Sucks to be us #nlpoli

Not so very long ago,  provincial Conservatives were crowing about how they would be running all sorts of mining projects in Labrador using electricity from Muskrat Falls.

These days, the word from Labrador isn’t all that good.  One mine is closed and, on Tuesday, things looked bad both for the major mine operating in western Labrador and the KAMI project.

No one can take an glee in the bad news. What we should do is remember that the assumptions on which the Conservatives spent heavily over the past decade were completely inconsistent with about a century and a half of experience with resource extraction industries  years in Newfoundland and Labrador.

Rather than learn from our considerable, collective experience, the Conservatives arrogantly assumed they alone knew better than everyone else.

They didn’t.

We all get to pay the price.

Oh joy.

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Gone, baby, gone #nlpoli

In September 2008,  four cabinet ministers went to Harbour Grace to announce that the provincial government was giving the company $8.0 million in public money,  interest free.

The provincial government communications people circulated a picture of the four at the time - from left, Jerome Kennedy,  Danny Williams, Paul Oram, and Trevor Taylor – as they tried on some of the boots made at the plant.  Every one is smiling.  The $8.0  million in taxpayers’ cash was supposed to help the company add another 50 full-time jobs on top of the 170 at the plant.

It’s an interesting picture because within 12 months of the announcement,  the two on the right – Taylor and Oram – would be gone from politics.  Williams left in 2010,  the year the provincial government started a “review” of the loan after the company cut the work force to 100.  They never did add any jobs. Kennedy hung on the longest of the lot,  but five years after his trip to the boot factory, Jerome was gone from politics as well.

Populations #nlpoli

Ross Reid has a new job. 

He used to be federal fisheries minister. 

Since 2003 or so, Ross has been a deputy minister in the provincial government.

Lots of people got excited last week when Premier Kathy Dunderdale announced that Reid would be deputy minister responsible for the provincial government’s population growth strategy.

Yeah, well, maybe people need to take a closer look before they get their knickers in a bunch.

The reality of her world #nlpoli

Some people are trying to make a controversy out of Premier Kathy Dunderdale’s recent comments that public sector unions should “expect a more modest increase” than the salary rises they’ve been used to from the Conservatives since 2003.

Look at “the reality of the world”, Dunderdale admonishes everyone.

Well, a look at the world she lives in  - as opposed to the one people imagine exists - reveals a great deal.

Revelation One:  As labradore has noted repeatedly, the provincial Conservatives are responsible for expanding the public service both in absolute numbers and as a share of the provincial labour force.

In his most recent version, labradore notes both the size of the public sector: 25% of the provincial labour force.  Then he adds Revelation 2: the growth in the total value of the pay packet.  Since 2006, the total public sector pay cost has gone from about $1.9 billion to about $2.65 billion by January 2011.

Revelation 3 really puts it in perspective. Scan down through David Campbell’s commentary in the Globe on December 28 and you’ll find plenty to knock your eyeballs out about the growth of the provincial economy. Take the bits rom labradore and put it together with this on the relative position od the public sector pay envelope compared to the national average:

In 1998, the average weekly wage in the public administration sector in Newfoundland and Labrador was more than 22 per cent below the national average. Now it is 3.3 per cent above. That is a monumental shift in wages over a short 11 year period. A similar, but less pronounced story is found in both the health care and education sectors.

Most of that increase came since 2006.

So for anyone who is still harbouring any misapprehensions, understand that the provincial public sector has been driving the provincial economy for the past decade.  Thousands of more employees making – collectively – hundreds of millions more year over year and you have the growth since 2006 focused on the northeast Avalon. 

Now add to that the sources of provincial government revenue, as laid out in the annual provincial budget Estimates. You start to see the role that taxes on individual incomes and consumption play in fuelling the explosion in government spending since 2006.

Mining taxes and royalties produced about $167.5 million in revenue in 2010.  Personal income taxes brought in $888 million and sales taxes brought in another $791 million. Even gasoline taxes brought in more than mining royalties ($168.45 million) in 2010.

The forecast for 2011 did include an increase in mining royalties and taxes to $343 million. But even with that, two of those three taxes will still produce well over double the amount for the treasury than will come from rent companies pay for the privilege of exploiting the province’s non-renewable mineral resources.

When you look at the reality of things, Kathy Dunderdale and the Conservatives can’t afford to chop into provincial spending without putting a gigantic chill in the local economy.  As much as Dunderdale likes to admit that she and her colleagues have been irresponsible in boosting public sector spending to unsustainable levels, they haven’t left themselves any real manoeuvring room politically.

