NL economy growth forecast to shrivel

TD Economics latest forecast for provincial economies has the Newfoundland and Labrador economy growing at less than one half of one percent in fiscal 2008, the lowest growth rate of any province in the country.

The quarterly forecast, issued October 16, puts real growth in gross domestic product only slightly behind that of Ontario and projects 2009 growth as being about 1.3%.

However, if the oil comments in the forecast are anything to go by, there is reason to doubt the validity of the TD Economics forecast:

After super-sized growth of 9.3% last year led by offshore oil output and exports, the Newfoundland & Labrador economy will struggle to expand, on an annual basis, in 2008. While high oil prices have helped to boost incomes (wage growth is running at 8.7% year-to-date), oil extraction is depressed due [to] the maturation of the oil fields. This will continue into 2009 and 2010. Expansions at the Hibernia and White Rose fields could help level off output, but a sustained rebound in oil production is not in the cards before 2014, which is when the Hebron project could come online.

Hebron won't start construction until about 2013/2014 - according to the project partners - and that assumes the project is sanctioned within the next 12 months.

First oil is not currently expected before 2018, assuming a very short construction.

Even at that point, Hebron will will merely replace production from some existing fields which at that point will likely have been all but exhausted.

TD Economics' forecast for Newfoundland and Labrador matches almost exactly the projections by RBC Economics. Scotiabank's 2008 forecast is higher, at 1%,  while its projection for 2009 matches the TD and RBC projection exactly.

The provincial government's budget forecast [left, Budget Speech]including a 2% shrinkage in real GDP in 2008, growth in 2009 now three times higher than that of private sector forecasters, followed by -2.8% in 2010.  The provincial government forecasts nominal GDP growth at -1.9% in 2009 and -5.0% in 2010.

The province's finance minister hasn't indicated when he will issue a mid-year economic update. He has been portraying the gloomy private sector forecasts as an improvement on the provincial government's own budget estimates.  At the same time, he hasn't reconciled his glowing revenue forecasts with the budget numbers. The contradictions remain unexplained.

While both the Premier and Memorial University economist Wade Locke have given rosy projections for the province's ability to avoid any dramatic consequences from the global crisis, it seems unlikely the Newfoundland and Labrador economy will be able to sustain Locke's pollyannaish claim that government's projections of a half billion dollar surplus will be met or exceeded.

On Wednesday, the Ontario government revised its budget estimates and is now projecting a half billion dollar shortfall for fiscal 2008.

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Comfortable words

According to the provincial premiers, "Canada's economic fundamentals are sound".

Like we haven't heard that one before, and not from Dubya and Steve, either.

There's nothing like an international economic crisis to end the go-it-alone talk, either.

"We're here to indicate to Canadians that we're prepared to act as a united front. We're in good shape, which is not to say there aren't problems, but we're in the best situation in the world."

The premiers apparently agreed to drop inter-provincial trade barriers as one sign of viewing the country as a whole.

People in Newfoundland and Labrador are all too familiar with the go-it-alone stuff, but they've grown so used to the contradictions between the words and the actions, they'll likely wonder how come the two have suddenly matched up on the "we are all Canadians" side.

It's like telling a crowd of Provincial Conservatives in Corner Brook that "[t]his great provincial party has taken our province in a whole new direction towards 'have' status and self-reliance. No more give aways, no more begging from others.…" right after sending the latest round of begging letters to Ottawa.

Jack Harris coined a phrase that will go down in local political history.

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The imaginary bubble

From RBC Economics' latest provincial forecast for Newfoundland and Labrador:

While domestic conditions are generally strong, growth in the economy is nonetheless expected to slow significantly relative to last year amid a leveling off in oil production. In 2007, the return to full operation of the Terra Nova offshore project and the completion of White Rose’s expansion have boosted crude oil
output by more than 20%. With no such increase this year, the contribution of the energy sector to provincial growth is likely to be flat or slightly negative.

Through the first six months of this year, crude oil production was down almost 9% year-over-year. All things considered, real growth in Newfoundland & Labrador’s real GDP is forecast to be negligible this year at 0.2% before picking up in 2009 to around 1.3% on the continued strength of the domestic economy.

Get that?

-  Oil production down by 9%  for the first half of 2008 compared to the same period in 2007.

-  Growth in real GDP at 0.2% in 2008 and only 1.2% in 2009.

Look at the whole report to get the full picture.

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Whistling past the economic graveyard

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:

1. As demand for energy products declines, exports to the United States will also likely decline.  That will reduce provincial government revenue.
2. 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.
3. Declining commodity prices and lessened demand for minerals, forest products and fish would affect the three traditional major economic drivers in Newfoundland and Labrador.
4. 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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The remittance economy and the long-term future

CBC Radio is running a short series of reports on remittance workers. Those are people who maintain a permanent residence in Newfoundland and Labrador but who travel to other places, mostly Alberta, to earn a living.

