US embassy cable - 04HALIFAX259

UNCLAS SECTION 01 OF 02 HALIFAX 000259 
 
SIPDIS 
 
STATE FOR WHA/CAN, EB 
 
E.O. 12958: N/A 
TAGS: ECON, ETRD, PREL, EPET, CA, Petrolium, Trade 
SUBJECT: ATLANTIC CANADA ECONOMIC OUTLOOK:  MODERATE GROWTH FOR 2005 
 
 
1.  SUMMARY:  Atlantic Provinces Economic Council's annual 
business outlook briefing predicts moderating growth for 
Canada's four eastern provinces.  Softening global demand and 
prices for commodities and forest products, low or no growth in 
tourism, a cooling housing market and declines in consumer 
spending all add up to regional growth in 2005 that will be 
about one percentage point below the forecast for Canada as a 
whole.  Major project spending -- non-residential construction 
and offshore energy investment -- remains a positive factor in 
the near term, but a "project gap" is looming in 2006-2007 that 
could undermine growth unless offset by other stimulus. 
Competition from Asia is growing for traditional regional 
exports such as seafood.  END SUMMARY. 
 
2.  David Chaundy, Senior Economist for the private think tank 
Atlantic Provinces Economic Council (APEC) briefed CG and other 
attendees of the Council's annual economic outlook conference 
for the region November 15.  Chaundy's estimate for overall 
Canadian economic growth in 2004 is 2.9%, and his estimate for 
2005 is 3.1%.  For Atlantic Canada the picture is not quite as 
good.  The APEC forecast notes a number of key negative factors 
that are likely to have an impact on regional growth: 
 
--  slowing demand and softening prices in 2005 for commodities 
produced in and exported from the region, including iron ore, 
wood products, pulp, and rubber products; 
 
--  a soft tourism market in 2004 may indicate that the boom 
years for tourism are over and that there will be fewer new 
opportunities for growth in this sector.  One bright spot for 
tourism is cruise ship arrivals, which continue to climb from 
their 2002 slump; 
 
--  declines in housing starts to 1991-94 levels; 
 
--  a significant drop in consumer spending including for new 
cars; 
 
--  declining job growth after summer 2004 peaks. 
 
3.  The strength of the Canadian dollar is likely to have a 
significant impact on Atlantic Canadian businesses, and the APEC 
forecast anticipates that exports will take a hit in 2005. 
Businesses in the region and across the country will need to 
examine how to cut costs and increase productivity to compensate 
for the high loonie.  One silver lining of the Canadian dollar's 
rise is that capital investment in the form of imported 
machinery could become relatively cheap and spark a capital 
spending boom such as the one in the late 1980s and early 1990s. 
 (NOTE:  We have converted Canadian dollar figures to U.S. 
dollars at a rate of US$0.82 = C$1.00.  END NOTE.) 
 
4.  On the bright side for the region's economy, Chaundy noted 
that federal government investment will help ease provincial 
budget squeezes, with higher than anticipated equalization 
payments and additional transfers for health care.  In the case 
of Nova Scotia the federal windfall will amount to about 3.6% of 
total provincial revenue, a roughly C$200 (US$164) million 
boost.  (That is offset, however, by an approximately 7% boost 
in the province's health care spending.)  In addition, major 
project spending -- such as offshore energy, mining, road 
building and liquefied natural gas plants -- should rise by 
about 12% across the region, with most of the increase in 
Newfoundland/Labrador and New Brunswick.  Announced projects, 
however, run out by mid-2006, leaving a potential "project gap" 
until mid-2008 when Lower Churchill Falls Hydro construction and 
the Deep Panuke offshore project potentially kick in. 
 
NOVA SCOTIA 
----------- 
 
5.  Atlantic Canada's largest economy, according to the APEC 
forecast, will grow by approximately 2.2% this year and 2.5% in 
2005.  Increases in services and manufacturing are and will 
continue to offset declines in offshore energy production.  The 
unemployment rate will continue its gradual decline, from about 
12% ten years ago to under 9% in 2005.  Strong employment growth 
in business services in recent years has helped both cut 
unemployment and raise the participation rate in the economy. 
Major project spending for 2005 will be a mix of public and 
private initiatives including an LNG plant in Cape Breton, 
cleanup of the Halifax harbor and the notoriously polluted 
Sydney Tar Ponds, the Sable Island natural gas compression 
platform and a major expansion of the community college system's 
infrastructure. 
 
