Canada’s Atlantic Provinces Will Benefit from U.S. Recovery

28 May, 2015

Interview by Rachel Duran

Things are still difficult on the fiscal front for Canada and its provinces; bright spots surface for the Atlantic Provinces.
Editor’s Note: This interview was conducted April 7, 2015. For the latest information in regard to the forecast for the Canadian economy, visit www.conferenceboard.ca.

 
Canada’s real GDP growth for 2015 will be 1.9 percent, which is 0.4 percentage points lower than economists at the Conference Board of Canada originally projected. The decline in oil prices pulled down capital investment in the energy sector and dampened growth prospects for the country.

The province of Newfoundland and Labrador is one of the Canadian provinces impacted by the lower expenditures in the energy sector. Thirty percent of the province’s budget is tied to oil royalties. This fact, combined with the province’s lower production of iron ore, will lead to a contraction of real GDP growth in 2015.

 
Moving to the national level, there are areas of economic strength throughout Canada, where a combination of the drop in the Canadian dollar and the strong recovery in the U.S. economy will support growth.
We asked Marie-Christine Bernard, the associate director, provincial forecast for the Conference Board of Canada, to home in on the economic performance of the Atlantic provinces.

 
Rachel Duran: When we visited at the beginning of this year the price per barrel of crude oil was $48 per barrel on January 6, which affected the Conference Board of Canada’s forecast for Canada. Your team had already forecasted a decrease in the country’s energy sector prior to the price decline. Where are we now?

Marie-Christine Bernard

Marie-Christine Bernard: The outlook hasn’t changed much since the last time we talked, back in January. The price of oil has come down; it fell a lot more in December and January settling around $45 to $50 a barrel for West Texas Intermediate Crude Oil (WTI). We expect that is the bottom and from there prices will gradually recover and increase to around $60 per barrel by the end of 2015, and a little higher by 2016.
So for the Canadian outlook we had already factored in the large decline in capital expenditures that we expect to see in the energy sector. In particular with Alberta, Saskatchewan and Newfoundland.
We expect the Canadian economy to grow by 1.9 percent in 2015. For 2016, we expect a higher real GDP for Canada of 2.2 percent, which is still fairly modest. We do not expect interest rates in Canada to move up in 2015. With the weakness in the Canadian economy there is still slack so there isn’t a need to increase interest rates at the moment.
We see a strong recovery in the U.S. economy, which will benefit certain provinces in Canada, in particular central Canada. Quebec and Ontario are expected to do a lot better than what they had seen over the last few years. Ontario will be one of the strongest provinces in Canada.
In terms of real GDP growth this year, we haven’t seen that since 2002. With the retreat in the Canadian dollar versus the U.S. dollar, the depreciation has helped in terms of cost competitiveness. It has also helped fuel export growth in the Central and the Atlantic provinces.
So things are still difficult on the fiscal front for Canada and the provinces. Some of the provinces are struggling to balance their books and they are still a couple of years away before they can reach a balanced budget. We will continue to see fiscal restraint at the provincial and Canadian levels. They are about a year away from balancing the books.

Dieppe, New Brunswick: Strategically Situated
Dieppe, located near Moncton, is known as the hub of Atlantic Canada because of its strategic location. At the Dieppe Industrial Park, which features three development zones, Canadian National Railway Co.’s main line runs by the park, with rail spurs located throughout the park. “At the other end of the city is CN’s intermodal complex,” says Louis Godbout, executive director, ExpansionDieppe.
The park’s most recent addition is Partner Seafood and Xtreme Cold Storage, which specializes in the storage, packaging and distribution of fresh produce. The company also produces, processes, and exports most of the Atlantic Ocean’s species in frozen and salted forms. From the park, the company has direct and secure access to the tarmac of the Greater Moncton International Airport, where customers store their goods in the warehouse before it is shipped worldwide without any breakage of the cold chain.
“Analysis shows it is cheaper and faster to land goods here coming from Europe, Asia or elsewhere, and truck it to the states,” Godbout says. Dieppe’s officials are expanding their infrastructure capacity to serve the North American East Coast. And with the free trade agreement between Canada and the European Union, the effort will gain traction, Godbout says.
Godbout says Dieppe’s business climate is diversified and no one sector represents more than 10 percent of the market. Infrastructure advantages include the trans-Atlantic fiber cable that runs through the city, which connects North America to Europe. There are also three deepwater seaports open year-round. A new initiative is to explore the feasibility of building an air cargo center of excellence to serve Atlantic Canada. “We are working with the airport to create a free trade zone, and further on, intermodal services for the different modes of transportation,” Godbout says.
For more information, visit www.expansiondieppe.ca.