If the CBC figures are accurate - upwards of 10,000 people earning pre-tax salaries of $100,000 a year - then remittance labourers are contributing to the Newfoundland and Labrador economy on a scale that rivals agriculture and the fishery.

Remittance labour is a common feature of the economy in the developing world. The figures for Newfoundland and Labrador would be also on a par with some countries at the low end of the scale in a 2003 World Bank study. Bond Papers noted the local history of remittance work in a post earlier in 2007.

The local workers involved in the Newfoundland and Labrador version of remittance labour include fishery workers displaced by changes in that industry. Others are older, skilled workers from the former paper plant at Stephenville or from the shipyard at Marystown. Neither of these groups will likely be doing the Big Commute for a long time. Either the projects they are working on will shut down or they will retire in Newfoundland and Labrador.

Others are young men and women who are attracted by high wages and steady work in their chosen fields. While the older workers are contributing to a localized economic boom in places without major industries - like Marystown or Stephenville -

Only a major and sustained series of local projects rivaling the work elsewhere will cause the younger workers to stay in the local labour force. Many are likely to settle outside of Newfoundland and Labrador.

In that context, it's interesting to recall that in 2003 Danny Williams campaigned on his commitment to "growing" the economy and creating jobs. He didn't do that, of course, as Bond Papers has noted several times, including in a reprint of a 2004 column from the original (pre-Cleary) incarnation of The Independent. The economic miracle of the past four years has been entirely due to the upsurge in world oil prices.

Essentially, the current progressive Conservative administration is following the same approach of its predecessors. The long-term is sacrificed to short-term expediency. The rise of highly-paid remittance work has served to both cushion the blow of outmigration and enable the provincial government to contribute disproportionately to the provincial economy in the process.

The current administration started out, supposedly, with a plan to control spending and deal with the burgeoning provincial debt. In reality, it did nothing about either. Spending has grown by 35% - well beyond the rate of inflation - and at the same time, the provincial direct and total debt is larger today than it was in 2003. Spending is forecast to increase, as is the debt.

Both oil prices and the remittance economy are shaky underpinnings for government spending and development of larger debt. Oil prices are historically subject to significant fluctuations. The remittance economy is limited either by the life of projects or the short time some of the workers have left to retirement.

Remittance work and the related subject of demographic changes in the province have been largely ignored by successive provincial governments in Newfoundland and Labrador and there is virtually no discussion of it in the public at large.

Perhaps the CBC report will change that.

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RBC confirms two year flat line for province's economy

RBC Economics is holding to its forecast that Newfoundland and Labrador will go from leading the province in economic growth this year to trailing for at least two years.

RBC predicts resource megaprojects that will start in the next decade will renew optimism after 2010.

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Scotia confirms predicted economic slowdown

Scotia Economics' latest forecast for Newfoundland and Labrador confirms the predictions thus far that the province's economy will drop to the bottom of the pile for growth in 2008, after leading the country in 2007.

Here's the section, for the record:

Newfoundland & Labrador will lead the Atlantic provinces in overall growth this year with a 4.8% advance before dropping to 1.2% in 2008. The province will benefit from mining and oil & gas extraction this year, given the resolution of earlier labour and production issues. An expansion at the White Rose oil field late last year is providing an additional output boost. Oil and gas production is expected to level off in 2008, as production peaks at the Hibernia and Terra Nova fields. Following labour issues last year and given strong pricing, nickel production should increase this year. Production started up at the Duck Pond mine earlier this year, providing a boost in output for copper and nickel. Exploration activity for uranium, iron ore and oil and gas remains vibrant.

Newfoundland & Labrador’s seafood processing industry is finding it difficult to replace older workers, given relatively low wages and competition amongst Atlantic Canada’s fisheries for the small pool of available workers. Shrimp and crab production are expected to remain the same as last year, although a modest increase in the E.U.’s import tonnage cap for cooked and peeled cold-water shrimp should be of some benefit. Newsprint mills continue to push through cost-cutting initiatives, although further shutdowns could be required.

Private investment should decline this year and next as no major projects are on the horizon. Potential projects, including the Lower Churchill dam, a second refinery at Placentia Bay and development of the Hebron and Hibernia South oil fields remain on hold. The services sector could see stronger tourism activity this year due to an increase in convention and cruise bookings, although Canadian dollar strength continues to pose a threat. Household incomes and retail sales will get a boost from tax cuts passed in the last provincial budget, although a diminishing population and net westward outflow of workers could limit the impact.

