The business world in a free market runs so extensively on psychology it's amazing that business schools around the world spend so much time on balance sheets, marketing and business plans.
Psychology is pretty much the reason why western government's responded to the American financial crisis with assurances that "the fundamentals" of the economy are sound.
However, in some instances, the efforts to describe the Canadian economy as somehow able to avoid any consequences of the move toward a recession south of the border became somewhat bizarre.
Take, for example, comments by Premier Danny Williams in an interview with the National Post:
"The fortunate thing about Newfoundland and Labrador and Saskatchewan in today's fragile economy is that our provinces are very, very well-positioned. We have strong economies, a lot of it based on natural resources, but we're going to weather this storm and weather it very well."
Finance minister Tom Marshall told reporters on several occasions that he doesn't see a problem find cash to build the Lower Churchill project. In other news stories, Marshall said he was concerned that lower oil prices would lower government revenues.
The Premier told VOCM listeners on Sunday night that the provincial "economy is growing very well." That isn't accurate. All economic forecasts - including the provincial government's own forecasts - show the province having incredibly modest growth. Some project the growth this year and next year will be scarcely above 1% and some have forecast growth at one half of one percent. That is as perilously close to a decline as it can get.
At the same time, European countries are taking action to bail out where necessary and take other actions to avoid repercussions from the American downturn. Odd is that, given that European countries are not as dependent as Canada generally or Newfoundland and Labrador specifically on the healthy American economy.
Iceland, once touted by some nationalists as a model for Newfoundland and Labrador to emulate, is in serious economic difficulty:
But in the financial world Iceland is now a hot topic of discussion for a different reason: many people suggest that it could become the “first national casualty” of the ongoing credit crunch. Until last year, Iceland’s economic track record in this decade had been phenomenal—its annual growth rate averaged close to four per cent over the past decade, and its per-capita gross national income is now higher than that of the U.S. This year, though, the country’s currency, the króna, has fallen twenty-two per cent against the euro; the economy has stagnated; and a global rating agency has put the nation’s three major banks on a credit watch. Now analysts are wondering whether the new Nordic Tiger will end up, instead, as “the Bear Stearns of the North Atlantic.”
Take, as but one example, an article from the weekend Globe and Mail. It included this comment one one manufacturer from Newfoundland and Labrador:
Mr. [Lorne] Janes, president of Newfoundland-based Continental Marble of Canada, is already getting the cold shoulder from his customers in Florida, Maryland and California. “The reply I'm getting now is, ‘Lorne, save the phone call, don't call any more until this sorts out,'” said Mr. Janes, whose 12-employee company manufactures equipment to produce moulded stone countertops.
Janes wouldn't be alone. A Bond Papers post from last July highlighted the extent to which the provincial economy is dependent on exports - especially energy exports - the majority of which heads to the United States. In 2005, the last year for which information is posted online at the provincial government website, 52% of international exports from Newfoundland and Labrador headed to the United States.
As the United States economy slows, the effects on Newfoundland and Labrador will be felt directly and in some instances very strongly:
- As demand for energy products declines, exports to the United States will also likely decline. That will reduce provincial government revenue.
- As the price of oil declines, provincial government revenue will decline accordingly. If crude oil averages US$87 in 2008, the provincial budget will run into deficit to the tune of about $800 million.
- Declining commodity prices and lessened demand for minerals, forest products and fish would affect the three traditional major economic drivers in Newfoundland and Labrador.
- The American credit crunch - and the resulting tightening of capital available for major projects - will affect virtually all the major projects projected for Newfoundland and Labrador:
- The NLRC refinery project is already in serious trouble and may well be dead for all practical purposes.
- Hebron is not yet sanctioned. While many believe the project is underway, it is not. Oil prices, increased costs and tight capital may delay project sanction.
- The Lower Churchill needs $9.0 billion in capital investment, capital which is growing increasingly scarce. The project currently does not have a single power purchase agreement. PPAs are crucial for securing long-term financing. A decline in revenues from oil and gas developments and mineral production would adversely affect the provincial government's ability to cover the costs of doubling the provincial debt in order to build the project.
The Newfoundland and Labrador economy is not immune from the effects of a serious downturn in the American economy. As much as politicians are tempted to say something different from that for political reasons, it would be far better to provide people with an accurate picture of the provincial economy and the interrelationship between international events and local economic well being.
The shock of finding out the truth if serious consequences follow will be far greater than if politicians didn't try to whistle a happy tune as they walk towards what - for some economic projects - might well be a graveyard of ambition. That shock will have far greater consequences than what would occur from telling it like it is right now.
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