Remarkable turnaround persists

This was illustrated in former finance minister Tom Marshall’s midyear financial report, released in December. The report forecasted a significant increase in the government’s 2012-13 deficit, to $725.8 million from $258.4 million. Marshall blamed low crude oil prices.

With further deficits anticipated in 2013-14, the province is looking to curtail spending and is warning public-sector unions to lower their expectations during contract negotiations this year.

“In the past few years, oil prices have contributed positively to the province’s bottom line,” Marshall wrote in a January fiscal update. “However, in the current fiscal year, the continued slowdown of the global economy has resulted in a reduced demand for oil and minerals and the volatility has shifted in the opposite direction to produce a negative result for the province.”

The return to deficit spending, following several years of chipping away at the province’s debt, is not expected to end soon. An analysis by Wade Locke, an economics professor at Memorial University, concludes that the province will operate in the red for the remainder of this decade.

This prognosis stands in contrast to largely positive signs from the private sector, where significant capital investment by industry is resulting in rapid growth in consumer spending. Housing starts are expected to be robust, particularly in the St. John’s region, with the government forecasting a 15% increase over 2012. Residential and commercial construction is barely keeping pace with demand.

Retail spending also is forecasted to maintain a healthy growth rate of 5.6% in 2013, compared with 4% last year. Automobile sales rose to record levels for the province during the first three quarters of 2012, up by 11.6% over the corresponding period in 2011 (vs 7% nationwide).

Capital investment is expected to remain steady this year, then decline in 2014. Construction of one of the province’s key projects – Brazil-based Vale SA’s nickel-processing plant on the Rock – will end this year, resulting in the loss of several thousand construction jobs. Once processing begins this coming autumn, the facility will employ 500 full-time workers in Long Harbour, a rural area that has long sought economic stability.

@page_break@ Many construction workers laid off by Vale are expected to find work at the nearby Bull Arm fabrication site, at which a consortium led by Exxon Mobil Corp. will build a massive concrete structure for producing oil from the Hebron offshore oil project. The decision in January to proceed with Hebron will result in $14 billion of investment prior to the first oil being produced in 2017, with much of that money being spent within the province, where thousands of engineering jobs and construction jobs are being created in the already booming region of eastern Newfoundland.

In Labrador, construction will peak this year at the Muskrat Falls hydroelectric project with 2,700 construction workers on the ground, mostly in the Goose Bay region. The $7.4-billion project, which is largely financed by a provincial crown agency, Nalcor Energy, is scheduled for completion in 2017. This project includes an underwater transmission link to Nova Scotia that will be built by Emery Energy Co. LLC.

In Labrador City and Wabush, expansion of the iron ore sector is being led by Alderon Iron Ore Corp., which is gearing up to open its Kami property in 2015-16. China’s Hebei Iron and Steel Co., which acquired a 25% stake in Kami last year, has agreed to buy 60% of the project’s projected output of iron ore concentrate.

Although the outlook for 2013 is largely positive for Newfoundland and Labrador, analysts warn that the prospects for subsequent years are somewhat darker. A report from the Ottawa-based Conference Board of Canada says public-sector restraint, combined with dwindling oil reserves, will act as “a drag on the economy over 2014-17,” despite the additional production from Hebron.

Economists with Royal Bank of Canada anticipate that a decline in capital investment in this period will result in a significant decline in economic growth – to just 0.6% in 2014 from 4.4% in 2013.

In addition, the province’s fishery, which remains the key to survival for hundreds of rural communities, is continuing to contract, with closures of seasonal fish-processing plants anticipated in coming months. A precedent-setting decision by the provincial government late last year to allow the export to China of unprocessed yellowtail flounder by Ocean Choice International LP has put the future of the processing sector in doubt.

In Corner Brook, the future of the province’s last paper mill remains murky – particularly after a two-week shutdown this past December by the operator, Kruger Inc. Concessions made last summer by the unionized workforce have given Kruger some breathing space, but fears of a permanent closure have not dissipated.

 

Population: 512,659

GDP 2011 ($bil.): 28.9

GDP % change: +3.0

2012-13 deficit ($mil.): 725.8

Estimated net debt ($bil.): 8.5

Median after-tax income, all families: $44,800

household disposable income/capita: $28,181

Housing starts are expected to be robust, particularly in St. John’s, with a 15% increase forecast for 2013

Figures are from latest available reports/estimates

Sources: conference board; Government reports

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