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Scotia Economics projects top to bottom of pack for NL

Scotia Economics joins all the other forecasters in projecting that Newfoundland and Labrador will lead the country in economic growth in 2007.

Like everyone else, Scotia also projects the province's economy will trail the country in2008.

The update report - released on May 3 - turned up on vocm.com today.

The original report, released in March, was covered by Bond Papers at the time.

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Wade Locke's latest analysis

Wade Locke has graciously provided his latest news release, which is reproduced below in its entirety:

Updated Estimates of Newfoundland and Labrador Treasury Impacts for the Equalization Options Contained in Budget 2007

Table 1: Updated Estimates Based on Accord Eligibility Criterion Contained in the Budget Implementation Act for the Impacts of the Equalization Options on the NL Treasury from the 2007 Federal Budget - 2007/08 to 2019/20

	Status Quo	50% w Cap (original estimate)	50% w Cap (updated estimate)
Period 2007/08 – 2011/12
Oil Revenue	$7.30 B	$7.30 B	$7.30 B
Accord Payments	$2.51 B	$2.37 B	$1.72 B
Equalization	$0.59 B	$0.76 B	$0.76 B
Combined	$10.40 B	$10.43 B	$9.78 B
Period 2012/13 – 2019/20
Oil Revenue	$7.37 B	$7.37 B	$7.37 B
Accord Payments	$0.0 B	$4.96 B	$0.0 B
Equalization	$0.76 B	$0.0 B	$0.35 B
Combined	$8.13 B	$12.33 B	$7.72 B
Period 2007/08 – 2019/20
Oil Revenue	$14.67 B	$14.67 B	$14.67 B
Accord Payments	$2.51 B	$7.34 B	$1.72 B
Equalization	$1.35 B	$0.76 B	$1.11 B
Combined	$18.53 B	$22.76 B	$17.50 B

On Wednesday, April 4, 2007 at 7:00 pm a presentation was given by Dr. Wade Locke in St. John’s on the estimated impacts for the Newfoundland and Labrador treasury of the equalization options specified in Budget 2007 (Government of Canada). The purpose of this presentation was to provide an objective and unbiased assessment of the net revenue impacts (oil revenue, equalization payments and payments under the Atlantic Accords) for the Newfoundland and Labrador treasury. As well, it is important to appreciate that the intent of the presentation was to provide some clarity to a complicated issue and to facilitate a more focused and informed debate. Moreover, there was a conscious effort in the presentation, and since, to stay away from the politics of this sensitive issue and deal only with the numbers in a professional manner. Although I will continue to do deal with this in a professional, non-political manner, it is my intention that after explaining the contents of this press release to interested individuals, I will have nothing else to say on this particular issue nor will I be undertaking further analysis in this specific area. I will leave it to federal and provincial officials to inform the public.

Given the sensitivity and the emotion surrounding this particular issue, I feel it is important to document how things have evolved to this point. This should enable others to judge the credibility of the approach and the results derived there from.

In any empirical assessment, it is necessary to make assumptions about how elements of each province’s fiscal capacity are expected to evolve over time. The assumptions used in the Locke analysis are clearly specified in the original presentation and interested individuals are referred to www.arts.mun.ca/arts to view the original presentation. While different assumptions will yield different specific results, they are unlikely to change the basic finding listed in Table 1. However, I would encourage both officials in Finance Canada and the Department of Finance, Government of Newfoundland and Labrador to present their own simulations to test the robustness of the results presented above. If this provides more credible information that is appropriately explained and independently vetted, then the public should be in a better position to understand the specific impacts of each of the options on Newfoundland and Labrador. I would encourage both parties to release their own analyses and expose them to public scrutiny as I have done.

The crucial assumption utilized in the original presentation was the eligibility criterion for payments under the Atlantic Accord. Specifically, the original analysis assumed that, under the 50% option, Newfoundland and Labrador qualified for Accord payments so long as it qualified for equalization before the equalization cap was imposed. This assumption was based on the fact that it seemed reasonable to assume that pre-cap equalization was the eligibility criterion because pre-cap equalization was used to calculate the value of the Accord payments. But, more importantly, before finalizing my analysis, I consulted with provincial government officials who confirmed that the pre-cap equalization eligibility criterion was their assumption as well. In addition, I sent emails to two separate officials in Finance Canada on April 1, 2007 requesting clarification on the eligibility criterion to be used for the Accord. Based on the responses that I received from those officials on April 2, 2007, I finalized my assumption about the pre-cap equalization eligibility criterion. In particular, my reading of those emails in the context of the questions asked was that the pre-cap equalization was the appropriate criterion to employ in judging Newfoundland and Labrador’s eligibility for payments under the Atlantic Accord. Without attribution, I have reproduced both the questions and the responses to the emails to allow others to judge the reasonableness of my assumption on eligibility.

