Growth Continued in 1995

The Provincial economy continued to experience economic growth in 1995 as real GDP advanced by about 1.5 percent. Much of the gain was attributable to Hibernia development activity and a strong showing by resource industries. On the downside, government spending restraint, particularly at the federal level, constrained growth and together with other factors, discouraged housing activity and new car sales.

Hibernia Construction Peaked

Hibernia construction kicked into high gear last year boosting average employment and total expenditures to about 5,450 and $1.4 billion respectively — the highest annual levels to date. A number of significant contracts to support future oil production were also awarded.

Heightened Interest in Oil Exploration

Speculation surrounding a potential oil discovery by Hunt Oil on the West coast last year led to the Province's largest ever onshore land offering. Twenty-eight land parcels were sold for a total work commitment of $21 million. Several offshore parcels are also expected to be sold this year. Oil companies have also renewed their interest in East coast (Grand Banks) oil exploration. In response to this interest, a land sale was conducted last year resulting in Amoco Canada's record setting bid of $90 million for a licence adjacent to the Terra Nova oil field. Another offering of land in the area has been announced for this year.

Strong Resource Sector

Newsprint mills operated near full capacity in 1995 while prices pushed value up by over 40 percent. Mineral shipments rose to their highest level in over a decade and employment increased. Mineral exploration expenditures and employment recorded strong increases, stimulated by the massive nickel-sulphide discovery in Labrador.

Boom in Crab Fishery

The value of landings rose to an all-time high due to record catches and prices for crab together with strong showings for other shellfish and pelagic species. The volume of fish landed and industry employment continued to decline, however, reflecting ongoing groundfish quota reductions and closures.

Employment Boost from Service Sector

Positive developments in the resource sector flowed through to the service sector boosting employment by 5,000. This offset losses in the fishery leading to a gain of 2,000 or 1.4 percent in total employment. Consequent gains in wages and salaries allowed for a modest 1.5 percent increase in the value of retail trade.

Public Sector Restraint

While the private sector experienced a good year in 1995 the public sector was constrained by a difficult fiscal environment. The 1995 Federal Budget announced spending reductions and other levels of government operated in an environment of restraint. In addition, UI benefits, the second largest component of personal income, were reduced by 15.9 percent largely due to changes in regulations introduced in July of 1994 under Bill C-17.

Milestones in 1995

Several developments during 1995 served to enhance the Province's future prospects. The Provincial government introduced its Economic Diversification and Growth Enterprises (EDGE) program; results from some sentinel fisheries were encouraging; positive exploration news continued to flow from the nickel-sulfide deposit discovered at Voisey's Bay; interest in oil exploration on the Province's East and West coasts intensified; and Petro-Canada announced that it will proceed with a Development Plan Application for the Terra Nova oil field.

Recession Expected in 1996

Economic activity is expected to decline in 1996 as Hibernia construction winds down and government spending reductions are implemented (see forecast details on page 74). All levels of government are reducing spending this year. Federal cutbacks are a continuation of those planned in the 1994/95 budget while the Province's cutbacks reflect measures taken in December 1995 as well as those contained in the current 1996/97 budget. The Provincial spending cuts reflect lower transfers from the federal government as well as lower tax revenues due to the recession.

A large part of the economic contraction being felt this year is attributable to the Hibernia project. This project was, by its sheer magnitude, a major positive influence on the economy over the past few years. In 1995 alone the project directly accounted for nearly seven percent of total wages and salaries in the Province. Its completion will be a drag on the economy over the coming months until the more stable, long-term production phase begins in late 1997. For 1996, employment, personal income, and other economic indicators will all be affected by the economic downturn. Among the various sectors, the public sector and the construction industry are expected to experience the sharpest declines in activity.

Export Industries Set for Good Performance

Export industries are expected to have another good year in 1996. Production at the Come-by-Chance refinery is forecast to increase. Pending an early resolution of the labour dispute at the Iron Ore Company of Canada, the mining industry is expected to perform well. As well, there are several other small mines which could potentially start up this year. Newsprint prices are forecast to remain relatively high and fish landings should match or exceed last year's levels, given another good year for shellfish and a possible capelin fishery.