Now this might seem a bit harsh to Kathy’s delicate sensibilities, but the reality is that Dunderdale can’t do anything but provide the public sector with some lovely increases in their coming contract negotiations. 

When Kathy Dunderdale says public sector unions should expect more modest increases, we should understand she is probably speaking relatively.  Compared to their last contract when they got an eight percent jump followed by three successive years of four percent, public sector employees should probably look for something like four years of four percent. or four percent followed by three over the subsequent years.

But any serious confrontation?

Don’t count on it.

The Tories don’t have the nuts for it, pea or otherwise.

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Five for Friday Round-UP

To round out the week, here are five curious posts on different subjects to send you off into the weekend.

And don’t forget this Saturday* is Guy Fawkes Day.

1. Via Crooked Timber, a post at the New Statesman about the particularly abusive comments hurled at women bloggers.
2. Maybe provincial justice minister Felix Collins and his provincial Conservative colleagues should just suck it up and stop whining about the costs of the federal Conservatives’ omnibus crime bill.  After all, Felix and the gang campaigned for the harper crowd. And it’s not like the provincial Conservatives didn’t know about the crime bill before they voted.
3. This is is a practical way to promote bras.
4. One the one hand Scotiabank’s chief economist thinks everything in Newfoundland and Labrador will be ducky over the next five years.
5. And on the other hand, money is moving from commodities – like oil – into credit.  Do those two things go together?

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*  Not Sunday

Commodity prices and economic recovery #nlpoli

From the Globe and Mail:

“If commodity prices were to fall back – apart from Canada, of course – it would be a pretty good thing for most of the world because it would put purchasing power back in consumers’ pockets,” Mr. [Roger] Bootle said Monday in an interview in Toronto before an annual conference organized by Capital Economics.

Commodity producers would be hurt by lower prices for their raw materials, but accelerating growth in Canada’s largest foreign market, the United States, would boost demand for exports of Canadian goods and services, he said. “You’ve got a bit of a two-way pull there.”

Bit like the trigger point, eh?

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Experts warn of external threats to recovery

Along with population statistics, here’s another one you can bet the current provincial Conservative crowd won’t be holding out quite as enthusiastically as the fabricated version of Bank of Canada' governor’s remarks they were using until recently.

As the Globe reported:

Top policy makers indicated Wednesday that they are on heightened alert for a deeper crisis in Europe that spreads beyond Greece and, potentially, hurts Canadian banks or the wider economy. Though the direct exposure of Canadian banks to countries such as Greece is low, the Bank of Canada warned that Canada’s financial institutions are vulnerable through links to the United States and other countries that are much more exposed.

Those top policy makers include analysts at the Bank of Canada and federal finance minister Jim Flaherty.

The question that remains is what economic problems in the United States and Europe would do to demand for oil – our new chief export – and other commodities as well as what it might do to prices for them as well.  Anything that drops the price and the demand will also drastically affect provincial government revenues.

That won’t be good on a go forward basis, to use another of a recently famous politician’s famous phrases.  Since the provincial government doesn’t even have an imaginary protective bubble this time, that could make what one analyst forecasts as a bad deficit and debt situation get much worse.

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The looming debt problem

The government’s favourite economist is sounding alarm bells about the provincial government’s financial health.  The finance minister, on a local talk radio program, sounding stressed as more and more people start talking about what has been obvious to readers of this corner for some years now:  the provincial government is in a financial jam and the current crowd running the place have no idea what to do about it. 

Well, if they do have an idea, they have no intention of doing anything, at least within the next four or five years.

Part of the charade they’ve been relying on the past few years is the perception that not only are happy days here but they aren’t ever going to leave.  In some years, the finance minister hasn’t been above presenting completely laughable forecasts during the Christmas season to keep consumer spending going through one of the most tax-rich seasons of the year.

Just as the proverbial chickens are coming home to roost in Tom Marshall’s office, it may not be too much longer before a fewer fowl start fouling other bits of the province.

Last week local news media mentioned a report on consumer debt.  Newfoundland and Labrador saw the largest jump in the country last year – along with Quebec – at 7.8%.  As CBC reported, the average consumer in the province owes $23, 372. That doesn’t include household mortgages.

Flip back to March and you’ll find a red flag on that issue. It was a report by the Bank of Montreal that warned Canada’s housing prices were getting perilously close to a “correction”: especially in places where prices were outstripping incomes or if inflation rates changed rapidly.

