Losing Balance, Regaining Control

Information gathered from a presentation by Todd Hirsch, ATB Financial's Chief Economist - September 9th, 2015

There have been serious imbalances in Alberta's economy over the past five years or so, and Albertans are worried... we have been relying on high oil prices and a stable and expanding energy sector to grow our economy and province. The recent extended period of lower oil prices is certainly a major contributor to the current economic environment we are seeing in Alberta, and across the nation. Make no mistake, low energy prices is a National issue, not just a provincial challenge! Last year at this time the cost of a barrel of oil was around $97, today we are looking at the mid $40's. Aside from the obvious effect that has on exploration and new capital expenditures, it also affects the Federal and Provincial Governments coffers.

To regain an economic balance, four things need to happen...

1) There must be some rebound in the price of oil. Reaching and sustaining around $60 a barrel should stabilize the industry, and contribute to our economic recovery. There is much debate regarding the question of whether or not we are in an economic recession in Alberta. We will not know for sure until April of next year whether or not we did see two consecutive months of economic retraction as that is when those figures are released.

2) There must be a re-balancing of wages. In the past decade the average earnings in Canada increased 29%, for that same period Albertans enjoyed an increase of 48%... here is the real kicker though, the average wage in the oil and gas industry increased 56%!  With many capital projects being put on hold in the energy sector, there should be downward pressure on wages as more contractors compete for less work.

3) We must see strong performances in other sectors of the economy. Agriculture, forestry and tourism should benefit from the lower Canadian dollar and lower gas prices. The US economy is also on an upswing, including new housing development contributing to the demand of products from our forest sector.

4) The value of the Canadian dollar needs to remain where it is. The lower value of the Canadian dollar is giving a bit of a cushion to lower oil prices, contributes to tourism from other countries and adds value to other exports such as forestry products.

The energy sector will need to adjust to these lower oil prices, and diversifying into other resources and alternate energy will be prudent going forward. I am sure we will find that we indeed have been in a recession this year, the question is to the extent of this retraction. Albertans are a resilient bunch and will persevere through this economic crunch. This should be a modest recession and we will most likely see a below average growth rate in the coming year. Generally people will be cautious in their investment and spending habits in the next few months, however, this should be a softer downturn than we saw in 2009-2010.

The new norm will be lower growth rates, right across the world. The rebalancing of income will start in the petroleum sector and move into other sectors of the economy leading to softer commodity prices, including real estate. Price corrections are most likely inevitable, however, should not be severe.

Alberta Economic Outlook 2015

I had the opportunity to sit in at an ATB presentation by their chief economist, Todd Hirsch, last week for some of his insights into how he see's our economy faring this coming year. Some great information that I will implement with my own thoughts here. To paraphrase Todd, the secret to good "economic forecasting" is to revise it frequently!

First and foremost on our minds is the question of how the orange tide and their political philosophy will influence the Alberta economy. Our political structure over the past four decades has been so entrenched in conservative thought and procedure, it will take some major work to completely change the path we have been travelling. The "machine" that runs each political portfolio within the system has a myriad of components and positions that have been filled by the previous conservative regimes. Making changes within this structure will be a long process ensuring that any major change in philosophical direction will take a fair bit of time and effort. Premier Notley has given us no indication that she sees any major policy changes in our immediate future.

The Alberta Economy has been slowing rapidly with the decline of the price of oil, a major component of our provincial economy. Our GDP growth rate is the lowest it has been in five years, certainly raising the level of anxiety amongst Albertans. We may have not seen the bottom of the market yet, although we have seen the price of crude increase over the past couple of weeks. Investors are still skittish and this nervousness will contribute to the volatility in the market over the next few weeks, leading into the summer. Prices should improve by the end of the year, however, the price will most likely still be lower than the actual cost per barrel of many Alberta projects. There will need to be some major re-adjustments and cost-cutting within the industry and this will be an uncomfortable and painful process possibly leading to more layoffs and lowering of contractor costs.
We will also see a discouraging job environment in all sectors of the economy. The labour market for new graduates will decrease as all industries adjust to the economic slowing process. The rate of "in-migration" to Alberta should also slow significantly as we see a decrease in employment opportunities.

Another concern we should be aware of is the record level of Canadian personal debt, last week at 163.3% of earnings. The good news is that we seem to have reached a plateau with that level.
NOW SOME GOOD NEWS...

The Loonie has decreased in value over the past year, however, this is more of an American Dollar story than a decrease in our own value. Where we are set today is actually good news as it contributes to our value as an exporter, especially to the United States. Costs of goods shipped to the US are lower for them when our dollar is lower. Our economy would be in a far worse position if we were closer to par. The Canadian dollar is in a "monetary easing" position whereas the US is moving into a tightening position.

Our dollar position should also increase tourism from our neighbours to the south. That in combination with lower gas prices at the pump will be appealing for many vacationers, especially folks with travel trailers and motor homes.

Other secondary industries in our province, such as forestry, will have the opportunity to find top notch employees due to the slowing of the oil industry. It is difficult for secondary industries to compete for manpower when oil prices are high. Other industries will also benefit from the low cost of fuel... imagine the increase in the bottom line for the trucking industry.

Although we are in the midst of a slowing economy, Albertans should not be overly worried. That is not to say we should ignore what is going on around us. It is not "business as usual", we should be making prudent, educated life decisions. The biggest threat to the economy is fear... fear leads to irrational decision making. This year will be a flat year for growth as we adjust to the new economic realities, however, we should return to normal levels of growth by 2017.

"My life has been full of terrible misfortunes, most of which never happened" Michel de Montaigne 

 

To subscribe to the Owl, the ATB economic daily outlook, please visit:
www.atb.com/economics