CURRENT ECONOMIC ENVIRONMENT

HIGHLIGHTS

• The economic outlook from the Nova Scotia Department of Finance 2013-2014 budget is for Nova Scotia’s Real GDP to advance +1.3 percent in 2013 followed by +1.5 percent in 2014.

• The March consensus outlook for Nova Scotia’s Real GDP growth in 2013 is +1.6 percent followed by +2.1 percent in 2014. Major projects such as the Maritime Link and vessel construction at the Halifax Shipyard have potential impact over the medium term.

• Ongoing sovereign debt issues in Europe continue to weigh on the global recovery. Europe is in recession. Growth in emerging countries has calmed. US prospects continue to improve but the challenge of fiscal consolidation remains.  Global growth is expected to remain modest as governments in major advanced countries continue to withdraw stimulus.

• Employment in Nova Scotia grew by +0.6 percent in 2012 after several years of minimal change. Since 2008, labour force growth has outpaced employment growth so the unemployment rate remains elevated; 9.0 percent in 2012 compared to 8.8 percent in 2011.

• Retail sales in Nova Scotia have slowed from their levels in the previous two years, similar to the trend in Canada. In 2012, Nova Scotia’s retail sales grew by +1.0 percent. New vehicle sales in Nova Scotia appear to have rebounded in 2012 with the number of vehicle unit sales increasing +6.1 percent the value of new vehicle sales increasing +5.9 percent.

• The re-opening of the NewPage facility is expected to boost export figures for 2013. In 2012, manufacturing sales fell -2.9 percent and international exports were down -14.6 percent; with exports from energy and forestry products declining. Production slowdowns from the Sable gas platform are also expected to be partly offset by the start of production from Deep Panuke in the coming months.  
• Canada’s economy slowed in the 3^rd and 4^th quarter of 2012, expanding at an annualized rate of +0.6 percent in both quarters. Small declines in primary industries, and falling Federal government and military expenditures slowed growth to +1.8 percent in Canada in 2012

GLOBAL ECONOMY

The outlook for the global growth remains subdued. Europe remains in recession, while growth in emerging markets has stabilized. In North America, the withdrawal of unprecedented levels of stimulus continues to weigh on growth. 

Significant monetary stimulus remains in place around the world, and threats to the global economy appear remote for the time being. Progress on fiscal coordination in Europe and the United States remains the main risk to the global outlook.

The IMF global economic outlook (April 2013) is slower than its previous forecast. The European economic outlook faces particular headwinds as governments balance pressures for fiscal austerity with the need to stimulate short-run economic growth.  Although the US and the UK also face steep Budget deficits, they are free from the constraints of a single currency zone, control their own monetary policy and have greater fiscal flexibility in the short run.  The IMF outlook expects that emerging and developing economies will be the primary engines of global economic growth in the short term.  Economic growth leaders in Asia (China, India) are familiar sources of growth; albeit slower than the pace of growth prior to 2007.  The IMF April 2013 outlook expects slower growth in Latin America and the Caribbean, notably Brazil, than its previous forecast but growth is expected to be stronger in both 2013 and 2014 than 2012.

The consensus forecast for world GDP growth is for increase of 3.3 percent in 2013 and +3.9 percent in 2014.

Note: The Nova Scotia Department of Finance monitors private sector forecasts from major financial institutions as well as the Conference Board of Canada, IMF, World Bank, central banks and OECD to prepare a consensus outlook for the world, the US, Canada.  The latest consensus was prepared March 4^th, 2013.

The ECB’s Outright Monetary Transactions (OMT) program and other policy action in the euro zone and the resolution of the “fiscal cliff” in the United States have lowered tail-risks compared to last year.

Momentum for reforms in the euro zone will have to continue through structural reforms to rebalance fiscal priorities and labour competitiveness in the periphery countries, and the core supporting efforts around deployment of European firewalls and steps towards full banking union and fiscal integration.