Marketwatch.com’s Bill Mann summarised it this way:

The cautionary Bank of Montreal report  says average home resale prices compared with personal incomes are 14 per cent above the long-run trend, up from last summer, although still below the 21-per-cent peak that preceded the 1989 crash.

But that is not the case in all Canadian real-estate markets. Five provinces are currently in the danger zone, led by Saskatchewan, where the ratio is 39 per cent above historic norms. That province has a booming commodities industry, centered around potash and oil.

Also well above the long-run levels is Newfoundland, 34 per cent higher; British Columbia and Manitoba, 31 per cent, and Quebec, 23 per cent above.

Overall in the province, debt servicing costs are the lowest in the country according to the most recent report from the Certified General Accountants Association of Canada. But that doesn’t mean there aren’t pockets of risk.  The CGAA also reported that incomes in the province fell short of previous growth:  problem is the year they are referring to isn’t clear, even though the report was issued in 2010.

Just thinking about it for a second, one could easily imagine there are a couple of potential hot spots in the province.  The northeast Avalon and western Labrador are experiencing particularly strong growth and that’s where you’d be more likely to see heavy debt loads and high debt to income ratios.

Not surprisingly, personal debt is one of three issues Bank of Canada deputy governor Jean Boisvin, right, highlighted in a speech in March that Canadians needed to watch as the country emerged from the global recession:

Let us start with household debt. Since the beginning of the recovery, household credit has increased at twice the rate of personal disposable income. In the autumn of 2010, Canadian household debt climbed to an unprecedented level of 147 per cent of disposable income (Chart 7).

The relatively healthy financial condition of Canadian households at the beginning of the “Great” Recession helped the Canadian economy to better withstand the initial shocks of the crisis. However, going forward, it is essential to maintain the necessary room to manoeuvre to keep household spending on a viable path. This leads us to believe that the rate of household spending will more closely correspond to future earnings, and certain signs to that effect have already been observed.

Here’s Chart 7 from the speech:

The other two issues were international competitiveness and productivity and investment.

There’s a parallel between the condition of the provincial government’s books and the household accounts in some areas of the province. Just as the provincial government has grown increasing susceptible to small shifts in economic circumstances, so too may more and more households in the province be vulnerable to shifts in the provincial economy.

If the province’s politicians scarcely recognise their own financial problems, it makes you wonder if they might be aware of the issues looming for consumers in the province.

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Locke warns of financial problems

Wade Locke’s been making the rounds of local media in advance of his talk tonight at the Harris Centre of Memorial University.  Your humble e-scribbler posted the details of it on Monday.

Some quick observations on this Telegram version:

1. There is nothing new in Locke’s presentation that hasn’t been in the public domain  - in some cases – for a couple of decades.
2. That said, the fact that the government’s favourite economist is now undermining the economist’s favourite government might be enough to get these issues into wider discussion.
3. Once that happens it should be fairly obvious the current crowd have helped shape the current mess and their intention is to make a bad situation even worse.
4. Locke’s solution – we need a plan – is a penetrating insight into the obvious. The current crowd got us into this mess precisely because they had no plan.
5. Unfortunately, there’s no sign of any pressure to create a plan in the near term.
6. Politicians – like some of the people on the panel with Locke tonight - will continue to deny there’s anything here that needs attention.  others, like the current administration will talk about doing something constructive and then either do nothing or make the situation worse.
7. There’s no sign any of the political parties in the province are ready to deal with the provincial government’s financial mess.

Put all that together with the volatile political environment and you have the potential for one of the most dramatic political years in the province’s history.

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No Muskrat Falls in BMO forecast

Curiously, BMO’s latest economic forecast for the province doesn’t include any reference to Muskrat Falls.

The bank’s economists forecast overall economic growth in the province of 3.,9% in 2011 driven by provincial government infrastructure spending totalling $5.0 billion “over the next several years.  BMO says that the province’s capital spending hit 3% of the province’s gross domestic product in 2010.

BMO forecasts continued strong capital spending over the next three years.  While the bank mentions Hebron, Hibernia South and Long Harbour, there’s no reference to Muskrat Falls. That stands out like the proverbial sore thumb since the forecast is up-to-date enough to note the change in Conservative leadership late last year. it’s also odd because the forecast of capital spending comes entirely from the provincial government’s figures.

