These four cities are driving Canada’s economy

Canada’s big cities took the toughest knocks during the pandemic, as families fled to the suburbs and beyond and office buildings emptied out.

Yet despite concerns about “big city cores getting hollowed out,” the reality is they still drive Canada’s economic activity, says a report from Bank of Montreal economists Robert Kavcic and Erik Johnson.

The economists say Canada’s four biggest cities — Toronto, Montreal, Vancouver and Calgary — have bounced back from the pandemic shock — albeit with a few bumps and scrapes.

Employment in these cities is now 8 per cent higher than in 2019, compared to 6 per cent for the rest of Canada, the report says.

Some industries such as restaurants, hotels and other direct services are still below their past peaks, but surging employment in other areas has made up for it.

Professional and technical industries, education, finance and public administration have all soared above PRECOVID levels, suggesting that big cities are not being hollowed out, but the sources of growth are reshaping, said the economists.

“In an economy where knowledge sector jobs are increasingly driving employment growth, cities will remain important engines of economic activity,” they said.

In 2020, the four largest cities accounted for 44 per cent of Canada’s gross domestic product and 41 per cent of total employment.

“When it comes to overall economic activity, the big cities are still providing significant muscle,” they said.

The high of cost of living continues to drive younger families out. The economists said by mid-2022 about 120,000 people on net moved out of Toronto, Montreal and Vancouver combined to other parts of their respective provinces.

Canada has also seen record migration between provinces, with Ontario losing almost 40,000 people on net in the latest year, mostly to Alberta and Atlantic Canada.

“Unlike in past cycles, when younger families would move to find work, or betterpaying jobs, affordability is now the biggest motivator,” said the economists.

But immigration is more than filling the void.

Adult population growth in the four largest cities is just under 4 per cent year over year, exceeding the 2.6 per cent growth for the rest of the country.

“The reality is that the big cities are a big draw for international immigrants ,” they said.

That’s not to say there aren’t problems.

While young, productive families are pushed out, the flow of newcomers puts immediate stress on housing, services and infrastructure that has become a “major challenge” for cities, said the economists.

Remote and hybrid work is also keeping weekday activity well below “normal” in downtown cores. Public transit ridership is down almost 20 per cent from 2019 across Canada, and in Toronto, it’s off 23 per cent. With transit revenues slumping, municipalities are left to foot the bill, says the report.

Then there is commercial real estate, whose woes have been well documented lately. Office vacancy rates climbed to a “historic high” of 18.3 per cent in Canada last year, and the economists said there is no evidence declining demand has hit bottom in Toronto and Montreal.

Amid uncertain demand and higher borrowing costs, investors continue to turn away from office real estate and further price corrections are still possible, they said.

Another strike against big cities is housing affordability. While this problem is bad across the country, it’s especially bad in these larger centres.

The average home in Regina costs $307,600; in Vancouver you’re looking at $1.27 million and Toronto $1.1 million, the report says.

BMO’S bottom line: “Despite the challenges facing Canada’s largest cities coming out of the pandemic, they are poised to remain key drivers of future economic growth,” said the economists.