Cautious optimism for Nova Scotia’s economic outlook

Although economists across the country are giving Nova Scotia’s economic outlook a cautious thumbs-up, the provincial government has expressed some concern over the longer-term implications of its deficit.

“Nova Scotia demonstrated significant resilience during what was clearly a difficult 2009,” says Warren Lovely, executive director and senior economist with CIBC World Markets Inc. in Toronto. “It emerged with one of the better growth records for the year.”

Much of the reason for that resilience was capital expenditure initiatives, says Paul Ferley, Royal Bank of Canada’s assistant chief economist in Toronto: “[They] provided some offset to weakening demand from the U.S. and weakening commodities prices.”

That scenario will shift this year, he adds: “In 2010, assuming recovery in the U.S. is sustained, this will lead to increased demand for Canadian and Nova Scotian exports and increasing commodities prices. But some capital spending should pull back.”

Meanwhile, Alex Koustas, an economist with Bank of Nova Scotia’s economics department in Toronto, predicts in his yearend provincial trends report that the province’s export sector should post a modest recovery in 2010: “A more optimistic outlook for automobile sales will provide support for hard-hit plastic and rubber manufacturers. Container traffic at the Port of Halifax should also increase as the global economy kicks back into gear.”

Rebounds also should be seen in some other areas, Koustas says, including seafood exports, particularly lobster, and the forest products industry, although the latter is still a fragile sector generally.

Overall, Koustas expects the province’s real gross domestic product to dip by 1.4% this year after 2% growth in 2009. However, he forecasts real GDP to grow by more than 2% in both 2011 and 2012.

Robert Kavcic, an economist with Bank of Montreal in Toronto, paints a similar picture. He is forecasting real GDP contraction of 0.5% for 2009, then growth of 1.9%, and 2.9% for 2010 and 2011, respectively.

There is also continued strength to be found in Nova Scotia’s financial services sector, which has been a focus of economic development activity over the past few years. “The financial services industry performed well in Nova Scotia last year,” says Lovely. “Globally, this industry is poised for growth — and Nova Scotia has attracted firms in this high-paying industry.”

In 2006, the province announced that three Bermuda-based hedge fund companies — Citco Fund Services, Olympia Capital (Bermuda) Ltd. and Butterfield Fund Services (Bermuda) Ltd. — were opening offices in Halifax. Within 18 months, at least two more international companies — Flagstone Management Services (Halifax) Ltd. and Marsh Captive Solutions Group — had set up shop. Several others have since expanded their operations.

The federal and provincial governments’ emphasis on infrastructure spending will also continue to bode well for Nova Scotia in 2010. “There’s an infrastructure boost that contributed to growth last year,” says Lovely. “It will be very much in effect in 2010.”

The provincial government has already announced a $20-million, state-of-the-art recreation facility for Truro. The facility, which will be equipped with a National Hockey League-sized ice surface, six-lane swimming pool, walking track, fitness centre and office space for community partners, is being paid for equally by both levels of government.

“But, by design,” Lovely stresses, “[these infrastructure projects] have an expiration date. The focus will shift to restraint.”

Indeed, agrees Ferley, “The province has had the good fortune of some major capital expenditures. There’s a price to pay in 2010.”

Much of the downturn will be linked to private-sector projects such as the Deep Panuke natural gas project, now moving from construction to production.

However, the provincial government remains concerned about the impact of the province’s deficit. Last year, it released two economic reports prepared by Deloitte & Touche LLP, and another from its own, newly established economic panel of experts. The consensus is that there is work to be done.

One Deloitte report concluded that Nova Scotia, which has an average industrial wage of $33,421, would be facing a projected annual deficit of $1.3 billion by 2012-13. If the deficit continues, the provincial debt will soar to $16.7 billion by the same date.

“That is mainly because of flat or declining revenue, matched against a pattern of spending that has been rising faster than either inflation or revenue,” Finance Minister Graham Steele said when the report was released.

The economic panel points to only three ways out of the crisis: increase revenue, decrease spending, and grow the economy. The province is not relying on the pundits, however. Steele has just launched a series of community consultation sessions to discuss the financial challenges the province is facing — and solutions to address them.

@page_break@“Together, we can develop a long-term, multi-year plan to address our fiscal reality,” the finance minister says, “and ensure we live within our means.”

In the short term, there is room on the shelf for a glass half-full. The Canada Mortgage and Housing Corp. is calling for increased housing starts in Nova Scotia in 2010 — to 3,325, up from 3,050. And BMO is forecasting that the province’s consumer price index will increase modestly this year, by 0.8%, the same growth rate it foresees for the provincial labour market.

“Resilience in the overall economy has been reflected in the labour market’s performance,” Ferley and his colleagues noted in RBC’s provincial outlook for 2010, which was released in December. “Employment in Nova Scotia has been little changed since 2008 as job losses in manufacturing have been fully offset by gains in the services sector and public administration.

“Such relative buoyancy has contributed to limiting declines in consumer spending and residential investment in the province,” the report adds, “both of which deteriorated significantly less than at the national level in 2009.”