WHY CANADIAN ECONOMY IS IN DANGER OF SLOWLY SLIDING IN TO A SECOND WORLD ECONOMY

Statistics Canada’s figures released on 30 May indicated that Canada’s economic growth slowed to an annual pace of 1.2 per cent in the first three months of 2014. It was the weakest growth since the fourth quarter of 2012. As per Statistics Canada, the gross domestic product of Canada in the first quarter of 2014 marked a deceleration from the 2.7 per cent of the final three months of 2013.

Much of the above is being attributed to severe winter which apparently impacted the overall domestic demand, or spending by consumers, government and business. Harsh winter conditions in US are also being cited as one of the contributing factors apart from drop in housing construction.

            

The weaker first quarter, however, hasn’t changed the 2014 outlook for some observers. A lot of hope is being pinned on US economy to bounce back and businesses in Canada loosening their purse strings to invest. However, some analysts fear that domestic demand are likely to remain under pressure as debt-laden households constrain growth in consumption, housing constructions slows, and government spending remains capped by tight fiscal policy.

But the abovementioned fear does not recognize the elephant in the room – the tardy pace of the exports and the ominous circumstances threatening to crush the expansion potential of major components of Canada’s export resource, i.e., oil sands (and yet to be tapped gas for export as LNG).

People who are familiar with the basics of Canada’s GDP know the significant contribution oil makes to Canadian GDP and the huge service sector it supports (remember, service sector is one of the two main components of Canada’s GDP). The Canadian Association of Petroleum Producer’s 2013 Crude Oil Forecast, Markets and Transportation report forecasts Canadian crude oil production will more than double to 6.7 million barrels per day by 2030 from 3.2 million barrels per day in 2012. This includes oil sands production of 5.2 million barrels per day by 2030, up from 1.8 million barrels per day in 2012.

But the situations that are surrounding oil sands today seem almost poised to strangulate the lofty expansion plans set forth by the industry. One of the main stifling reasons being lack of infrastructure to export the bitumen out of Alberta – the various proposed pipeline projects meant to solve this situation are getting increasingly bogged down in litigations, controversy and delays. One of the casualties of this disheartening situation was Total’s Joslyn North project which was recently put on hold for an indefinite period.

Over on the LNG export side of things too, the portents don’t inspire optimism: the tax regime of the Province (BC) is yet to be finalized, LNG supply economics is getting squeezed due to the recent gas supply deal between Russia and China and the issues with First Nations not settled yet.

The horrifying scenario of oil sands industry getting stifled and LNG projects not getting off the grounds (or just one or two LNG projects getting set up at best) is that Canada’s revenues will get severely impacted in which situation hundreds of thousands of jobs will not get created which will in turn mean opportunity lost in the boost the service sector would have got.

As more people get jobs and earn more, they spend more and, as this work force grows, they need more of everything - from Tim Hortons to pickup trucks. This leads to more jobs and higher wages in other sectors and other regions of the economy, so everyone benefits.

The knock-on effect of stifling of the oil sands (and the proposed LNG industry) will be so severe on the overall Canadian economy that many features of the first world economy that Canada is would get severely disrupted: health care, education, infrastructure, seniors’ care, all these sectors would be badly affected. What would that mean? It would mean Canada would slide from being a first world country to second world nation for all intents and purposes. Is this what Canadians would like for their children’s future?

Can something be done about it? Yes, sure but Canada does not have the luxury of time. The Canadian Federal and the Provincial governments would have to resolve the issues that have the potential of strangulating the oil sands and the LNG industry. The governments need to deal with the First Nations (FN) on top priority basis. The FNs are economically better off than before and smarter too – they now know better how to leverage off their so-called treaties with the Crown and wangle bigger slices of the pie.

The FNs are getting publicity savvy too – the latest example being to get Desmond Tutu to lecture Canada on climate change. What should be raising the alarm bells for the Federal and Provincial governments is that people like Tutu are not lecturing the other heavy oil producing countries nor even lecturing his own country (South Africa) on coal based power plants but comes almost half way around the world to lecture Canada.

This means that there is probably a sinister move to throttle Canada’s oil industry (which for all practical purposes is predicated on oil sands) and thereby deal a crippling blow to Canada’s economy and its economic clout. This is indeed cause for worry and the Canadian government with all the resources at its disposal, namely, CSIS and CSEC, should investigate and take necessary protective measures.

The global economic situation stands at a very critical juncture where economic outlook is still very uncertain and recovery mechanisms highly fragile. At such a juncture, Canadian economy is also walking a tight rope. A slight push or shove can potentially send Canadian economy on downward slippery slope, some forces seem to be wanting to do that. It is up to Canada (its government and the peoples) how it handles this and succeeds in continuing to be a vibrant first world nation. Canada would need all the speed, alacrity, nimble-footedness, resilience, determination and innovativeness to come out on top. 

