After riding a crest of investment spending which was augmented by strong growth of energy revenues, the Newfoundland and Labrador economy appears to have hit the beach with a thud.

Despite robust growth of capital spending (49.4% year over year) in first-quarter 2009, plunging energy prices plus declining petroleum production have caused the value of the province’s energy exports to drop by 36% year over year and total manufacturing exports to fall by 29%.

This weakness in resource revenues has had a depressing impact on total employment.

Compared to 3% year-over-year growth in total employment in May of 2008, in May of 2009 it contracted by 5.3% primarily due to significant drops in employment in manufacturing (-20.4%), public administration (-12.2%), forestry (-11.0%) and retail trade (-10.1%).

Despite the progressive weakening in Newfoundland’s employment growth over the past year, housing demand has remained quite robust due in part to a reversal of the province’s chronic pattern of out migration which started in first-quarter 2008 and has continued into 2009.

Year to date, the value of residential building permits is up by 30%. And while sales of existing homes have dropped by 12.4%, average house prices were ahead by 14.7% year over year in May compared to a 0.2% increase for the country as a whole.

Looking forward, Newfoundland’s economic health should be reinforced in the near term by the sustained capital spending on projects such as the Vale Inco nickel processing facility in Long Harbour; the development of the North Amethyst oil field (part of the White Rose Expansion); and upgrades to the Come-by-Chance Refinery , according to the recently released Major Project Inventory compiled by the Atlantic Provinces Economic Council.

Looking further ahead, the province’s economy should rebound in 2010 due to the impact of a pickup in petroleum prices, plus a significant increase in spending to develop the Hebron project, and possibly a decision to go forward with the Lower Churchill hydroelectric project.

Gross Domestic Product (GDP) Growth – Newfoundland and Labrador vs Total Canada

Data source: Statistics Canada/Chart: Reed Construction Data – CanaData.