St. John’s Board of Trade Outlook 2021, Day 2: Feet on Fire

Finance Minister Siobhan Coady assured the Board of Trade that the banks and credit agencies are happy—and that good times are on the way.

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With light finally appearing at the end of the Covid-19 tunnel, the mood at the St. John’s Board of Trade Outlook 2021: The Road to Recovery conference was positively buoyant. Between optimistic economic projections for a post-pandemic recovery and warm tidings for industrial interests from federal and provincial politicians, the message was clear: the best is yet to come. (After a little more pain, of course.)

“The Road to Recovery” was held via Zoom for about six hours over the course of June 7 to 9. Monday featured remarks from Premier Andrew Furey and federal Natural Resources Minister Seamus O’Regan, as well as a keynote address and brief question and answer session with Prime Minister Justin Trudeau. Tuesday saw provincial Finance Minister Siobhan Coady discuss the province’s financial situation following the May 31 budget, as well as a presentation on national (and international) economic trends with Doug Porter, Chief Economist and Managing Director for BMO Financial Group. Finally, on Wednesday, a panel of representatives from the Fisheries Council of Canada, the Newfoundland and Labrador Oil and Gas Industry Association, Mining Industry NL, the Newfoundland and Labrador Environmental Industries Association, and TechNL shared perspectives on trends, challenges, and opportunities in their respective sectors.

The 2021 conference was an illuminating glimpse into the mood and mindset of the province’s industrial and business interests as Newfoundland and Labrador prepares for a post-pandemic reopening. 

The Independent was in attendance for all three days of this event. What follows is the second of three reports on the week’s discussions. (Our first report on Trudeau’s keynote can be found here.)

The Budget 2021 Roadshow

On June 8, provincial Finance Minister Siobhan Coady sat down with Board of Trade CEO AnnMarie Boudreau to give an overview of the 2021 budget released a week earlier, as well as answer some questions from BoT members. It was a friendly discussion, with Coady reminiscing warmly about her own time leading the Board in the 1990s.

Coady described the provincial budget as focused on “transformation and modernization,” geared towards strengthening the economy, altering the education system, and enabling a post-pandemic recovery.

“It’s time for us to address how services are delivered,” Coady told the Board of Trade. “[Thank you] to the business community for holding our feet to the fire on this.”

As part of these transformations, Coady highlighted the government’s pledge to bring in balanced budget legislation as an important symbolic gesture, and argued it signaled a real commitment to address the province’s structural deficits. She explained that despite the apparent increase in expenditures in Budget 2021-22—largely due to recording federal transfer payments like the $320 million for the oil and gas industry recovery fund, as well as $120 million in Covid contingency funding—provincial program spending remained in check, and the government anticipates returning to surplus by 2026.

Coady also reiterated that there will be continuous program evaluation for core government departments, public service commissions, Crown corporations, and everyone receiving public funds. She also noted that the government, following the recommendations in the Greene Report, would be establishing a Future Fund for the purposes of paying down debt and/or transitioning to a “green economy.” (Coady stated that if the province proceeds with selling any of its public assets, those revenues would go into the Future Fund.)

Other “modernization” efforts the province intends to undertake is a comprehensive analysis and reorganization of Nalcor, and merging other agencies and Crown corporations—specifically, the Newfoundland and Labrador Centre for Health Information—into core government. Coady also said the government will be reviewing all 200 Crown agencies with an eye to similar reorganization. They will also be seeking “joint solutions” with private and non-profit sector partners to establish “alternative service delivery mechanisms” for provincial land registries and the ferry system.

Governance of Memorial University is also slated for an overhaul. Specifically, the province intends to phase out the tuition freeze and open the Memorial University Act to deliver “more autonomy,” which Coady indicated would include changes to tuition models. She added that the province intended to offer needs-based grants to “students who need it.”

The minister also signalled that the province was going to be pursuing a regionalization strategy for municipalities across the province—as championed by both the Board of Trade and Municipalities Newfoundland and Labrador—but did not provide any details about what this would look like. (Asked by Boudreau to address concerns that the budget didn’t contain enough detail about how the province’s plans would actually work, Coady responded that the budget speech was an hour long and contained a lot of material.)

“Hold our feet to the fire on this”: Coady

Coady also highlighted that the budget had already garnered a positive response from bond rating agencies and other banking interests. She noted that a number of agencies were enthused to see the deficit (and program spending) decline, and that RBC, BMO, and TD had expressed that the latest budget demonstrated the government’s seriousness in tackling the province’s fiscal situation. She also said that the province’s cost of borrowing had been reduced, and that the provincial government would be reopening the Financial Administration Act in order to modernize how the state borrows money and otherwise manages the Treasury.

The finance minister was somewhat more coy when pressed about her thoughts on the Greene Report. Coady said she appreciated the depth and comprehensiveness in the Premier’s Economic Recovery Team report, and emphasized its recommendations were undergoing public consultation. She noted there was some crossover between Greene’s recommendations and the provincial budget, and that many of the ideas Greene brought forward were “particularly valuable.”

“We’ll see where the future takes us [in terms of modernizing],” Coady told the conference. “Not just for government, but all of Newfoundland and Labrador.”