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Related:  Labour force indicators raise questions about economic health and competitiveness

The Fragile Economy: finance minister complains about his own policies

Finance minister Tom Marshall thinks its time for the private sector to step in and boost the economy around Corner Brook.

“Other than construction, I would like to see more economic investment; I would like to see more businesses coming in and investing here,” he said. “It is jobs ... What we have seen is government spending, in a massive way, in this area.”

That’s from a story in last Friday’s Western Star.

Two observations come readily to mind.

First of all, that’s a great big “D’uh” there, Tom.  Your humble e-scribbler has been banging out post after post after post over the past six years on this very subject.  The number of posts on it has gone up in the past two years because the fundamental situation is getting fundamentally worse. 

It is getting fundamentally worse – to hit the second point – as a direct result of government policy.  In everything from its energy policy to its disastrous seizure of private sector assets in 2008, the current administration has shown itself to be relentlessly opposed to creating an economic climate that attracts investment, promotes innovation and rewards entrepreneurship. 

The current fragile state of the provincial economy  - “fragile” is a word Tom Marshall used not so long ago, by the way - is a direct consequence of government policies.  Only a fundamental shift in those policies can move the province off the course it is currently on.

As it stands in early 2011, the current administration is firmly committed to continuing the policies that have contributed to putting the economy in its current parlous state.

We have seen the enemy, says finance minister Tom Marshall, and he is us.

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Crude up, but what does it mean?

Crude oil finished the week on a high, with Brent coming closer to US$90 a barrel than at any time since October 2008.

That’s good.

Right?

Well, maybe.

Certainly, in the short run it brings in some extra cash.  The provincial government low-balled production estimates in the spring budget but the actual production level only offset prices below the forecast average of US$83. in the end, the forecast oil revenue will likely not be far off the actual budget projection of $2.1 billion. 

Don’t be surprised if it is more like $2.5 billion.  if that’s the case, then the current budget is the first one in a long while where the provincial government gave figures that were close to the actuals.

Unfortunately, the budget forecast a cash deficit of around $900 million.

Two things will help bring that number down.  First, production at Voisey’s Bay – even allowing for a strike – might start pushing government’s mining royalty back up to where it was before the recession.

Second, and perhaps most likely, the provincial government could be way off in its  capital works spending.  This is – you will recall – a government that has a real problem getting the job done.  If someone could come up with a little blue pill for it, these guys would buy it by the container load.  We are talking projects announced in one year, forecast to end in a couple and they only get around to tendering the thing at the end of the two years.  Delays and massive cost over-runs are routine.

Things would be a lot clearer if the provincial finance minister issued a mid-year financial update in September as he should.  That’s halfway through the fiscal year.  As it is, he will say something in December.  If last year is any indication, he’ll toss a load of sheer bullshit into the public mix in the hopes of keeping people lined up at the counter spending cash for Christmas.

The we just have to keep an eye on crude prices.  Oil is still the biggest revenue source the provincial government has. Things are fine as long as oil stays where it is now.  But when the markets can show an eight dollar a barrel increase in as many days, they can equally show a drop if the factors come together in the right way.

If the provincial government plans to unleash a year of election spending at the same time as the markets start to sort themselves out, this could prove to be a very interesting year indeed, right up to the next provincial election.

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NL population drops in Q2 #cdnpoli

Newfoundland and Labrador was the only province to experience a population loss in the second quarter of 2010, according to figures released Wednesday by Statistics Canada. The cause is primarily net interprovincial outflows, in other words outmigration. That’s also the first drop since 2008.

While the provincial government issued a news released last quarter trumpeting the gain of a mere 96 people, you are unlikely to see a release like it this month talking about a drop three times the size.

Here’s what the past five years looks like, by quarter.

Now it could be nothing at all but a blip.  Then again, it could be a sign of things to come.  Note that for the last three quarters the rate of growth has dropped dramatically.  That suggests the steam was going out of things and that the Q1 results were the peak of the curve.

You can see that more clearly if you look at this chart:

In less than a year, the province went from gaining 130 people in a quarter to losing 300.

And actually, this could also mean that the North American economy is on solid footing.  The change in migration patterns for Newfoundland and Labrador in Q3 2007 actually heralded the onset of the recession.  A long-term analysis of provincial population suggests that the population grows shortly before major recession.  Those are all people working elsewhere with relatively weak ties to the community who opt to come back to the province to weather the economic storm.  When things pick up, they head off again.