The specific questions asked and the responses received were:

Question #1: In calculating the accord under the new arrangement, is it the case that NL receives the accord if it qualifies for equalization on the new arrangement prior to the cap being imposed? In other words, while the cap can remove all equalization payments, but before that happens, the province could qualify to receive equalization pre-cap and as such be eligible to receive the accord. Is that correct?

Response #1: Your assumption is correct; it is the pre-cap equalization amounts that are used in the Accord calculations.

Question #2: In calculating the accord under the new arrangement, it is my interpretation that the province is entitled to receive the accord so long as it qualifies for equalization before the cap is imposed, rather than after. Is that correct?

Response #2: The legislation before the House proposes that under the new arrangement, the test for determining whether or not NL qualifies for the 2005 Accord is whether or not it would receive Equalization payments under the base O’Brien formula – that is, 50% inclusion of resources plus the cap. If it receives EQ under that formula, then the next steps are taken to determine how much. In this case, the offsets are determined before the cap is applied.

On the afternoon of the presentation, at approximately 2:00 pm, I was contacted by telephone by officials from Finance Canada to explain that the eligibility criterion for the Atlantic Accord that was contained the Budget Implementation Act, 2007 was not pre-cap equalization as I had assumed in my presentation. As it turned out, the Budget Implementation Act, which contained relevant legislation on the eligibility criterion for the Accord, was tabled approximately one week prior to my presentation. As explained in a follow-up email at 4:40 pm on Wednesday afternoon, government policy, as outlined in the Budget Implementation Act, specified an eligibility criterion that was different than the pre-cap equalization criterion that was assumed in my presentation. The specific criterion that was identified in that email was:

In effect, NL would be eligible to receive Equalization and offsets as long as long its own-source per capita fiscal capacity (including non-resource yields and 100% of resource revenues) is not equal to or greater than the own-source per capita fiscal capacity of the non-receiving province with the lowest per capita fiscal capacity.

At that point, I had asked for the specific legislation so that I could review it myself. I received it the next day after my presentation and reviewed it on Easter weekend. However, between 4:40 pm (the time of the email) and 7:00 pm (the scheduled start of the presentation) it was impossible to re-analyze the data with the alternate eligibility assumption. Instead, I modified the original presentation to flag the crucial assumption about Accord eligibility. I, as well, indicated in the presentation that if the eligibility assumption was changed, then the estimates under the 50% option would have to be modified, not realizing the extent of the change that would be required.

After reviewing the legislation, it was clear that a new analysis was needed. This was completed on the weekend and sent with an accompanying email to Finance Canada officials on Monday at 5:00 pm NL time and followed-up on Wednesday with a conference call. It was in that call that all remaining technical issues were addressed as Finance Canada officials explained in great detail how the legislation worked. This enabled me to finalize the revised analysis on Thursday for release on Friday, April 12, 2007.

As is clear from Table 1, the impact on net revenues flowing to the provincial treasury, if the 50% option is invoked immediately, is $17.5 B. This is reduced from the $22.8 B estimated previously. The primary reason for the reduction in the estimated impact is that the Accord eligibility standard outlined in the Budget Implementation Act is more stringent than the pre-cap-equalization criterion utilized in the original analysis.

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NL only province to see capital investment drop in 07/08

RBC Economics is the latest to forecast that the Newfoundland and Labrador economy will trail the country in growth in 2008, at 1.5%.

The decline will be led by what RBC calls a "retreat by capital investment".

In fact, according to RBC, Newfoundland and Labrador will be the only province in Canada to experience a decline in capital investment.

Nova Scotia is the province with the smallest forecast growth, at around 2.5%.

Newfoundland and Labrador's capital investment is expected to shrink by 7.5%.

With all three oilfields now operational and the labour disputes at Voisey’s Bay in the past, we expect the province to post above-average growth of 4% this year. Beyond 2007, growth will be much weaker as dwindling oil production and a decline in capital spending — led by a retreat in private investment — drag growth to a 1.5% pace in 2008. The weakness in construction markets is expected to span both non-residential and housing markets. Newfoundland is the only province reporting a decline in overall 2007 capital spending intentions. Broadbased weakness in housing markets has also emerged with several indicators down this year compared to year ago levels.

Unlike last year, this year’s federal budget will have little effect on Newfoundland other than a new transfer funding formula that requires provinces to include 50% of resource revenues in the equalization formula. But, since the Offshore Accord shields offshore resource wealth in Nova Scotia and Newfoundland from clawbacks, they now both have the option of sticking with the existing system until the accord expires or opting into the new formula.

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