ATLANTIC CANADA ECONOMIC OUTLOOK: MODERATE GROWTH FOR 2005

UNCLAS SECTION 01 OF 02 HALIFAX 000259

SIPDIS

STATE FOR WHA/CAN, EB

E.O. 12958: N/A
TAGS: ECON ETRD PREL EPET CA
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