CANADIAN ECONOMY’s RESTORATION: TIME RUNNING OUT, CANADA NEEDS TO ACT FAST

There were some important nuggets to be picked up from Bank of Canada Governor’s address to the Saskatchewan Trade and Export Partnership in the last week of April:

·       One of the most important forces powering Canada’s economy currently is the long-term strength in global prices for resources; and, for Canada, oil stands out. 

·       As people earn more, they spend more and, as this work force grows, they need more of everything - from Tim Hortons to pickup trucks. This leads to more jobs and higher wages in other sectors and other regions of the economy, so everyone benefits.

·       Diversifying Canada’s export markets is important to future growth and resilience.

·       Canada’s is an export-driven economy. Canadian economy needs to shift gears and for exports to lead again.

A new report from the Conference Board around middle of May put Canada's three oil rich provinces on top of the world in terms of economic performance. The report places Alberta, Saskatchewan and Newfoundland -- the three oil producing provinces -- in that order as the top performers with A-plus scores across indicators such as per capita income, economic growth, unemployment and productivity. They are the only jurisdictions rated to have A-plus economies. Alberta is "class leader," says the report with 2013 per capita income that was $10,000 higher than Norway, the top-ranked country in that indicator. For the rest of the country the news was not so stellar.

What the above narrative clearly suggests is that while the 31 subsectors (of Bank of Canada) of the non-energy export sector need to be promoted with suitable strategies, the increase in production and export of the energy resources, i.e., oil and gas is vital from the point of view of Canadian economy’s restoration to good health in near term and sustaining it in the long term.

However, the growth of the aforementioned two energy resources appears to be getting bogged down in an endless loop of consultation, opposition and procrastination. As Leo De Bever, chief executive of Alberta Investment Management Corp., the largest wealth fund in the country with assets under management of $63-billion, says, “We find it easier to pay somebody not to build something rather than actually build it. There has been a shortage of resolve to build projects.”

De Bever was alluding to opposition to various pipeline projects and oil sands projects. To compound issues there is tardiness is formulating policies that the investors need to know urgently to firm up their investment decisions. For example, investors (Petronas, Shell, Chevron et al) are eagerly waiting on British Columbia’s final decision on the tax regime. As well, the investors are concerned about wage inflation, the tax environment and about Canada’s ability to actually deliver in a timely fashion on environmental assessments.

Besides cost-competitiveness of doing business in Canada (e.g. British Columbia) being crucial, time is of the essence as investor companies are mulling similar projects in Australia, East Africa and the United States. Petronas led consortium is hoping to set sail its first shipment of LNG by 2019 before a number of Australia’s brownfield projects start ramping up. Analysts say that some South Korean investors are already gravitating towards U.S. projects.

Then there is the proposed long term multi-billion dollar oil and gas agreement between Russia and China which Russia’s president Putin is going to pursue aggressively. If this agreement gets concluded, it would mean China’s financial capacity and need to import these resources from other countries like Canada would get that much reduced. Which would in turn mean the companies intending to invest in Canada may like to change their minds.

On the flip side, the Ukraine crisis has got the Europeans to clearly articulate their desire to source their long term energy needs from Canada (and US). This is a godsend opportunity for Canada to latch on to and expedite the necessary approvals process associated with oil and gas and pipeline projects.

Just to give an idea on negative impact of ‘endless cycle of consultations’, as oil sands projects stall and crawl, Canadian producers have lost as much as $30-billion annually due to discounts on their blend of crude in the past few years. While spreads have narrowed over the past 12 months there is much more at stake. According to energy consultancy IHS CERA if oil sands production reaches 3.8 million barrels per day in 2025, the bitumen’s contribution to Canadian GDP could nearly double, and a third more jobs could be expected.

“Between 2012 and 2025, oil sands’ contribution to Canadian GDP could grow from $91-billion to $171-billion,” the IHS estimated in a report published this year. “This would be like adding an economy the size of Saskatchewan today to Canada by 2025. Oil sands could also add over one-quarter of a million more jobs, contributing to 753,000 jobs in Canada in 2025.”

To address the concerns around environmental impacts of oil sands development, Alberta already has in place stringent measures and more are expected. This should blunt criticisms brought forth by the environment-activists. As regards carbon emission issue, an independent group of scientists/experts are challenging the White House National Climate Assessment (NCA) issued in early May. In their view, the foundation of the NCA is a "masterpiece of marketing" that crumbles like a "house of cards" under the weight of real-world evidence.

And, in regard to the issue of opposition by the aboriginals to the various oil and gas and pipeline projects, the legal experts say that as for aboriginal communities, they need to recognize that their right to be consulted doesn’t negate the government’s power to make decisions.