Preliminary investment intentions from Statistics Canada indicate that spending in areas of the economy excluding Hibernia and government will show a significant increase this year. Nevertheless, total investment will fall by approximately 18 percent from 1995. Mineral development and exploration investment will continue at a strong pace. Furthermore, oil and gas exploration expenditures are expected to increase for the fourth consecutive year.

Manufacturing investment is slated to grow as several of the Province's new EDGE companies set up operations and the pulp and paper mills upgrade equipment. Also, a vibrant and growing advanced technology sector is fast becoming a significant contributor to the Provincial economy.

In summary, economic activity for the year will be constrained by the winding down of Hibernia construction and lower government spending. Nevertheless, solid performances are anticipated for the mining, forestry, fishing and manufacturing industries. Once adjustments for Hibernia construction and government spending reductions are realized, the longer term outlook is for a resumption of economic growth.

Longer Term Prospects

The Province has just weathered four years of fishing moratoria (with the help of Hibernia construction and fishery compensation programs) during which time some restructuring of the fishery has occurred and a process to ensure further restructuring has been put in place. Other changes include the emergence of a major shellfish fishery, higher fish imports for secondary processing, and increased aquaculture production. Results from last year's sentinel fisheries on the South and Southwest coasts of the Province indicate the possibility of a limited commercial groundfishery in those areas in the near future. Combined with the likely return of the capelin fishery, this points to significant upside potential for the industry.

The start of production from Hibernia in late 1997 will be a major milestone for the Province's oil industry. It is expected to be the first of several offshore oil fields to enter production as Terra Nova will likely be the second followed by others such as Whiterose. As well, major exploration programs, both offshore and onshore, give rise to the possibility of other major discoveries.

The development of the Voisey's Bay mineral discovery will produce a major increase in mineral production. Also, the construction of a mine, mill, smelter, and refinery will be a major project in its own right providing many construction jobs. Extensive mineral exploration in Labrador could result in additional mineral discoveries.

Together with the EDGE program, an increasingly entrepreneurial labour force, and the development of the innovative technologies sector, the Province has significant long term potential. Once adjustments are made for government downsizing and completion of Hibernia construction, these factors should enable economic growth to resume.

Economic growth in the Canadian and U.S. economies slowed significantly last year relative to 1994. Canadian and U.S. Real Gross Domestic Product (GDP) grew by 2.2 and 2.1 percent respectively. Slower growth was not unexpected given the increases in interest rates that occurred in 1994.

Weak economic expansion brought some relief to Canada's labour markets during 1995. Employment grew by 1.6 percent, but labour force growth kept the unemployment rate near the 9.5 percent level, down only slightly from levels recorded near the end of 1994. Employment and GDP were both constrained by a weaker U.S. economy, higher interest rates and cuts in government spending, especially at the Federal level.

Improving inflationary performance combined with lower interest rates and favourable trends in exports and investment point to moderate economic growth in Canada and the U.S. in 1996. Canada's GDP is forecast to grow by 2.0 percent while U.S. GDP is expected to increase by 2.1 percent. In Canada, further cuts in government spending at both the Federal and Provincial levels will constrain growth, but the private sector is expected to do well.

The recent paring down of government deficits in Canada and the Country's excellent inflation performance has increased foreign investor confidence in the Canadian dollar. As a result, the Bank of Canada was recently able to reduce short-term interest rates below U.S. short-term rates without triggering a decline in the dollar. This negative interest rate spread finally reflects Canada's improving fiscal situation and superior inflation performance. This development bodes well for the Canadian economy since lower interest rates are helpful in stimulating economic growth through business investment, consumer spending, and residential construction. In the past Canadian interest rates usually tracked U.S. rates in repeated attempts to stabilize the dollar.

The Federal government deficit for 1995/96 is expected to be below the current target of $32 billion. Strong corporate revenues and lower than anticipated interest rates are behind this improvement. The recent Federal budget introduced more spending cuts to be implemented in 1998/99. These cuts combined with a strong outlook for corporate tax revenues and low interest rates could result in a balanced budget in four to five years.

Canada's merchandise trade balance continued to expand during 1995, helped along by strong export growth and a weak consumer sector. Export growth is forecast to slow over the next few years, but expected slower import growth due to weak domestic spending means than the merchandise trade balance will continue to improve. In fact, a current account surplus is expected as early as 1997 or 1998. This means that for the first time since 1982, Canada will be earning more from foreign countries than it pays out.