The cause: a lack of major economic development. Projects that were in development have all been cancelled. None of the others proposed are certain or are not close to development.
The analysis, extracted below for Newfoundland and Labrador, is simple and concise. It also corresponds to observations made previously by Bond Papers.
Newfoundland & Labrador to rank third in real GDP growth in 2007 …but last in 2008
In the 1990s and early 2000s, economic growth in Newfoundland & Labrador was rock-solid. Manufacturing, retail, construction and transportation sectors benefited from massive investment in the resource sector. Unfortunately, the labour-intense construction phase of massive projects ended last year, leading to adverse impacts on the economy: the province was virtually at the bottom of the barrel for growth in retail sales and housing starts. Also, the 111,000 barrels of oil extracted in 2006 was unchanged from 2005 (see chart). Problems with the gas compression system at the Hibernia oilfield and longer than-anticipated shutdowns at the Terra Nova oilfield were offset by the first full year of extraction at the White Rose oilfield. One area of strength was the mining sector, thanks to the start-up of nickel extraction at the Voisey’s Bay mining site. Altogether, we estimate the economy expanded at a respectable pace of 2.5% in 2006.
Canada’s most easterly province is likely to be the leader in the Maritimes this year, with real output growth quickening to 3.5%. It is important to notice that this acceleration is primarily coming from the oil industry, assuming activities at the Hibernia and Terra Nova oilfields resume as planned. Besides the oil sector, the rest of the economy is expected to expand slowly in 2007. In 2008, total oil production should edge down slightly given that reserves are declining at the Terra Nova oilfield. As a result, real output growth is anticipated to ease to 1.7%.
New projects to light N&L’s economic future?
The province needs to find new capital projects to feed both the labour market and the economy. One good news is that two dwells drilled has led to the discovery of an extra 190 million barrels of recoverable oil resources at the White Rose oilfield. However, this discovery won’t lead to massive investment. In fact, none of the major investment projects proposed lately are fully certain to go ahead yet. In mid-January, the Newfoundland & Labrador government declined the proposal from a group of oil companies looking to expand the Hibernia oilfield. And, back in the spring of 2006, the province and the same group of oil companies were unable to find a deal to develop the Hebron oilfield. No agreement has been reached for a number of reasons. On one hand, the provincial government is not willing to accept new oilfields development without reaping more benefits for its residents. This is understandable. Standards of living of Newfoundlanders and Labradoreans – measured by per capita real output or per capita real disposable income – is well below the national average. It is also more difficult to find a job in this province than anywhere else in the country, amid an elevated jobless rate of about 15%. It is not surprising then to find out that the labour force had stalled in the last two years and that a growing number of residents are moving to Western Canada, lure by job opportunities. On the other hand, the oil industry wants to make sure that their private investment in the province will be profitable in the long run.
The bottom line is that the economic future of the province is highly tied on both parties’ abilities to find a consensus about the potential development of resource projects. If a deal is reach, the benefits are likely to be felt beyond 2008 and not alter meaningfully our 2007-08 forecast. The potential development of the Lower Churchill hydroelectric resource is another project that could provide a fresh impetus to growth.
Shift from deficits to a respectable surplus
On the fiscal front, the provincial government has successfully turned the boat around and recorded a surplus of $199 million in the fiscal year 2005-06. This is quite an improvement compared to the $489-million deficit reported the year before. The government forecasts a $6 million surplus for fiscal 2006-07. Looking forward, the fiscal outlook could depend heavily on the outcome of a new deal on equalization payments. The latter count for about one of every six dollars in revenues in Newfoundland & Labrador. The exclusion (inclusion) of royalties revenues in the 50,000 formula will be good (bad) news for oil-rich province.