And as much as the province’s finance minister may like to believe otherwise, odds are that is what’s going on again.

Great news, wot?

Well, not really. The longer term demographic problems that come with that aren’t ones the current administration and its unsound financial and economic management are not ready to cope with.   Not by a long shot.

Don’t forget that in this pre-election and pre-leadership period, you can bet the government won’t be willing or able to do much to start adjusting to cope with the harsh reality of the economy and demographics.  In fact, the next 18 months are basically a write-off for serious government decisions to deal with the problem. 

On top of that you can forget the period between the election and whenever the new Premier arrives to replace the Old Man. And if that doesn’t wind up happening happen until a couple of years before the 2015 election you can almost write off dramatic policy shifts until that election is history as well.

Wow.

Not to worry sez you.  There’s oil.

Sure there is.

Unfortunately, production and royalties won’t be able to cope with the demand for added revenue.  There’s not much else going on to take up the slack and for good measure, the current administration plans to use oil money to fuel increases for education and health care and use exactly the same money to build the $14 billion Lower Churchill project.

Here’s lookin’ at you, kid…

…as you leave the province again.

At least we’ll always have Ottawa.

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Forever blowing bubbles

We are in a bubble. I think we are in a protected bubble.

That’s Danny Williams making a few observations at the close of the most recent session of the provincial legislature.

It’s not the first time Williams talked about bubbles.  He said the same thing in October 2008 as the world headed into the worst recession since the Great Depression in the 1930s:

We now, for the first time in our lives, are in a bit of a financial bubble and that's a wonderful thing. We have that protection and the people of this province got the support of the provincial government

Williams even claimed during that call to a radio open line show that “[h]opefully our [budget] surpluses will continue, hopefully they'll get even larger, it will enable us to do the things that we've been doing. I mean this, for us this hasn't happened overnight. We've been preparing for this.”

Then the talk of surpluses and bubbles disappeared. 

You see, bubbles are wonderful things,  all pretty and shimmery in the sunlight.

But bubbles are flimsy and insubstantial.

Bubbles have a distressing tendency to burst.

And in the case of the Williams economic bubble, the whole thing burst quite spectacularly.  The provincial gross domestic product dropped 22% in 2009, or 10.2% in real terms as RBC assessed it. Deficit spending became the new order not just for the day but for the years to come and cabinet ministers openly admitted provincial government spending was unsustainable.

Now for those reasons alone it was nothing short of bizarre to see Williams return to the complete nonsense that somehow the province – let alone the provincial government – had emerged from the recession safely wrapped in some sort of bubble. It was even more bizarre to see Williams repeating this line:

However, when I look at what is happening here in Newfoundland and Labrador, the fact that we do have our debt reduced,…

It’s bizarre because it simply isn’t true.  The total public sector liabilities remain as high in 2009 as they were at just about any point in the last five years.  Even the net debt – government’s favourite misleading measure – increased as the 2009 cash shortfall sucked up a half billion dollars of cash the government had laying about and which had previously been used to offset government’s liabilities, even if only paper.

Williams went even beyond those crazy remarks, claiming that the previously unfunded pension liabilities had been addressed.  Of course, that isn’t correct either.  As Budget 2010 forecasts, the unfunded pension liabilities will increase in the current fiscal year just as the net debt will increase.

So aside from a decidedly unhealthy dose of self-delusion, it’s pretty hard to tell what the Premier was getting on with in the House of assembly only a month or so ago.

The prospect of a second and prolonged recession  - widely discussed for some weeks now – only makes the premier’s claims that much harder to fathom. If the United States economy slows down again, then the Newfoundland and Labrador economy will follow suit.  Williams’ own economic policies have seen to that.

If economist George Athanassakos turns out to be right, things in Newfoundland and Labrador could be even worse:

Economies are still extremely vulnerable to speculative bubbles and dips and increased volatility. The panic of 2008 and the subsequent rescue packages did not provide the necessary catharsis that recessions bring to economies. Demand for broader reforms has also waned as a result of the rescue of the economy from the panic of 2008. If this were not enough, economies have become addicted to low interest rates and to liquidity infusions.

Rather than being protected by a bubble, Newfoundland and Labrador may be more vulnerable to a second economic downturn than other parts of the western world. First of all, more and more of the local economy under the Williams administration is based on unsustainable public sector spending.*  Second of all, the metro St. John’s area housing explosion  - even as it subsides – has been built on public sector spending coupled with low interest rate policies. A second recession will likely kill both of those simultaneously.