Duran: This issue’s Canadian profile focuses on the Atlantic provinces [Newfoundland and Labrador, New Brunswick, Nova Scotia and Prince Edward Island]. You mentioned the decline of the energy sector, including in Newfoundland.
Bernard: In Newfoundland and Labrador the drop in oil prices is certainly not welcome news. A large part of the provincial budget, 30 percent, is linked to oil royalties. They are facing a significant budget deficit again. They have had a deficit in the last two years.
Newfoundland and Labrador’s economy has been weakening. It is not just the difficulties in the oil sector. The province is a major producer of iron ore, and those prices have come down significantly. A lot of production capacity in the iron ore industry was idled in late 2013 and in 2014, so we see much weaker production.
We expect the province’s economy to contract in 2015 by 0.6 percent; it contracted by 2.3 percent in 2014.
There have been major investments in the province in the last few years, which are still under development. However, we have seen capital expenditures peak. So we don’t expect the economy to recover much in 2016 despite the fact we are expecting oil prices to gradually recover.
Duran: How is the rest of Atlantic Canada performing?
Bernard: Prince Edward Island didn’t do very well in 2014, and we didn’t see any growth in the province. It is a small province so if one sector is not doing well it affects the entire economy. There wasn’t much momentum in terms of housing demand. Residential and nonresidential spending is quite weak. That held back the economy and we did not see much job creation.
We expect housing starts to turn around, as well as more investments in to the province, so that should help in terms of improving real GDP growth for Prince Edward Island. The drop in the Canadian dollar will help the province’s economy because they are oriented toward tourism, and we are expecting more people will drive to the island due to the lower gasoline prices.
In addition, the province’s manufacturing sector has been doing well over the last few years. They used to be very dependent on the food processing industry. They have diversified the manufacturing sector and are now major producers of aerospace services and products, and pharmaceutical and chemical products.
The drop in the Canadian dollar and the fact that the U.S. economy is doing better will also help the manufacturing sector. So Prince Edward Island will see real GDP growth of 2.4 percent in 2015, and slightly above 2 percent in 2016.
When we look at Nova Scotia and New Brunswick, they have been the weakest provinces in the Canadian economy in the last few years. Economic growth has been lethargic. Both provinces shed jobs over the last two years. It was a generalized weakness in both provinces.
Things are picking up. Nova Scotia’s trade is linked to the U.S. economy. The fact that the U.S. economy is doing well will help the province’s manufacturing sector. The construction industry should do well as there are a number of projects in development.
We expect Nova Scotia’s real GDP to grow by 1.6 percent in 2015, and by a slightly better 2 percent in 2016. This should help the job market and consumer demand to expand in the next two years.
Also, a few years ago, Nova Scotia won the national shipbuilding program. They will build combat ships for the Canadian Navy. The contract is worth $26 billion. The shipyard is prepared and manufacturing activity should get underway in the second half of 2015. We should see a boost in hiring, and workers locating from other provinces to Nova Scotia to take advantage of this economic activity.
In regard to New Brunswick, their trade is also linked to the U.S. economy, which will help to revive the province’s economy. Their job market has performed poorly; they lost 7,000 jobs over the last several years. Things have been fairly difficult with no real GDP growth in the last few years.
There are promising investments in New Brunswick’s forestry sector. J.D. Irving, which is a major player, is investing $500 million to upgrade its pulp and paper mills. That will help the construction sector and the forestry sector afterward.
So we expect real GDP growth of 2.2 percent for New Brunswick in 2015, and 2.7 percent in 2016.

 
Marie-Christine Bernard is the associate director, provincial forecast, for the Conference Board of Canada. She can be reached by emailing bernard@conferenceboard.ca or by visiting www.conferenceboard.ca.

Illustration by renjith krishnan at Free Digital Photo.net

Rachel Duran

Rachel Duran is the editor in chief for Business Xpansion Journal. Contact her at rduran@latitude3.com.

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