Japan’s recession is expected to be short-lived with fiscal stimulus and monetary easing boosting growth in the near term.

UNITED STATES

Although the pace of growth in the US remains slow and unemployment rates are above their pre-recession norms, signs continue to point to a strengthening recovery in the US. The labour market and housing markets in particular have shown continued improvement.

The latest estimates suggest US Real GDP slowed to an annualized rate of +0.4 percent in the 4^th quarter 2012.  This followed growth of +3.1 percent in the 3^rd quarter.  A decline in defense spending and weak inventory investments contributed to the slow growth in the 4^th quarter.

Personal consumer expenditures are recovering and US households appears to be winding down deleveraging efforts; shown in declining rates of savings as a share of disposable income and growing real consumer spending.  However, at the same time as US consumers are stepping up the pace of their current purchases, government spending is waning as recessionary stimulus programs conclude and fiscal consolidation begins.

The US housing sector was one of the primary causes of the global financial crisis.  Although it is nowhere near the levels of real construction spending observed at its peak in 2006, the US housing market appears to have turned a corner in 2012.  Similarly, real private sector non-residential investment has improved in the US.

Trade makes up a comparatively smaller portion of the US economy than it does in Canada.  Nevertheless, US export growth has outpaced import growth since the recession.  As a result, US current account and trade imbalances are narrowed compared with their pre-recession levels.

US job losses during the recession reached 8 million compared with their levels in 2007.  Since their trough in 2010, US employment has recovered over two-thirds of the jobs lost, with growth primarily concentrated in private service producing industries.  Goods sector employment remains nearly 4 million below the levels observed in 2007. US government employment has also declined through 2011 and 2012.

The unemployment rate in the US has been falling since 2010 and was 7.6% in March 2013. The falling unemployment rate has been aided by falling labour force participation rate which continued to fall through 2012.

 Note: The Nova Scotia Department of Finance monitors private sector forecasts from major financial institutions as well as the Conference Board of Canada, IMF, World Bank, central banks and OECD to prepare a consensus outlook for the world, the US, Canada.  The latest consensus was prepared March 4^th, 2013.

CANADA

In January, Canadian GDP (measured on an industry basis) grew by +0.2 percent to $1.56 trillion, lead by growth in manufacturing which had declined in the previous month. The Canadian economy slowed in the latter half of 2012 with real GDP growing  at an annualized rate of +0.6% in both the 3^rd and 4^th quarter.

For 2012, the Canadian economy grew by +1.8 percent, the slowest pace since the recession. All private service sector industries (except arts, entertainment and recreation) experienced positive growth. Growth in the goods sector was weighed down by negative growth in primary industries (agriculture, forestry, fishing, mining, oil and gas). Growth in the construction sector was strong at +3.9 percent.  Among the sectors with significant government presence, public administration output declined due to falling Federal government and military expenditure.

By some measures, Canada’s economy experienced a similar recession to that experienced in the US. The duration and severity of GDP contraction between the two countries were similar.  However, the Canadian impacts on employment and residential investment were much more muted and both have recovered beyond pre-recession levels.  Moreover, economic stabilization and other policy interventions were much smaller than their American (or European) counterparts. 

Relatively stable money supply growth and the currency demand fuelled by safe-haven investments have eroded Canada’s external balances (trade, current account) during the recovery.  Among major sectors of the economy, exports are the largest component that has failed to return to real pre-recession levels.

The outlook for the Canadian economy remains modest with real growth projections of +1.8 percent in 2013 and +2.5 percent in 2014. Risks to the forecast are mostly external and downside risks not materializing will be key for Canada’s external trade to improve as the global recovery gains momentum through 2013 and 2014. The primary internal risks to Canadian economy continue to be household indebtedness and a softening housing market. Canadian government and household spending are expected to remain sluggish as both attempt to improve balance sheets.