Incidentally, the most recent figures from Statistics Canada suggest that the construction boom in Newfoundland and Labrador isn’t a commercial one. 

Investment in all categories of non-residential building construction peaked in mid to late 2008 and declined steadily in 2009 until it flattened for the past three quarters.  The pattern shows up in the total provincial number (the long red line on top) as well as in the St. John’s-only line (the blue long line with diamond shaped data points)

Even as spending on the Vale Long Harbour project, Hibernia South and Hebron ramp up in 2012, they won’t be able to offset a decline through all other sectors of the economy. And that’s even allowing that oil prices don’t drop thereby putting development of Hebron in some doubt.

The forest industry is a pale shadow of what it was even a half dozen years ago.  The fishery is mired in restructuring talks. In any event, the industry is woefully short of the capital investment needed to sustain itself let alone retool for global competition. Destroying Fishery Products International and selling off its most useful and lucrative assets will prove to be one of several catastrophic policy failures of the current administration.

Mining may be doing reasonably well in the year ahead, but a second global recession will also adversely affect commodity prices.  Even if oil prices remain at current levels, declining production over the next two to three years will reduce government revenues significantly.

Meanwhile, provincial government cash deficits in 2010 and again in 2011 would rapidly eat up whatever cash reserves are on hand. A significant economic downturn through the latter half of 2010 and into the 2011 election could force the government into a difficult financial position likely meaning spending cuts and wage freezes.

The province is not protected by a bubble.  It is subject to the same forces that affect the rest of the world. Far from insulating the provincial economy from global forces, government policy has left the province in a more precarious position than it has been in two decades.

That’s the thing about bubbles.  Like delusions, they have a tendency to burst in the most unsettling way imaginable.

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* The growth in the provincial public service in recent years is not just a relative growth owing to a decline in other sectors, like forestry. From labradore:

In the past decade, the absolute numbers of people in NL who work in the provincial public sector — the provincial civil service, public health care, social service, and education system, and public post-secondary education institutions — has increased by 35%.  Not only is that the largest increase, start to finish, of any of the ten provinces, for most of the decade, NL has topped the chart in terms of the growth rate. And, starting in 2006, that growth curve spiked steeply upwards, with annualized growth of up to seven percent per year, unmatched by any other province except, starting in the second half of 2008, Prince Edward Island. [Emphasis added]

Significant Digits – oil production

In 2009, the Canadian Association of Petroleum Producers forecast a steady decline in local oil production. 

The decline is forecast to end around 2017 as new production from Hebron comes on stream, but the increased production only lasts for a couple of years before the decline sets in again

The peak once Hebron comes on stream is forecast to be about the same level as the forecast shows for 2012.  That’s slightly above 80 million barrels.

 

But hang on a sec.

Production for the current year – 2010 – is forecast by government officials at 86 million barrels.

Yessirree, that’s right.  And production last year was 97 million barrels, again a figure CAPP had down for 2011.

In other words, the decline is about two years ahead of forecast. We also know that Hebron is behind schedule as well.  How much behind schedule isn’t clear but it could be as much as a year later than the optimistic projections when the deal was announced or when it was re-announced.

So that period in the low-production trough could well be longer than CAPP’s forecast shows and the rise back up after Hebron could be much slighter.

In other words, when finance minister Tom Marshall admits that oil production is on the down-slide, he’s acknowledging that he already knows exactly what the implications are from that CAPP graph.

Let’s put it this way:  this year, if oil averages around $83 a barrel as the provincial government believes, the total value of oil production offshore will be about $7.1 billion ($83 X 86 million)

In order for the provincial treasury to bring in the same royalty as it forecasts for this year - $2.1 billion – with production at 40 million barrels (i.e. the bottom of the trough) – oil would have to average $178 dollars per barrel in that year.

No sweat, says you, oil got to $147 a couple of years ago.

Yes it did, sez your humble e-scribbler.  And look what happened right afterward.  Oil didn’t average that price:  it hit the number and then fell off quickly.

If that isn’t enough for you, consider that oil prices averaging $178 a barrel would be more than double the average price ($83) the provincial government forecast for oil this year.

So in order for the provincial government to do exactly what they are doing in 2010 in that mythical year we will call 2014 (remember everything is two years ahead of schedule) oil would have to be almost $180 a barrel all year.

For those keeping track, and just to show you how soon this is, just bear in mind that 2014 is one year beyond the period of continuing deficits forecast in the spring provincial government budget.

