B4| REPORT ON BUSINESS O THE GLOBE AND MAIL| TUESDAY, FEBRUARY 18, 2020
OPINION&ANALYSIS
DILBERTR
egardless of the direct im-
pact of pandemics on eco-
nomic activity in Canada
and globally, it’s their psycholog-
ical effects on economic partici-
pants that pose the deeper risk.
So while economists continue
to predict just a modest and tem-
porary Canadian slowdown from
the China-based coronavirus
outbreak, it’s less comforting
that the segment of the economy
most directly in the line of fire is
the already confidence-chal-
lenged manufacturers.
Two weeks ago, I wrote in this
space that the impact on the
Canadian economy from the cor-
onavirus looked likely to be less
than that of the 2003 SARS out-
break, a pandemic that hit Cana-
da particularly hard – and that
nevertheless shaved fewer than
0.2 percentage points off the
country’s real gross domestic
product growth for the year as a
whole.
Now, deeper into this out-
break, with authorities mostly
successful in preventing the
spread of the virus into Canada
(unlike the serious outbreak of
SARS in Toronto 17 years ago),
the prospect of a SARS-style hit
to the economy looks increasing-
ly unlikely.
Last week, the Office of the
Parliamentary Budget Officer es-
timated the coronavirus would
reduce real GDP growth by 0.3
percentage points annualized in
the first quarter of 2020 – about
half of the estimated impact of
SARS in the second quarter of
2003, the peak period for that
outbreak. It did caution, howev-
er, that “estimates of the overall
impact of the coronavirus are
highly uncertain at this time.”
While the impact of the virus
itself in Canada looks destined to
be much smaller than with
SARS, the role of China in Cana-
da’s economy has grown since
that time – as several readers
were quick to point out in re-
sponse to my previous column.In 2003, China represented 1.3
per cent of Canada’s exports and
5.5 per cent of its imports; today,
it accounts for 3.9 per cent of ex-
ports and 12.5 per cent of im-
ports.
The combination of those two
forces suggests that the channels
through which the economic im-
pact of coronavirus is felt in Can-
ada are certain to look different
than they were with SARS.
Where SARS primarily hit the re-
tail sector, coronavirus looks
more likely to be felt in manu-
facturing.
“The biggest effect ... could be
disruption to supply chains,”
Canadian Imperial Bank of Com-
merce economist Andrew Gran-
tham wrote in a recent report.
Since SARS, globalization and
trade liberalization have led to a
much deeper integration of glob-
al supply chains, while over the
same time China has grown dra-
matically as a manufacturing
power. The result is that Cana-
dian manufacturers are reliant
on a lot more Chinese-made
components than they were in
the SARS era.
Mr. Grantham cited data from
the Organisation of Economic
Co-operation and Development
showing that the content of Chi-nese-made parts in Canadian
transportation manufacturing
“almost tripled” from 2005 to
2015; makers of machinery and
other key manufacturing seg-
ments “saw similar increases.”
“Delays in sourcing parts
could have a significant impact
on Canadian production and ex-
port growth in the months
ahead,” he said.
So far, we’re only talking
about a few weeks of disruption.
Companies carry inventories for
a reason; relatively short-term
disruptions of parts supply, re-
gardless of scale, shouldn’t force
them to close their doors or dra-
matically reduce output. Never-
theless, the longer the coronavi-
rus outbreak disrupts Chinese
production and transportation,
the more likely this will throw a
wrench into the Canadian pro-
duction that China supplies.
The effects of coronavirus-re-
lated uncertainties on business
sentiment are something else
entirely.
Having spent the past decade
on the uncertainty roller coaster,
the world’s manufacturers, in-
cluding those in Canada, have
become highly attuned to cau-
tion. Retreat from risk has be-
come standard – and it typicallymanifests itself in delayed and
reduced investment.
We don’t necessarily have to
see the physical evidence of a
slowdown in economic activity
before manufacturers duck back
into their foxholes. Remember
that fears of escalation of the
China-U.S. trade war crippled
global manufacturing invest-
ment last year, and the unsure
outcome of North American
trade talks weighed on Canadian
business spending for the better
part of the past three years.
We probably won’t have a
good read on how the coronavi-
rus has affected confidence
among Canada’s manufacturers
and exporters for several weeks
yet. The first indicator could
come in early March, when new
employment data will provide a
glimpse into hiring decisions in
February.