6.  Nova Scotia's main export market by far is the U.S., with 
2004 exports to date -- C$3.2 (US$2.6) billion -- running about 
4% ahead of last year.  Primary exports to the U.S. are natural 
gas (21%), fish (21%) and tires (13%).  Offshore energy 
exploration has fallen sharply since 2003 and production is 
projected to level off at around 4.5 billion cubic meters in 
2004 and 2005.  APEC's Chaundy noted that something is needed to 
rekindle interest in Nova Scotia's offshore energy resources if 
the sector is to play a major role in stimulating growth. 
 
NEW BRUNSWICK 
------------- 
 
7.  After solid growth of 4% in 2003, New Brunswick is likely to 
see about 2% growth in 2004 and about 2.7% in 2005. 
Unemployment will tend downward to just above 10%.  Major 
investment in 2005 will include an LNG plant outside of St. 
John, a federal/provincial highway project, new electric power 
infrastructure to better link NB Power to the Maine grid and 
permit more efficient energy imports and exports, and a new 
Molson brewery in Moncton.  New Brunswick's primary export to 
the U.S. -- 42% of the total -- is refined oil, making it by far 
the largest Atlantic exporter to the U.S. with C$5.7 (US$4.7) 
billion so far in 2004.  Overall exports to the U.S. are up by 
11% so far in 2004.  Paper and wood products account for about 
10% each of the province's remaining exports. 
 
NEWFOUNDLAND AND LABRADOR 
------------------------- 
 
8.  Economic growth in Newfoundland and Labrador was 6.5% in 
2003, driven primarily by oil production and investment in 
offshore energy, the APEC forecast sees Newfoundland/Labrador 
growth falling dramatically to 1.7% for 2004 and 1.2% in 2005. 
Unemployment will remain in the 16% range, with new jobs created 
in manufacturing, trade and construction but lost in the public 
service and health care.  The province's exports -- over half of 
which are refined and crude oil -- will be up slightly in 2004. 
The U.S. remains by far Newfoundland's largest export market -- 
over C$2.1 (US$1.7) billion so far in 2004 --  although exports 
to China -- mainly fresh and frozen seafood for processing -- 
are up so far this year by more than 29% to C$239 (US$196) 
million.  Business investment has played a major part in the NL 
economy in recent years, but it will slow in 2005 as initial 
spending begins on the White Rose offshore energy project, the 
Voisey's Bay, Labrador, nickel mine and mill and the St. John's 
harbor clean-up project.  White Rose should boost oil production 
-- and provincial economic growth -- significantly by 2006. 
 
PRINCE EDWARD ISLAND 
-------------------- 
 
9.  Tiny PEI, according to the APEC forecast, will move from 
less than 2% growth in 2004 to around 2.3% in 2005.  Low potato 
prices, which brought down farm receipts significantly in 2004, 
are a main factor in the Island's current sluggish growth. 
Processed potatoes make up over 30% of PEI's exports, with raw 
potatoes another 7% and fish and fish products more than 20%. 
Unemployment will remain in the 11% to 11.5% range.  Exports to 
the U.S. have fallen slightly so far in 2004 to C$362 (US$297) 
million.  No other country comes close to the U.S. as an export 
market for PEI, although fish exports to Japan are up this year 
by about 200% to C$11.2 (US$9.1) million. 
 
COMMENT 
------- 
 
10.  Overall the APEC forecast predicts that Atlantic Canada 
will trail the rest of the country in economic growth in 2004 
and 2005.  Offshore energy, which has been a major factor in 
growth for the region, is stalled for the moment, despite high 
prices which should normally trigger investment in the sector. 
Waning interest in the offshore, particularly Nova Scotia's 
after several disappointing exploratory wells, will take time to 
reverse. 
 
11.  APEC's President, Elizabeth Beale, told the conference that 
Atlantic Canadians need to take stock of how their economies are 
structured.  Dependence on exports of primary products -- mainly 
to the U.S. but increasingly to Asia -- means that "we have a 
developed economy but Third World export patterns."   The goal 
of value-added processing at home remains as elusive as always, 
and structural factors such as labor costs and rigidities mean 
that Atlantic Canada will likely see an increasing flow of its 
products, such as iron ore and seafood, going to developing 
countries to be turned into finished products and sold either 
back to Canada or to the region's traditional export market, the 
United States.  Beale's analysis of Atlantic Canadian exports 
facing direct or indirect competition from Asia should be cause 
for serious thought among businesspeople in the region. 
 
HILL