Summary: Energy (oil and gas) is a vital component in the context of restoration and sustainability of Canada’s economy and standards of living associated with this first world country. The companies in Canada, who wish to implement the various oil and gas and pipeline projects, and the Federal and the Provincial governments must expedite the approvals’ process. The window of opportunity for Canada is NOT going to be there for ever, therefore, it would be a criminal folly if they fail to capitalize on the opportunities presented to Canada by the global situations.

CANADA’S CURRENT CHALLENGES AND DILEMMAS AND WHY CANADA IS STRUGGLING TO COPE WITH THEM?

Canada, a G-7 country, has had a good run – generally – in terms of progress and prosperity over the last four to five decades. Canada can be proud of the AAA rating of its economy, consistent ranking in top five or six in terms of best country to live in, happiest country, best cities and so on. Canada performed the best, amongst G-7 countries, during the recession of 2008 and subsequent years. All in all, quite a solid performance!

                

However, of late Canada is finding itself to be struggling to meet current major challenges and dilemmas. What are these major challenges and dilemmas? These could be summarized under the following buckets:

·       Economic

·       Political

·       Societal

·       Other

The main reasons Canada is struggling to cope with them can be distilled down to following:

-      Apparent conceit (misplaced and silly, of course) on the part of the members of the majority community of Canadians, who are in the decision making positions, that they know best, and their stubborn unwillingness to learn from others (other races, other countries)

-      Political expediency, and

-      Tardiness (including benign slothfulness of the populace psyche).

We would return to the effect of how these factors are negatively impacting Canada’s interests; however, let’s first look at the listing of challenges/dilemmas under the above four categories:

Economic: Canada is on way to balance its books – the present government is quite confident that it will present a surplus budget in 2015. On the surface things may appear to be quite hunky dory but when you dig deeper you would find some issues – issues that have the potential to cause deleterious effect of varying degree over the long run. These are:

-      Exports in general failing to pick up to the extent it was expected to (uneven performance)

-      Commodities’ export struggling (lack of outlets, lack of new market, drop in international demand)

-      Employment numbers moving more like stock exchange indices rather than in a predictable manner with decline in (quality) full-time jobs

-      Too much fiscal conservatism of Conservatives (which is proving more counter-productive than helpful)

-      Putting all eggs in one basket (too much dependence on US)

-      Over-dependence on consumption numbers of China’s economy and/or investment flowing from China to Canada (this brings in its wake concerns and apprehensions)

-      Sustainability of welfare schemes in its present form (due to changing demographics and consequent changes in revenues etc)

Political:

-      Party ideologies swinging from one end of the spectrum to the other (from very conservative/free market ideology to liberalism to confused egalitarianism)

-      Failure among Federal parties to align on where Canada’s interests actually lie

-      Ottawa and some Provinces failing to align on where Canada’s interests actually lie (misalignment on national priorities, action plans etc)

-      Unnecessary spats between Executive and Judiciary and supposedly autonomous bodies, like, Federal Election Office etc

-      Misalignment with prevailing leadership of USA (the President, its various Secretaries)

-      Lack of well thought out strategies vis-à-vis different global regions, countries, issues [often strategies appearing to be getting modified based on ideology (and interests) of party in power in Ottawa and/or Provinces rather than furthering Canadian interests]

-      Threat of radicalism (and the measures required to deal with them)

-      Not so competent politicians (e.g. ostensible lack of understanding of fundamentals of Canadian economy, lack of grasp of issues staring in the face and so on)

Societal:

-      Changes in age demographics (increasing geriatric component of the population which brings different set of challenges for the society)

-      Changes in population structure (growth of certain ethnic groups which could cause serious issues down the road)

-      Widening gap between the rich and the poor

-      Declining standards of welfare schemes, services (including pension plans, health care etc because of funds failing to keep pace with the demand)

-      Increasing liberalism on various issues like LGBT and questions/scenarios they are raising/creating

-      Atomicity of familial structures, changes in family concept

-      Activism carried out by different interest groups

-      Explosion of social media

Other:

-      Increasing income gap between rich and poor

-      Decline in the corporate leadership competence

-      Absence of deep pocketed Canadian investors

-      Global issues like climate aberrations (aka climate change)

It would be naive to expect that idealistic situation would prevail in Canada and there would be perfect harmony and alignment among political parties of all stripes – at Federal and Provincial levels – and all the issues would get sorted out nicely and smoothly, that there would be competent people at the right places at the right time and so on.  

But the reality is something else: there are some basic factors that seem to be exacerbating the situation. These could be traced to be stemming from three items listed at the beginning of this narrative. How these factors are negatively impacting Canada currently and can impact in future will be dealt with in a separate blog. Stay tuned!