Much stronger and more de-
tailed evidence will come in
early April, when the Bank of
Canada publishes its quarterly
Business Outlook Survey. Only
then will we have evidence of
how the coronavirus has affected
the confidence of Canada’s man-
ufacturers and exporters – and
how serious a setback it has been
to their willingness to invest.Pedestrians in downtown Toronto are seen wearing protective masks last month. Last week, the Office of the Parliamentary Budget Officer said the coronavirus outbreak would reduce real
GDP growth by 0.3 percentage points annualized in the first quarter of 2020, but said the overall impact of the virus remains ‘highly uncertain at this time.’FRANKGUNN/THECANADIANPRESS
Thisoutbreak’seffectwillbedifferentthanSARS
Canadianmanufacturers
aremuchmorereliant
todayonChinese-made
componentsthanthey
wereduring2003crisis
DAVID
PARKINSON
OPINIONT
he International Energy
Agency (IEA) issued an un-
expected pronouncement
last week – global greenhouse gas
(GHG) emissions didn’t rise in
2019, even though the world
economy expanded by 2.9 per
cent. This, at last, is some good
news on the climate-change
front.
According to the IEA, the “flat-
line” came from a significant de-
crease in emissions from ad-
vanced economies, offsetting in-
creases elsewhere in the world.
And this leads to the second inter-
esting finding – that most of the
gains came from CO2 reductions
in the United States.
The same United States that in
November gave formal notice of
its intention to withdraw from the
Paris Agreement. The same Unit-
ed States whose President has
been attempting to roll back envi-
ronmental regulations.
What’s going on?
In 2019, U.S. greenhouse gas
emissions fell by roughly 140
megatonnes – almost 3 per cent of
its total. Most of this decrease re-
sulted from a shift from coal-fired
electricity toward lower-emitting
sources. In particular, 2019 saw
the largest yearly decline in coal-
based power generation since- Coal is increasingly being
displaced by cheap natural gas –
and in 2019, the benchmark price
for gas declined roughly 45 per
cent from 2018 levels.
But this should come as little
surprise. Over the past two dec-
ades, the U.S. electricity sector, ac-
counting for roughly a third of to-
tal national emissions, has
changed dramatically. In 2001,
coal made up half of total electri-
cal generation, whereas natural
gas contributed just 17 per cent. In
contrast, in 2018, coal declined to
roughly 27 per cent of total electri-
cal generation while natural gas
surged to 35 per cent. In 2017, the
IEA reported that “the U.S. power
sector has led the world in cutting
CO2 emissions since 2008, thanks
largely to natural gas.” Renew-
ables also played a role: the com-
bination of wind, solar and bio-
mass increased from around 1.5
per cent to 10 per cent over the
2001 to 2018 period.
The recent declines clearly
don’t stem from actions of U.S.
President Donald Trump’s ad-
ministration around climate
change; rather, they are largely
the result of market forces – cheap
natural gas and declining costs
from renewable energy sources.
What has also helped is that U.S.
electricity demand has remained
flat, forcing coal to compete for
existing market share. And final-
ly, the development of new coal-
fired facilities has become more
costly than building alternative
energy sources – particularly giv-
en uncertainty surrounding fu-
ture emissions regulation in the
face of growing public pressure.
Moving forward, these forces are
expected to bolster the trend, as
coal-powered facilitiesexperi-
ence lower utilization rates and
older plants are retired.
The news from the IEA raises a
number of questions. First, doesthis “global flatline” mean that we
can all breathe a collective sigh of
relief? Sadly, no. Although total
worldwide GHG emissions in 2019
didn’t rise, this neutral outcome
was a combination of a decrease
in advanced economies offsetting
an increase in the rest of the
world. Moving forward, there is
likely a limit to how much of a de-
crease from current emissions
can be squeezed out, but the glob-
al appetite for energy keeps grow-
ing.
Second, what does this news
mean for Canada? It doesn’t mean
that we are likely to be able to
achieve the same results as the
U.S. – at least from the same
source. Today, the majority of
electricity generation in Canada
already comes from renewables,sourced primarily from hydro-
electricity. In fact, Canada’s use of
renewables as a share of total elec-
tricity demand ranks highest
among all Group of Seven coun-
tries and second in the Group of- As a result, reductions in do-
mestic emissions in the future
will require decreases across a va-
riety of sectors.
But Canada does have a role to
play in the global coal-to-gas sto-
ry. As coal remains the largest
power source internationally at
more than a 38-per-cent share of
the global energy mix, Canada
has an opportunity to help dis-
place coal with natural gas
around the world – a benefit for
our economy, and a route to help
global emissions continue to
drop.
Lastyear’sflatlineincarbonemissionsislargelyaresultofmarketforces
PATRICK SMITH
MARLA ORENSTEIN
OPINIONPatrickSmithisapolicyanalystat
theCanadaWestFoundation.
MarlaOrensteinisthedirectorofthe
NaturalResourcesCentreatthe
CanadaWestFoundation.