Note: The Nova Scotia Department of Finance monitors private sector forecasts from major financial institutions as well as the Conference Board of Canada, IMF, World Bank, central banks and OECD to prepare a consensus outlook for the world, the US, Canada.  The latest consensus was prepared March 4^th , 2013.

The Bank of Canada has moderated earlier indications that monetary conditions would retreat to more natural levels. With weak fourth quarter economic growth as well as slowing inflation; the Canadian economy appears to be operating below potential GDP.

NOVA SCOTIA

Nova Scotia’s economic output has lagged the national average for most years of the past decade. In last year’s partial revision to the Provincial Economic Accounts, Statistics Canada revealed that Nova Scotia did experience a recession in 2009 (previous publications had indicated zero change in real output).  Still, Nova Scotia’s economic performance during 2008 and 2009 were stronger than most provinces that were more exposed to the global recession.  In the two years since the recession, Nova Scotia’s economic growth has lagged other provinces on the rebound from more severe downturns.

One of the principle reasons for Nova Scotia’s relatively slow economic growth in recent years has been demographic conditions.  Our total economic growth has been stronger than population growth. Slow growth in total GDP masks real improvements per capita GDP, the indicator of average living standards enjoyed by the population.  

The mining, oil and gas sector and the construction sector both experienced the largest pull back in 2011. Construction of the Deep Panuke platform was winding down and declining production of natural gas from the Sable platform has yet to be offset by the start of production from Deep Panuke.  The construction sector experienced a peak during the 2008/09 recession, boosted by government stimulus and other construction projects, including Deep Panuke.

In 2011, service-producing industries accounted for just over 80 percent of Nova Scotia’s output.  They are typically a source of stability, but not of rapid growth.  Service industries advanced +1.1 percent in 2011 following growth of +1.9 percent in 2010.

Growth in service-producing sectors in Nova Scotia was led by real estate, rental and leasing, transportation and warehousing and other services.  Slight declines were experienced in the arts, entertainment and recreation, accommodation and food and administrative support and waste management sectors.

Nova Scotia’s economic outlook for the 2013-14 Budget Assumptions are tempered not only by short term global uncertainties, but also by factors that are unique to the province.  The restructuring of the forest sector and short term restraint in government spending are expected to keep real GDP growth slower than long run trends.  With limited price inflation (low GDP deflators) in the short term, growth in nominal GDP growth is also expected to fall short of long run trends.

Note: The Nova Scotia Department of Finance monitors private sector forecasts from major financial institutions as well as the Conference Board of Canada, IMF, World Bank, central banks and OECD to prepare a consensus outlook for the world, the US, Canada.  The latest consensus was prepared March 4^th, 2013.

Over the medium term, the outlook has some upside risks; major projects such as Maritime Link and offshore exploration that are expected in the middle of the decade have not been incorporated at this time. The budget forecast includes assumptions around investment in the Halifax Shipyard and subsequent vessel construction, however, these impacts may not materialize as planned; Changes in such a major event can have a noticeable impact on a small economy like Nova Scotia’s.

Consistent with the slow growth in the Nova Scotia economy, employment growth in the province has been weak. In 2012, Nova Scotia’s employment increased by a very modest +0.6% after several years of no growth.

Labour force growth has been stronger than employment growth since 2008, which has help to keep the unemployment rate elevated above prerecession lows. In 2012, the unemployment rate was 9.0 percent and 44,900 Nova Scotians were unemployed.

Consumer price inflation in Nova Scotia has tended to be higher than Canada’s in recent years, partly due to higher inflation for household energy products like fuel oil (which Nova Scotians use in greater quantities than other Canadians) and electricity (which recently experienced a regulated price increase).

Nova Scotia’s inflation has been primarily a phenomenon of the province’s exposure to fluctuations in world oil prices.  Excluding food and energy prices set on global markets, Nova Scotia’s domestically-sourced inflation is moderate and consistent with the Bank of Canada’s target for core CPI growth.

