RBC on NL economy: strong headwinds

RBC Economics has revised downward its 2009 forecast for the Newfoundland and Labrador with the economy expected to shrink by 3.5%.

That’s the largest forecast drop in GDP in the country and compares to the 1.9% shrinkage forecast in March 2009.

RBC also forecasts the province will have one of the  top economies in the country in 2010.

However, if you look at the chart, virtually all provinces will experience growth of nearly 3.0% in 2010 as the effects of all that government stimulus spending takes hold.

That wouldn’t be entirely surprising since Newfoundland and Labrador is also spending among the largest amounts in the country on stimulus as a percentage of gross domestic product.

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More to follow update:

From another RBC Economics report released on June 5:

• Employment in the province is expected to be down by almost 7%.  that's the biggest drop of any province.
• While our housing prices and starts are tops in the country, the resale price is expected to drop about 15%.  That's right in the middle of the pile. 
• Manufacturing sales are expected to be down about 26%.  That's the biggest drop in the country.
• Retail sales are forecast to be up by the highest amount in the country.  Most places are dropping.
  

RBC expects 2010 to be relatively good again based on increases in mineral production, the expanded White Rose project and government infrastructure spending. Here's how they view the current situation:

On the resources side, softer demand and the resulting nose-dive in the prices for commodities following last summer’s peaks have negatively affected energy and metals production in the province. Iron ore mining operations cut output by nearly 19% in the first quarter compared to a year ago and rapidly rising stocks would indicate that they will further slash it in the near term. Market-related downtime is also affecting nickel production. In the case of crude oil, rapid maturation of the province’s existing offshore oil fields will keep output on an accelerated downward track until late this year or early next when the White Rose project expansion enters into operation. Crude oil production in Newfoundland and Labrador fell by more than 4% year-over-year during the first quarter.

There are two things that should be noted.

First of all, next year's return to growth in GDP is driven by government spending.  While it's great that government had the cash to throw into a stimulus package, the amount of cash on hand is finite and will likely be consumed over the next two years.

If the economy doesn't rebound as expected, then 2011 and beyond may be different especially since the provincial government won't have the ready piles of cash to toss around.

At the same time, demand for increases in other sectors will start biting into the government treasury.  That twin challenge - increased demand and decreased resources to meet the demand - could become even more pronounced if the drop in oil production that will take place is coupled with soft energy markets and lower than forecast resource prices.

Second of all, and following out of the prospects of recovery, it must be borne in mind that the provincial economy is tied directly and indirectly to the American one. The prospects for a major turn around locally are very much tied to recovery south of the border.  Concerns about that prospect continue. RBC is forecasting a turnaround in the US economy in 2010.