The empty storefronts in downtown St. John’s offer the first clue about the current state of Newfoundland and Labrador’s once booming economy: much has changed in the past year and a half.

Until mid-2013, the province could boast of investments in megaprojects such as the Hebron offshore oilfield, Vale Canada Ltd.’s nickel processing plant in Long Harbour and facilities needed for the Muskrat Falls hydroelectric infrastructure. The unemployment rate, while still stubbornly high by national standards, was trending downward and business activity remained strong in urban areas.

Since then, however, the outlook has darkened. The real estate market has softened considerably, with the Canadian Real Estate Association reporting an increase of 32% in new listings this past September, compared with the same month in 2013. The overall supply of homes is running at historically high levels. Condominium sales are particularly poor this year, with “for sale” signs festooning newly constructed properties overlooking St. John’s harbour.

But despite sluggish demand for new homes, St. John’s and the surrounding metro area continues to be one of Canada’s economic hot spots, driven in part by the Hebron offshore oil project and the inexorable drain of young workers to the city from foundering coastal communities throughout the province. Public-sector hiring in the health and government sectors have been crucial to the St. John’s region, and will probably continue to be so over the coming year. The province’s economy may also benefit from a falling Canadian dollar, particularly in the seafood industry.

Tumbling oil prices

However, tumbling world oil prices pose a threat, particularly for a provincial government that was already dealing with a $389-million deficit in 2013-14. In March, the government predicted another budget shortfall of $538 million for 2014-15, followed by a $28-million surplus the year after.

In November, auditor general Terry Paddon warned that declining oil prices are likely to result in a deeper deficit this fiscal year and that a return to surplus for 2015-16 is in jeopardy. Royalties from the province’s three producing offshore oilfields account for approximately 30% of government revenue, but crude oil prices are now trading well below the US$105 level set in this year’s budget.

Sluggish iron ore prices may also affect government revenue, while also threatening to delay Alderon Iron Ore Corp.’s proposed Kami mine in Labrador. Paddon suggested the government look at tax increases or spending cuts to bring expenses in line with revenue in 2015-16. He pointed out that the province spent almost $15,000 per person in 2013-14, which was 45% more than Canada’s provincial average.

Landmark agreement

However, the government signed a landmark agreement with unions this year on unfunded pension liabilities, which accounts for 75% of the provincial debt. This deal will do nothing to mitigate what Paddon suggests is a structural problem with government finances. But fiscal restraint may prove politically difficult to implement in the short term because a general election must be held by September 2015.

With Premier Paul Davis’s Progressive Conservatives far behind the Liberal Opposition, there may be little appetite for the kind of bitter medicine prescribed by Paddon in the near future.

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