A number of factors, including high energy prices and high levels of debt, could constrain consumer spending in Nova Scotia as well as across Canada over the short term.

In 2012, retail sales in Nova Scotia grew by +1.0 percent to $13.2 billion. The growth in 2012 was slower than growth in 2012 at +4.5 percent and +3.5 percent in 2011. A similar slow down in retail sales was also observed at the national level, with Canada’s retail sales growing by +2.5 percent in 2012 following growth of +4.1 percent in 2011 and +5.6 percent in 2010.

Sales in the motor vehicle and parts dealers sector were flat in 2012, with a -0.2 percent decline in sales compared to 2012. Sales grew at new car dealers by +2.2 percent while sales at used car dealers and automotive parts, accessories and tire stores declined by -18.6 percent and -12.3 percent respectively. Growth in the retail sales sectors gas stations, health/personal care stores and building/garden centres were the main contributors to Nova Scotia’s retail sales growth in 2012. Declining sales at grocery stores and electronics/appliance stores tempered the growth in the retail sector.

Following three years of decline, Nova Scotia motor vehicle units sales increased +6.1 percent in 2012 to 48,703; the value of new vehicle sales increased +5.9 percent to $1.4 billion.

Residential construction investment rose +5.0 percent in 2012 to $2.4 billion. This follows growth of +4.3 percent in 2011 and +11.5 percent in 2010. New dwelling and renovation investment increased in 2012 by +8.0 percent and +5.1 percent respectively.

Non-residential construction declined in 2012, falling -7.1 percent from 2011 with 4th quarter investment in non-residential building construction (seasonally-adjusted) of $196 million. In 2012, institutional and governmental construction investment declined -37.3 percent compared to 2011. Institutional and governmental construction spending is now back to levels more consistent with the pre-recession period in Nova Scotia. Industrial construction increased +59.5 percent in 2012 after a decline of -47.6 percent in 2011.

Manufacturing sales fell by -2.9 percent in 2012 to $10.5 billion after growing +10.4 percent in 2011 and +11.1 percent in 2010. Both the non-durable and durable sectors fell in 2012, -3.0 percent and -2.6 percent respectively. Shipments of seafood products fell by -5.1 percent after increases of +12.0 percent in 2011 and +8.7 percent in 2010. Plastics and rubber products shipments fell by -5.2 percent in 2012 after growth of +20.5 percent in 2011 and +21.3 percent in 2010. Wood products declined -5.1 percent in 2012 following a -14.8 percent decline in 2011.  Non-metallic mineral product shipments increased by +6.6 percent and aerospace shipments increased +3.9 percent.

In 2012, exports fell -14.6 percent compared to 2011 to $ 3.75 billion.  Exports of energy products fell -81.3 percent. Production of natural gas at Sable Offshore Energy product was 2,147.4 million cubic metres in 2012, a -24.1 percent decline from 2011. Some of the drop in international energy exports may reflect greater consumption of Nova Scotia’s natural gas within the Canadian market. Exports from Forestry products and building and packaging materials were -44.0 percent lower in 2012 likely due to temporary closure at NewPage facility and closure of Bowater Mersey paper facilities.

Tourism indicators have been stable for the past few years. In 2012, the number of visitors increased +2.0 percent while the room nights sold fell -1.9 percent.

Source: Economic and Rural Development and Tourism, http://www.gov.ns.ca/econ/tourism/research/

KEY ECONOMIC INDICATORS

Sources: Statistics Canada, Nova Scotia Department of Finance projections, various private sector Forecasts, Industry Canada Trade Data Online
*The unemployment rate does not represent change over the previous period but rather the actual rate for that period.

Sources: Statistics Canada, Nova Scotia Department of Finance projections, various private sector forecasts, Industry Canada Trade Data Online
*The unemployment rate does not represent change over the previous period but rather the actual rate for that period.