Is the worst over for Alberta?

Unemployment levels will remain relatively elevated, real estate prices will be essentially flat and consumer spending will be muted in 2017, economists suggest. However, an increase in capital expenditures in the energy sector, buoyed by higher oil prices, will begin to show positive effects on the broader economy, probably by the latter half of the year.

“We’re going to start to see those factors that were weighing down the economy swing the other way,” says Robert Kavcic, vice president and senior economist in the capital markets division of Bank of Montreal in Toronto. “But we’re not making up for the losses of the past two years.”

The province’s real gross domestic product (GDP) is projected to grow by 2.1% in 2017, following an estimated decline of 3% in 2016 and 3.6% in 2015. An improvement to be sure, but a far cry from the boom period of 2010-14, when real GDP growth ranged between 4% and 6.5% a year.

Fuelling the nascent turnaround is the rising price of crude oil, which was trading in the low to mid-US$50-a-barrel range in mid-January. A year earlier, oil prices had touched lows below US$30 a barrel.

A deal agreed to by OPEC late in 2016 to scale back oil production has boosted prices. As well, the Canadian government’s approval of two pipeline projects and the election of a new president in the U.S. who supports the Keystone XL pipeline project also contributes to improved business confidence in Alberta.

“If [Keystone XL] happens, that would be good news for the province and the country as a whole,” says Prince Owusu, senior economist with the Conference Board of Canada in Ottawa.

Oil prices are expected to average US$55 a barrel through 2017, reaching as high as US$60 by the end of the year. If oil prices surge well above the US$60 threshold, however, U.S. shale-oil production will ramp up again, putting downward pressure on prices.

“U.S. shale production comes online very easily and very quickly, and there’s a lot of shale oil,” Hirsch says. “[That fact] imposes a bit of a ceiling, we think, of about US$60.”

Investment spending in the oilpatch, which plummeted during the downturn in Alberta, will rebound moderately in 2017. Capital will be directed toward existing oil-related projects or those already launched. With oil prices still relatively low, Hirsch says, “there’s not going to be enough incentive to direct spending toward new projects.”

Unemployment, which hit a high of 9% in November, will average about 8.4% for 2017. During the most recent boom, the oil and gas sector “overhired and at high wages,” Hirsch suggests. The energy sector, having shed about 25% of its workforce during the bust, but without cutting oil production, will be cautious about adding to the sector’s employment numbers.

“I don’t think we’re going to see a lot of hiring, and that’s going to be a frustration for Albertans,” Hirsch says.

Consumer spending expectations for the province, not surprisingly, remain weak.

“Over this year and next, we don’t expect wages to rise substantially – wage growth will probably lag behind inflation growth,” Owusu says.

Housing prices in the province, which dropped during the correction, are beginning to show early signs of stabilizing.

“By the latter half of 2017, with confidence returning, the job market bottoming and improving a bit, and economic news turning a bit more positive, we expect to see a turnaround in the housing market as well,” says Robert Hogue, senior economist with the Royal Bank of Canada in Toronto.

The commercial real estate industry, however, continues to struggle, with some 30% of office space in Calgary sitting empty, Hirsch says. In fact, a number of new office tower projects in Calgary, launched during the boom years, still are under construction, exacerbating the problem.

“That is going to drive down prices and leases for companies looking at office space, and that is going to result in a pretty strong pullback in construction activity in 2017,” Hirsch says

The province’s most recent fiscal update forecasts a deficit of $11 billion for 2016-17 – a figure that includes the $500 million the province spent in dealing with the Fort McMurray wildfire last year. The province also finds itself in debt for the first time since 2000.

Hogue, along with other economists, is hoping to see the provincial government lay out a plan to return to balanced books in the upcoming budget.

“Running deficits during recessions is perfectly fine,” Hogue says. “But we will be entitled to see a bit more of a firmer plan for how the government is going to steer its finances toward a more sustainable position.”

A bright spot for Alberta has been tourism, thanks primarily to the lower Canadian dollar. Tourism has been booming over the past two years.

In particular, visits from Americans and Chinese to Alberta are increasing steadily. Last year, a China-based airline began offering the first non-stop flights between Beijing and Calgary, scheduling three a week.

“That’s really going to tap open that Chinese and Asian market for tourism,” Hirsch says.

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