Downside of resources cycle hits Alberta

As in 1986, when the price of oil fell by 70% over the span of six months, Alberta’s economy is being sideswiped by a global glut in oil in a time of lower demand, Hirsch says. In mid-January, the benchmark West Texas intermediate price for a barrel of oil fell to less than US$30, down by almost 75% from a high of around US$108 a year and a half ago.

Unlike 30 years ago, however, when high interest rates forced widespread mortgage failures throughout the province, today’s low interest rate environment should cushion the negative impact of the low price of oil. “We’re still going to see defaults, but it won’t reach crisis proportions,” Hirsch says.

Hirsch is calling for a contraction in Alberta’s real gross domestic product (GDP) of 0.5% in 2016, following an estimated decline in real GDP of 1.0%-1.5% in 2015.

“Most of the pain will be concentrated in the first half of the year,” Hirsch says, “with some recovery – or, at least, stabilization – around mid-year and, hopefully, a return to very modest growth by the end of the year.”

Robert Kavcic, vice president and senior economist with BMO Capital Markets Corp. in Toronto, for one, expects the price of oil to trade in the US$30-US$40 range this year, barring some external factor such as a global conflict that could lead to a spike in the price.

“We’re not really too bullish on a quick rebound [for oil prices] in 2016,” says Kavcic.

Unemployment in the province is expected to rise to the 7.5%-8.0% level, up from the current 7.0% and above the national average of 7.1%.

After a significant wave of layoffs in the energy sector in the autumn of 2015 and a quiet period over the holiday break, another round of job losses is in the offing, Hirsch fears: “The reality is that companies are going to have to shed more labour. I also expect more mergers and acquisitions activity in [the energy sector] in 2016, with smaller firms being bought wholesale by larger ones. When that happens, you don’t need all that staff.”

The price of oil would need to be at the US$70 level today for oilsands projects to be profitable, Hirsch estimates, although that benchmark will continue to fall as oil producers wring out costs from their operations.

“Probably by [producers’] own admission, firms would say they overhired and paid people too much [during the boom times],” Hirsch says. “[Energy companies] are in the process of ratcheting down costs, and I think a year from now US$60 will be the new ‘we’re OK at’ mark.”

Job losses are having a negative effect on the residential real estate market, Hirsch adds. He expects home prices to fall by 2%-5% in Edmonton, by 5%-10% in Calgary, and by a whopping 20% in Fort McMurray in 2016.

On the other hand, housing starts dropped significantly in December 2015, reaching their lowest level in four years, Kavcic says: “A lot less supply is going up, which should balance out the market. Even so, there’s not a lot of room for prices to rise over the next year or two.”

Commercial real estate also has been hit, with the vacancy rate in Calgary now sitting at 18%. No fewer than five major office tower projects are under construction in the city, launched when the economy was still thriving.

As these projects reach completion, the vacancy rate will only rise, Hirsch says, adding, “Companies are getting attractive lease renewal offers.”

Although provincial in-flow migration numbers remained positive in 2015, Kavcic expects the flow of job-seekers will reverse in 2016 after a decade of Canadians flocking to the province.

“This might be the year that people decide to leave Alberta,” Kavcic says.

The province’s troubled economy represents a challenge for Alberta’s New Democratic Party government in Edmonton, which won a surprise majority last year after four-plus decades of Conservative rule. The NDP has announced a five-year, $34- billion infrastructure spending program – money that will be borrowed – to help boost the province’s economy.

“You can probably make a good case for [the infrastructure program],” Kavcic says. No provincial economy has as great a need, he says, and because the province had no prior debt, it has the power to borrow.

On the other hand, the new government’s revenue-raising efforts, via higher taxes on the wealthy and higher corporate tax rates, have wiped out what was one of the province’s most attractive benefits for entrepreneurs and investors. “A lot of that tax advantage has gone away,” Kavcic says.

Hirsch is skeptical about the new government’s promise to balance the books by 2019. Those plans were predicated on oil prices bouncing back to US$60 a barrel this year. “I wish them luck,” Hirsch says, “but I don’t think it’s entirely realistic.”

On a positive note, the province’s main non-energy sectors – forestry, agriculture, and particularly tourism – should thrive in 2016, thanks in part to the steep drop of another economic measure – the Canadian dollar. Rising confidence in American consumers, who now have more money for travel, is prompting more visits.

“Tourism had its best year ever in 2015,” says Hirsch, who foresees strength in the sector continuing. “It’s not just American visitors driving it, but Canadians taking advantage of the low Canadian dollar and vacationing here.”

ALBERTA

Population: 4,187,166

GDP, 2014 ($bil.): 375.7

GDP, % change: 9.1

2015-16 deficit ($bil.): 6.1

Estimated net Assets ($bil.): 18.4

per capita wage growth, % change, 2015: -1.2

Household disposable income, per capita: $41,686

Figures from latest available reports/estimates

Sources: Conference Board of Canada; Province

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