And just remember, as well, that this year the budget is forecast to be short by almost a billion dollars of cash.

Not only is there not enough of a cash reserve to cover that sort of a shortfall in 2014, there wouldn’t be enough cash in any secret government pockets to handle a deficit half that big.

And that’s without thinking of what tremendous pressures there’d be for higher wages and higher costs and higher priced everything else in a world where the price of oil doubled in a mere four years. 

Yes, gentle reader, that little scenario assumed spending stayed where it is predicted to be in 2010.  But as we all know, if oil prices were to shoot up that way, spending would have to go up just as radically.  The only problem is that spending would shoot up but – as we know – the major source of provincial government revenue would only come in at the level for 2010.

When oil was forecast to be half the price.

Increase your spending dramatically while holding your revenue about the same.

That’s the definition of “unsustainable”.

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No bubbles in sight: GDP dropped 26% in ‘09

The value of goods and services produced in Newfoundland and Labrador dropped 26% in 2009 compared to 2008.  Those figures are in an appendix to the finance minister’s budget speech delivered on Monday.

GDP in 2009 hit $22 billion compared to $31 billion in 2008. That’s only slightly above the GDP in 2005.   The single year drop erased the gains of 2006 and 2007 which together saw an increase in GDP of 27.9%.

Real GDP declined 8.9%.

In 2008, Premier Danny Williams claimed the province would be protected from the global recession by some unknown means.  He and finance minister Tom Marshall continue to claim the recession did not affect Newfoundland and Labrador as severely as it did other places.

Average annual employment in the province during 2009 remained below employment levels in 2006 and the current forecast is for negligible growth (one half of one percent) in the coming year.  Meanwhile the labour force remains swollen with returning migrants thrown out of work in other parts of the country by the recession. 

Wages and salaries in the province are higher, driven primarily by increases in the public sector.

Sales of manufactured goods (shipment value) were down 33% in 2009. Housing starts fell 6%.

Oil production hit 97 million barrels in 2009, compared to 125 million in 2008.  That’s basically the forecast production from Budget 2009.  Interestingly, the December financial update had forecast an increase in oil production to 101 million barrels.  Oil production is forecast to drop again – to 86 million barrels – in 2010.

Newsprint shipments in 2009 were down by 49% from 2008 and 66% from 2005.  The value of fish landings was down 19% in 2009, wiping out gains in the preceding two fiscal years.

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Loonie on the way up

The Canadian dollar is at a level it hasn’t hit since just before the giant meltdown of the economy in the middle of 2008.

And this is supposedly a good thing.

How exactly is unclear since the United States economy is still in the crapper and the Canadian economy is still full of government cash.

Productivity is up, for sure, and that’s good.  But…

While the recent pickup in productivity is welcome, “the question of sustainability still remains front as centre as firms continue to increase hours worked along with overall employment,” said Bank of Nova Scotia economists.

That’s really the warning that has to go with any Pollyanna projections:  we can’t be absolutely sure this is real.

Sales of manufactured products was down 11% in this province in January from December.  But the January 2010 numbers were about the same as the numbers in January 2009.  And that’s the opposite of what was happening nationally.

Oil production is still running about 17% below last year.  January production was about 8.7 million barrels compared to 10.5 million barrels in January 2009. That’s consistent with what you’ve been seeing reported in this corner since last fall.

 

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Inherent weakness: a public sector-driven recovery

Newfoundland and Labrador showed weak job growth in February with an increase of a mere two tenths of one percent compared to January 2010 and 1.5% compared to February 2009.

Nationally, the job growth in February was driven almost entirely by the public sector.

That matches rather nicely with the experience in Newfoundland and Labrador where private sector job creation has been trailing off for a couple of years. As usual you can find great details on this at labradore: One, Two, Three, Four, Five, Six.

Here’s a chart – h/t  labradore – that should help you get a clear picture of what has been going on.

Three things to take away from this:

1.  What you just saw is absolutely, categorically NOT what you are hearing from the mainstream media, political circles and people in the local business community.  But it is real. The happy-crappy-talk coming from places like the Board of Trade demonstrates the extent to which the Board has its head up its collective backside or can’t understand simple numbers.

2.  The corollary to the private sector jobs-slide is that the jobs growth that has taken place – akin to the boom on the northeast Avalon – has been fuelled almost entirely by the public sector.  Since public sector spending is – as regular SRBP readers have known for years – unsustainable the whole thing is built on very shaky foundations.

