QUEBEC QUEBEC IS IS ADJUSTING ADJUSTING TO TO ECONOMIC ECONOMIC GLOBALIZATIONGLOBALIZATION

ROMANIA, SEPTEMBER 2008

http://www.finances.gouv.qc.ca

PLAN OF THE PRESENTATION

2 International Situation

1 Quebec’s Economy

3 Adjustment in Quebec

4 Economic Forecast

5 Conclusion

•The largest province in Canada

•Population of 7.7 million

•GDP of US$245 billion (PPP)

•Per capita GDP of US$31 845 (PPP)

•International exports: 36.3% of GDP

•Free trade between Canada, the United States and Mexico

QUEBEC’S ECONOMY Quebec at a Glance

Manufacturing : 18.9%

Distribution of Real GDP by Major Sector in 2007

A Modern and Diversified Economy

Natural resources : 2.2%

Services : 73.1%

Construction : 5.8%

QUEBEC’S ECONOMY

Greater Economic Integration

• Freer trade

• Fragmentation of the production process

• Specialization in production

• Offshoring of part of production

INTERNATIONALSITUATION

– Advances in technology

– Improvements in transportation

– Many agreements and international policies

• Offshoring of part of global production to emerging economies

• Hourly pay of workers is lower than in advanced countries

• In particular, China has gained substantial market shares throughout the world

Hourly Pay of Manufacturing Workers

(American dollars, 2006)

Offshoring of Production

23.82

28.76

20.20

25.74

6.43

2.750.67

U.S. EuropeanUnion

Japan Canada Taiwan Mexico China

INTERNATIONALSITUATION

• The internationalization of production has resulted in substantial growth in international trade

• The advanced economies have benefited from cheap goods and services and have become more specialized in high technology goods:

Global Exports of Goods and Services

(Billions of American dollars)

Substantial Growth in World Trade

– Germany and the United States are the world’s largest exporters 2000

4000

6000

8000

10000

12000

14000

16000

1990 1994 1998 2002 2006

INTERNATIONALSITUATION

• Greater demand for services

• The total number of manufacturing jobs in the world is up because of job creation in certain emerging countries

• Thanks to productivity gains, global manufacturing production continues to rise

Share of Employment by Sector in the Global

Economy(Percentage of total

employment)

Employment in the Manufacturing Sector in Decline Compared to Services

20

30

40

50

60

70

80

1980 1985 1990 1995 2000 2005

Manufacturing Services

INTERNATIONALSITUATION

• Significant appreciation of the Canadian dollar versus the American dollar

• High energy costs

• Economic difficulties in the United States

• Transformation of global trade

• Other challenges facing Quebec:

Quebec Is Under Pressure on a Number of Fronts

ADJUSTMENTIN QUEBEC

– Productivity

– Demographic changes

A Difficult International Situation: Oil Price and a Dollar That Are High and Volatile

0.60

0.70

0.80

0.90

1.00

1.10

2002 2003 2004 2005 2006 2007 2008

Canadian Dollar(American dollars)

Oil Price (West Texas Intermediate,

American dollars )

20

40

60

80

100

120

140

2002 2003 2004 2005 2006 2007 2008

ADJUSTMENTIN QUEBEC

Chinese Market Shares in the United States

(Percent)

Share of the American Market

(Percent)

Changes in International Trade Are Having a Major Impact on Quebec

0

20

40

60

Furn

iture

Com

pute

r,el

ectro

nic

Impr

essio

n

Clot

hing

Elec

trica

leq

uipm

ent

Text

ilePr

oduc

ts

2000 2007

3.8

8.2

2.9

16.5

Quebec China

2000 2007

ADJUSTMENTIN QUEBEC

• Manufacturing job losses in North America:

Quebec Is Adjusting to Economic Globalization

– In Quebec, one out of every five jobs

– In Canada, one out of every eight jobs

– In the United States, one out of every eight jobs

-106

-1 375

-241

United States Canada Quebec

Manufacturing Job Losses Between 2002

and 2007(Thousands)

