Compared with the rest of the country, New Brunswick’s economy held steady in 2007 despite a major downturn in the forestry industry, once considered the backbone of the province’s economy.

An 80% reliance by the N.B. forestry sector on U.S. exports, the slump in the U.S. housing market and the high Canadian dollar have forced most of the province’s lumber mills out of business as 2007 lumber production dropped by 50% to slightly more than 500 million board feet.

“We have a serious challenge in the forestry sector, no question,” says Victor Boudreau, New Brunswick’s finance minister. “We have some communities that rely on the forestry sector almost entirely, and it’s going to take some work to diversify their economies.”

To these communities’ peril, the forestry industry depended too much on a lower C$ to turn a profit. But, ultimately, it was antiquated and inefficient technology that did the industry in as the market turned to foreign makers of cheaper lumber and paper. The province is, however, taking steps to find a new model for the industry by hiring CIBC World Markets Inc. analyst Don Roberts and a team of experts. An action plan is expected in June.

Nevertheless, the industry reports some successes, most notably by AV Birla Group and Irving Paper Ltd. Armed with almost $60 million in new capital, Birla has abandoned the paper business altogether by making a new pulp that’s being turned into rayon. Meanwhile, Irving Paper has poured millions into a paper plant so it could roll out a higher-value, high-gloss paper instead of low-margin newsprint. Both companies are also investigating opportunities to turn wood waste into ethanol for biofuel.

The forestry industry does need a serious turnaround to reverse the effect it’s having on the province’s manufacturing and exports, says Ed Barrett, CEO of Barrett Corp. and chairman of the New Brunswick Business Council, a volunteer group of the province’s most powerful business leaders.

“I think all of those [in the industry] would say that 2007 was a very tough year,” Barrett says. “Costs have to be managed and controlled very aggressively and they have to diversify their markets more.”

Approximately 42% of New Brunswick’s gross domestic product comes from exports, which actually declined by 3.5% last year, the worst drop in the country.

Regardless, New Brunswick’s economy held its course in 2007, with an estimated 2.3% growth in real GDP, slightly less than the estimated national average of 2.4%, according to TD Bank Financial Group. The province is expected to grow by 1.9% in 2008.

Unemployment came in at 7.5% for 2007, the lowest it’s been in more than 30 years, and it’s expected to go as low as 5.8% by the end of 2009, according to Royal Bank of Canada chief economist Craig Wright. TD, however, expects the unemployment rate to remain stagnant, at 7.6%, for 2008.

So, considering all this — as well as the loss of thousands of jobs and millions of dollars in the forestry industry — what’s New Brunswick doing right to make up for that and more?

“There’s been a lot of growth in information technology and services firms, particularly in the urban areas of the province,” says Mount Allison University economics professor Frank Strain. “Even though many rural New Brunswickers have had to go out west to find work, the change in workforce composition is having a positive effect.”

The most frequent job postings for 2007 were in IT, engineering, customer contact and financial services, according to Jean Nadeau, general manager of www.Career-Beacon.com, the province’s largest recruitment Web site. He says it’s most likely due to the unprecedented amount of private and public capital investment pouring into the province, such as Irving Oil Ltd.’s new Canaport LNG liquefied natural gas terminal off the Bay of Fundy.

And with more capital projects slated to start up in the next two years, this will give a significant boost to the provincial economy, Boudreau says: “The various projects that are going to start up are particularly in the energy sector. I can’t help but think that the next two years are going to be very positive.”

Other projects in the works include the construction of a $1.5-billion potash mine; a $1.4-billion refurbishment of New Brunswick Power Corp.’s nuclear power-generating station, as well as billions more to be spent on a second reactor; $1 billion in private wind-energy projects; and, the pièce de résistance, a new $7-billion Irving Oil refinery in Saint John.

@page_break@“The Irving refinery will be the largest capital project in Atlantic Canada’s history,” Boudreau says. “So far, the largest has been the Northumberland Strait crossing [from New Brunswick to P.E.I.], at $1.4 billion.”

Irving Oil’s new Saint John refinery is expected to employ as many as 5,000 workers during its construction, and several hundred once it’s operating.

However, it is premature to factor the refinery into any real projections until more concrete announcements have been made. Getting a green light still depends on a satisfactory environmental impact assessment and the success of a financial deal between the Irvings and a Saudi company.

To add even more fuel to the fire, Liberal Premier Shawn Graham recently announced a $486-million capital budget for 2008-09 for infrastructure improvements and economic stimulation.

“The coming year will see the largest capital budget in New Brunswick’s history being invested in our roads, schools and hospitals,” he said to an audience of more than 1,000 at his annual state-of-the-province address in January. In total, public and private capital expenditures were $5.6 billion in 2007, up by 12.7% over 2006.

Barrett believes that N.B. businesses need to step up to the plate quickly and find new ways to do business: “I’m not one to believe that there’s anything government can do by itself to make a difference. There needs to be a dual strategy of aggressive business attraction and retention.”

Barrett thinks developing and supporting more small and mid-sized businesses in New Brunswick is essential for sustaining long-term success in the province.

“There are a number of good businesses in New Brunswick that are headquartered here,” he says. “So, when there’s a downturn in the economy, they don’t close up shop, which might be the case with a branch-plant type of mentality.”

Strain says it’s these types of businesses — especially McCain Foods Ltd. and Irving Oil — that are having a stabilizing effect on the N.B. economy. As both are global companies with operations all over the world, the province isn’t hit as hard as those more sensitive to changes in local or regional economies.

However, when it comes to finding the skilled labour New Brunswick needs to meet project demands, there will be problems. With so much out-migration, the province will inevitably face significant challenges finding the right people at the right time — and at the right price.

“Moving out west and working out west is a good thing right now,” Nadeau says, “because when they come back, they will have more education and skills relevant to the jobs that are coming.”

Another reason why this is a good thing, for now, is that a good majority of those workers out west are sending their big paycheques home to their families — and their families are spending that money in New Brunswick.

“When you look at retail, whether in Fredericton, Moncton or Saint John,” he notes, “you can’t drive during any given week without seeing new shopping centres, office buildings and hotels being built.”

Growth in retail sales for 2007 is expected to come in at 5.7%, less than the national average of 6.6%, with inflation up by 1.9%, according to TD. Both figures are expected to match the national average in 2008. However, the price of housing will more than likely be on the rise if all projects planned start up at once. Housing starts dropped to 3,700 in 2007 from 4,100 in 2006. And with up to 7,000 new jobs coming, housing developers are going to have to get busy.

Finance Minister Boudreau is committed to doing what’s necessary to keep costs down in New Brunswick: “Last year, the C.D. Howe Institute recognized New Brunswick as the place to do business with the lowest costs. To keep this, we have to make sure that we’re producing graduates with the skills our workforce needs. Some of our programs are training people for jobs that don’t even exist here.”

For 2008-09, it looks like New Brunswick can expect the same or better results as in 2007. Whether or not its renewed focus on the energy sector will help the province reach its goal of self-sufficiency by 2026 remains to be seen. But for now, it looks like finding more ways to feed the eastern U.S. energy appetite will be its focus over the next three years. IE