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.

CANADIAN ECONOMY 2014 AND BEYOND: ISSUES, AND ACTIONS REQUIRED

The Bank of Canada (BoC) gave its latest assessment of Canadian economy in its Monetary Policy Report of 22 January 2014; some of the key points of the Report are:

·       Inflation in Canada has moved further below the 2 per cent target. This is due largely to significant excess supply in the economy and heightened competition in the retail sector. The path for inflation is now expected to be lower than previously anticipated for most of the projection period.

·       The Bank expects inflation to return to the 2 per cent target in two years or so, as the effects of retail competition dissipate and excess capacity is absorbed.

·       The United States will lead the way, helped by diminishing fiscal drag, accommodative monetary policy and stronger household balance sheets. The improving U.S. outlook is affecting global bond, equity, and currency markets.

·       In Canada, economic growth improved in the second half of 2013. However, there have been few signs of the anticipated rebalancing towards exports and business investment.

·       While we are doing more work to understand the wedge between the level of Canadian exports and that of foreign demand, this remains difficult to explain. We are therefore taking a conservative approach to our forecasts for exports, and assuming the wedge will remain.

·       That said, the U.S. recovery is becoming more broad-based, including higher investment spending by companies, and that, as well as the recent depreciation of the Canadian dollar, should help to boost exports. This, in turn, should lead to stronger business confidence and investment here in Canada.

·       Meanwhile, recent data have been consistent with the Bank’s expectation of a soft landing in the housing market and a stabilization of household indebtedness relative to income.

·       Real GDP growth is projected to pick up from 1.8 per cent in 2013 to 2.5 per cent in both 2014 and 2015. This implies that the economy will return gradually to capacity over the next two years or so.

·       Although the fundamental drivers of growth and future inflation appear to be strengthening, inflation is expected to remain well below target for some time, and therefore the downside risks to inflation have grown in importance. At the same time, risks associated with elevated household imbalances have not materially changed.

Basics of Canadian economy:

-     30% of GDP comes from exports
-     >60% from internal consumption

GDP contributors by Sector:

-     ~11% of GDP comes from manufacturing
-     ~8% comes from mining, quarrying and oil or gas extraction
-     ~79% from service sector (including public administration)
-     ~2% comes from agriculture, forestry, fishing and hunting

Some salient issues vis-a-vis Canadian economy:

Ø  As BoC mentioned, the wedge between the level of Canadian exports and that of foreign demand;

Ø  Strength of Canadian Dollar vis-à-vis US Dollar and other major currencies including Korean Won;

Ø  Reluctance on part of big capital owners (companies, individuals) to invest (the reasons need to be understood and addressed – more on this later), hence lack of multiplier effect in the economy;

Ø  Dis-inflation;

Ø  Too much dependence on US economy’s health;

Ø  Sluggishness creeping in China’s GDP growth (hence impacting consumption of goods and therefore import of goods from other countries, including Canada);

Ø  Absence of federal government/manufacturing industry/agriculture/service sector coordination and policy making (there is reasonably good coordination between mining, oil and gas and federal government though);

Ø  Extremely tardy progress on providing finality re: investment/export avenues (e.g., oil export, LNG export);

Ø  Slow turnaround in European Union’s economic health.

Salient list of actions required by Federal/Provincial Governments to infuse more vigor in Canadian economy:

-     Review export items vis-à-vis existing export outlets and promote these exports through suitable strategizing and free trade agreements, bilateral trade agreements;

-     Review export items vis-à-vis new and potential export outlets and promote these exports through suitable strategizing and free trade agreements, bilateral trade agreements (look for new regions, like, South America, Africa and untapped Asian regions) and adding new items;

-     Devise policies that encourage manufacturing/production of those products that have export potential in existing and new markets (example, bitumen, natural gas, high-tech items);

-     Have more cohesive and inclusive federal government/manufacturing industry/agriculture/service sector coordination;

-     Promote innovation in the industry in a big way through incentives;

-     Encourage big capital owners to invest – have continual dialogue and make necessary adjustment in policies (conclude reviews quickly, conclude deals with provincial agencies, first nations tribes in an expeditious manner rather than a process that takes forever to complete, or, sometime, never reaches any conclusion);

-     New investments would result in more employment and hence have multiplier effect of higher consumption;

-     Subtly encourage consumption (not necessarily in housing sector but other areas which won’t load the national debt situation)

-     BoC may consider lowering interest rate and/or engage in some sort of quantitative easing;

-     Stimulus spending should be kept as one of many options of last resort;

-     Create an optimistic environment rather than that of impending gloom and doom (one of the key requirements would be that the political parties would need to talk less in inflammatory and fear mongering tone, less recriminations and uttering nonsense)

Summary:

Other countries too are facing similar situations as Canada faces and, therefore, they too are considering many of the abovementioned strategies and actions. Therefore, the window of opportunity is short and there is lot of competition out there. If Canada wants to maintain its pre-eminent position within the G-7 nations and international comity at large, Canada would have to act quickly and decisively both at Federal and provincial levels in a coordinated manner without the political ideologies inhibiting such coordination. There are already signs of wear and tear at some aspects of social support and quality of life which Canada is famous for and proud of; if Canada does not act soon, things would get worsened and some damage may be irreparable.