reflect changes in demand due to weaker economic conditions.

2 Dealership activity also adjusts to reflect changes in demand due to weaker economic conditions on top of the assumed rationalization of dealers following the collapse of the Detroit Three automakers.

3 The Detroit Three employment figures are provided by the Canadian Vehicle Manufacturers’ Association at www.cvma.ca.

4 This study captures the expected impact on Canadian auto parts manufacturers’ exports through the assumption that 80% of the industry collapses in the 100% Reduction scenario and 40% in the 50% Reduction scenario.

5 It is worth noting that the job impacts from this analysis are greater than the often quoted 7 jobs for every vehicle assembly worker. The principal cause of this difference is the assumed 80% reduction in the parts industry. This impact is larger than would be expected for general expansions or contractions in the industry and reflects the systemic failure of the parts industry following the closure of the Detroit Three. The total employment impact continues to rise over time because the weaker economy depresses investment, discourages immigration and puts the breaks on new housing leading to negative economic spiral that is eventually halted by lower interest rates, a falling Canadian dollar and lower production costs.

6 Unit labour costs measure the cost of labour required to produce a unit of real GDP and, although they exclude the cost of materials and capital, are often used to provide an indication of trends in overall production costs.

^{The Centre for Spatial Economics}

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