Probably the best way to describe the Newfoundland and Labrador economy, as it approaches 2016, is “under a lot of stress” from three key sectors.
First, the sharp 58% drop in oil prices over the past two years, together with maintenance-related production cuts, has severely curtailed revenues from resources.
Indeed, the total value of the province's exports year to date have fallen by 36% compared to the first eight months of 2014 due primarily to a 53.0% year-to-date collapse in foreign sales of crude petroleum, which accounted for 81% of the drop in the province's total year-to-date exports.
Other contributors to this drop in total exports included sharp declines in exports of iron ore and concentrates (-54%) and copper and copper concentrates (-32.6%). Looking ahead, oil production should rise slightly in 2016 due to increased production at Hibernia South and there will be a significant boost in 2017 when the Hebron facility comes on line.
Second, faced with a projected record deficit of $1.1B in the current fiscal year, due in large part to significantly lower offshore oil royalties, the provincial government plans to slow its growth of spending, scale back hiring and raise taxes.
Third, over the past year the drag on the economy caused by the weakness in the energy sector and the slowdown in government spending has been exacerbated by a pull back in construction activity in the province reflected by weakness in both residential and non residential construction. Year-to-date residential building permits are down by -19.1% and, consistent with that sharp drop, year-to-date total housing starts in the province are down by -24.5% due to declines in starts of single family units (-22%) and multiples (-30.2%).
This weakness in new construction appears to be due, in part, to a reversal in net migration from +253 in the first half of 2014 to a net outflow of -587 during the first six months of 2015.
While the volume of non-residential construction spending increased by 0.7% in the first three quarters due to an 8.8% rise in commercial building, the volume of industrial construction and institutional building exhibited significant year to date declines of -18.7% and -12.8% respectively.
Moreover, based on Statistics Canada most recent Capital Spending Intentions Survey, firms in the province plan to scale back their total spending by 5% in 2015 following gains of 2.7% and 3.4% in the previous two years.
Looking forward, with both the Hebron project and Muskrat Falls approaching completion and given the prospect of persisting low commodity prices in general and oil prices in particular, it appears likely the contribution to growth from resource-driven capital spending will gradually shrink over the next several years.
After posting a strong gain of 7.2% in 2013 followed by a 2.6% decline in 2015, we expect that this combination of weak export growth, slower capital spending and higher taxes will likely cause the province's economy to contact by a further -2.5% to -3.5% in 2015 and by -0.5% in 2016.