ADJUSTMENTIN QUEBEC

Job Losses Concentrated in Low Value-Added Sectors

Employment, Wages and Salaries in Quebec Job creation

(Units) Weekly pay

(Dollars)

2002-2007 2007

Manufacturing sector1

Clothing -21 500 578

Textile plants and textile products -10 500 690

Furniture and related products -4 300 750

Wood products -3 100 741

Electrical equipment, appliancesand components 500 997

Non-metallic products 1 000 778

Metal products 2 300 794

Services2

Warehousing and transportation1 21 200 758

Finance, insurance, real estate and leasing1

777

Professional, scientific and technical services1

48 500 885

-39 400

+108 900 39 200

1: According to Statistics Canada’s Labour Force Survey.

2 : According to Statistics Canada’s Survey of Employment, Payrolls and Hours.

ADJUSTMENTIN QUEBEC

Exports Have Peaked

Quebec’s Exports of Goods and Services

(In millions of chained 2002 dollars)

0

10 000

20 000

30 000

40 000

50 000

60 000

70 000

80 000

90 000

100 000

1989 1992 1995 1998 2001 2004 2007

ADJUSTMENTIN QUEBEC

Quebec Continues to Increase Exports in High Value-Added Sectors

Cumulative Growth in Merchandise Exports from 2002

to 2007 in Quebec(Percent)

37

203

235

235

409

579

Pulp and paper

Total

Primary metals

Machinery and equipment

Chem. prod. and oil derivatives

Aircraft and parts

ADJUSTMENTIN QUEBEC

• Quebec’s productivity lags significantly behind that of its trading partners

• For Quebec to equal Canada’s real GDP per hour, it would have to double its growth in hourly production each year for 15 years

Productivity In 2006(Real GDP per hour worked,

dollars)

Quebec Must Meet the Productivity Challenge

44.4

57.449.7

United States Canada Quebec

ADJUSTMENTIN QUEBEC

Number of people of working age (age 15 to 64) as a proportion of the number of people

age 65 or over (Percent)

Projection of the population age 15 to 64 in Quebec

Demographic Changes Will Have an Impact on the Economy

9.0

5.0

2.0

1971 2001 2031P

P: Statistics Canada

ADJUSTMENTIN QUEBEC

5 100 000

5 150 000

5 200 000

5 250 000

5 300 000

5 350 000

5 400 000

5 450 000

5 500 000

2006 2011 2016 2021 2026 2031

2003-2007 2007 2008 2009

2.0

2.4

1.5

2.0

P P

No Recession Expected Despite a Slowdown in 2008 and 2009

Real Gross Domestic Product(Percentage change)

P: 2008-2009 Budget projection

FORECASTASSUMPTIONS

Contribution of the External Sector

Contribution of the External Sector

(As a percentage of real GDP)

P: 2008-2009 Budget projection

-4

-3

-2

-1

0

1

2

1995 1997 1999 2001 2003 2005 2007 2009P

FORECASTASSUMPTIONS

Domestic Demand Remains Vigorous

Contribution of Domestic Demand

(As a percentage of real GDP)

-1

0

1

2

3

4

5

1995 1997 1999 2001 2003 2005 2007 2009P

P: 2008-2009 Budget projection

FORECASTASSUMPTIONS

The Quebec Government Is Taking Action

CONCLUSION

• Balance the budget

• Reduce personal and corporate taxes

• Encourage investment

• Implement an infrastructure plan ($30 billion over 5 years)

• Tackle the public debt and control spending

• Support the transformation of the economy

Quebec Continues to Adapt to the International Situation

• Jobs have moved from manufacturing to the service sector

• Manufacturing output is shifting to high value-added sectors requiring skilled workers

• Companies are investing to boost productivity

• The external sector remains under pressure

CONCLUSION