Overall, despite repeated references to the severity of the province’s fiscal situation, Coady stressed that the economic outlook for the province was broadly optimistic. Newfoundland and Labrador can expect upwards of 5 percent GDP growth in 2021-22, she said, and there are a number of other positive economic trends coming out on the other side of Covid. Hydroelectricity, hydrogen, ocean sciences, tourism, and the technology sector were all highlighted as particularly bright spots, as well as mining—specifically gold, rare earth minerals, and iron ore—and the offshore oil and gas sector. 

Coady was particularly enthused about the offshore. She noted that CNOOC, BP, and BHP were all engaged in significant exploration while Equinor had just updated its reserve projections for the Bay du Nord project to nearly one billion barrels of oil. She anticipated a rebounding in oil demand in the wake of the pandemic, and emphasized that NL has a competitive advantage given lower carbon emissions at the point of extraction.

The discussion ended with Coady thanking the business community for their support, and encouraging them to continue pressing the government for reform. She reiterated that there would be “opportunities for economic development” for the private sector in the near future as the province will soon be “asking for solutions” on registries and ferry services. No less than three times, she encouraged the Board of Trade to “hold our feet to the fire.”

“Continue giving sage advice to the province and hold us to account,” Coady told the conference. “We’ll get through this. We’ll get this done.”

Consumers are “aching” to spend: Porter

Following a brief break after Coady’s discussion, Doug Porter, Chief Economist and Managing Director for BMO Financial Group, gave a short presentation to the conference about the general economic outlook for post-pandemic Canada.

Overall, the picture he painted was one of cautious optimism.

On the labour market front, Porter said trends in the United State suggest a major labour market mismatch, as workers are reluctant to take up precarious and/or lower-waged jobs as the pandemic subsides. He noted that Canada is likely to face similar issues as the economy fully reopens, and that there may be some upward pressure on wages as employers have to coax people back into the workplace.

One interesting note was the Canadian disposable incomes actually rose 10 percent over the last year—the largest increase in 40 years, especially noteworthy given that this transpired during a recession. Porter attributed this to the combination of federal government support programs and people being constrained in how much they could spend. He described this as an “explosion” in saving, with roughly $220 billion—or 9 percent of national GDP—in “excess savings” accrued across households during the pandemic. He suggested this glut of savings would serve as potential firepower for a post-pandemic recovery, and anticipates that consumers will be “aching” to spend.

Porter suggests the boom is household savings stemmed from the federal government shouldering the main financial burden of the pandemic. While the last fiscal year saw a federal budget deficit of $350 billion, this is expected to drop to $154 billion over the next year as federal support programs wind down in September. While Ottawa’s debt-to-GDP ratio increased from roughly 30 percent to about 50 percent, Porter noted that this was manageable—and well below levels seen in the 1990s.

Monetary policy also played a role in shepherding Canada through the pandemic, and this will have repercussions in the form of higher-than-average inflation.

Porter explained that central banks had slashed interest rates and engaged in “aggressive” quantitative easing, and that this response “worked like a charm.” He told the conference to expect central banks to be very patient before interest rates begin rising again, as they will likely wait for labour markets to more fully recover—anticipated to occur sometime in mid-to-late 2022—before slowly cranking rates back up over the following year. He suggested businesses could be confident in making new capital investments, as short-term borrowing rates are good.

“Policymakers want to generate a boom year”: Porter

On the inflation front, Porter noted that there was a slight risk of markedly higher inflation, but that this was unlikely. More likely is that both Canada and the United States will see higher-than-average inflation over the next few years in the ballpark of three percent annual increases (compared to the average two percent inflation rate of the past decade). Porter argued that this is largely whiplash from the collapse in prices during the depths of the pandemic, but that some of this is also attributable to fiscal stimulus and specific supply chain bottlenecks (e.g. lumber, computer chips, etc.). 

Porter also suggested that central banks will prefer to let the economy “run hot” by keeping interest rates and borrowing costs low in order to generate a strong economic recovery, and in so doing are prepared to tolerate modestly increased inflation. While he noted this strategy may change if inflation hits levels between five and ten percent, ultimately, Porter said inflation is expected to return to average over the next three to five years.

When asked about the next ten years of oil and gas price forecasts, Porter noted he was cautiously assuming an oil price of about $60/barrel for West Texas Intermediate. He noted that there was a risk to prices over the next decade and beyond due to the “war on carbon.” Between new federal legislation aimed at slashing carbon emissions between 40 and 45 percent over the next nine years, shareholder revolts at ExxonMobil and Chevron, a judicial ruling against Royal Dutch Shell forcing them to take climate action, and the International Energy Agency urging a moratorium on investments in new future fossil fuel supplies to meet Paris Accord climate targets, significant pressure is mounting on the global oil and gas industry.

But Porter also noted that most activism was tackling the supply side of the equation. Squeezing supply without downward pressure on demand could, Porter suggested, increase oil prices in the short term.

Overall, Porter’s delivered a message of cautious optimism. A full “return to normal” is at least a year away—best conceived in terms of two six-month ‘transition periods’—and heavily dependent on full inoculation. But, barring serious complications from the Delta variant of Covid-19, travel will eventually return.

“Policymakers want to generate a boom year,” Porter concluded. “Businesses should plan around this.”

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