It can’t last.

Therefore…

3.  Stand by for some serious adjustments.  The reckoning may not come in the next few months but it will have to come.

Of course, you will hear nothing but happy-crappy-talk from politicians who are looking to get re-elected in two years.  The pre-election campaign has already started.  What’s more, in a worst case scenario, some of those politicians may be looking to become Premier in a Tory leadership fight before then. Either way, there’s little hope that any political party in the province will be able to come to grips with the real economic issues and start taking action to set the right course for the future.

To steal the words of the Lucides:

Those who deny there is any danger are blinded by the climate of prosperity that has prevailed in … recent years. … That’s the peculiarity of the current situation: the danger does not appear imminent but rather as a long slow decline. At first glance, there doesn’t seem to be any risk. But once it begins, the downward slide will be inexorable.

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Financial shorts – Second Monday in March edition

1.  Crack whores rebel:  Icelanders voted against a US$5.3 billion package to deal with part of the country’s financial mess.

“This is a strong no from the Icelandic nation,” said Magnus Arni Skulason, co-founder of a group opposed to the deal.

“The Icelandic public understands that we are sovereign and we have to be treated like a sovereign nation — not being bullied like the British and the Dutch have been doing.”

Sovereign Icelanders may be, but they are also broke.  If they don’t like it when people come looking for their money back – it ain’t bullying, BTW – then maybe they shouldn’t have been running the financial equivalent of a crack-house.

2.  More hidden cash turns up:  There may be a few million extra in provincial coffers when the financial year ends.  This isn’t a windfall or a gift.  It’s just what you get when you compare the actual amount of federal transfers in the current fiscal year - $1.264 billion – to the $988 million reported in Budget 2009 last spring.

Well, that’s if you use the Estimates which gives different numbers than the ones in the budget speech. The numbers in the budget speech are pretty much dead-on the actual federal transfers.

Someone should ask the finance minister to explain why he feels the need to keep two sets of books.

3. Counter-intuitive.  Okay.  Crude is up.  Gold is up and silver is is up as well. US dollar is down.  The American economy shed jobs but not as many as expected.  Some news media are reporting this as a good thing.  Basically, it’s more of the recovery-is-here-yada-yada crap they’ve been fed since this time last year.

If the dollar is down, and oil and gold are up, that’s a sure sign that not only is the US economy not in recovery, it’s virtually a guarantee it won’t recover while prices for things like crude oil are that high.

The American economy needs oil prices to be about half of what they are currently in order to see a recovery tale hold.  And when a recovery does start, it won’t keep going if oil prices shoot back up to their current levels.

In the meantime, stand by for an “adjustment’ sometime in 2010 or early 2011.  The “correction” won’t be as big as the collapse in 2008 but it will hurt.

It will especially hurt any government that doesn’t have its financial house in order.

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The Spin Economy

Spin is bullshit.

Plain and simple.

In this Canadian Press story, much is made of the fact that 29% of employers in a survey by careerbuilder.ca said they planned to hire next year.

Logically, that means that the overwhelming majority – 71% – planned to keep things just as they are or reduce staff.  And since the story says only nine percent of those surveyed planned to decrease their staff levels, that means that – you guessed it - twice as many of those surveyed weren’t planning to do anything with their staffing at all next year as indicated they’d be hiring.

So where in the name of merciful heavens did Canadian Press get the idea this means the survey is “adding optimism” that the year-long job doldrums are over?

They got it from the news release, of course written by a company which has a vested interest in hyping the crap out of expectations for a boost in hiring.

And Canadian Press isn’t alone.  Others have picked up the pure, undiluted bullshit from careerbuilder.ca and its American parent.  It’s all in line with the line coming from different sources for about a year now that the recession was over and the recovery was underway.  Unfortunately for the purveyors of all this nonsense, repeating the same crap over and over doesn’t actually do anything least of all make the untrue suddenly and miraculously true.

What’s really more interesting in all this is not that organizations with a vested interest in hyping the crap out of something – like government for example – actually hypes the crap out of something.  Nope.  Notice instead that even the venerated Canadian Press  is now being affected by the same problems that have afflicted other news outlets.  Reporters and editors aren’t suddenly innumerate. They just don’t have the ability any more to weed out bullshit, even when the bullshit is so patently obvious as in this news release.

If only 29% of employers plan to hire next year – or 20% in the United States version of the survey – rest assured of one thing: the recession ain’t over.

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