Although it looked for a time this past year as if Alberta might escape a recession, all indications are that the province will join its Canadian peers in sharing the pain of the global downturn.

Plummeting commodities prices, combined with a steady decline in residential real estate values, have considerably darkened the province’s economic outlook for 2009.

“The supporting pillars for growth are not there,” says Pascal Gauthier, an economist with Toronto-Dominion Bank in Toronto. “The housing market is contracting and private-sector business projects and investments are being put on ice, taking billions of dollars out of the system for 2009 and beyond.”

Most economists are calling for Alberta’s economy to contract this year, projecting that real gross domestic product will decline by 0.5%-2% in 2009, after posting real growth of 1%-2% in 2008. A minority of economists believes that the province can avoid a pullback this year, and might hit real GDP growth of 0.5%-2% in 2009.

Among the more optimistic about Alberta’s outlook is Robert Hogue, senior economist with Royal Bank of Canada in Toronto. “There are still enough projects to keep work going in Alberta,” he says.

The province’s economic fortunes, however, depend heavily on the direction of commodities prices, which in recent months have been volatile in the extreme. Crude oil prices have fallen from a high of US$147 a barrel in mid-2008 to a low in the mid-US$30s by the autumn of 2008 before recently bouncing back to the US$40-US$50 range. Natural gas prices have also fallen sharply.

Economists’ opinions differ on how long it will take for oil and gas prices to rebound — or, indeed, if energy prices have further to fall. They do agree, however, that eventually energy prices will begin to rise, once North American and global economies hit bottom — possibly as early as the second half of this year. No one is expecting oil to return to the dizzying highs of 2008 anytime soon.

“Crude oil overshot on the upside, and now it’s overshooting on the downside,” says Todd Hirsch, a economist with ATB Financial in Calgary. Hedge funds and other speculators are contributing to the dramatic sell-off in energy prices, he says: “Somewhere, behind all this noise, there lies the reality of global supply and demand fundamentals, and eventually the price will move up to reflect that reality.”

In the meantime, energy companies have moved quickly to postpone or cancel major projects in the oilpatch, reacting not only to lower energy prices but also to tighter credit conditions and the Alberta’s new resources royalty regime. This last item has led to companies moving projects to neighbouring provinces. To help oil companies deal with the downturn, the Alberta government has decided to delay implementing the royalty regime for some new oil and gas projects until 2013. Existing projects are still subject to the new framework.

In tandem with the mothballing of major projects, Alberta’s residential real estate market is undergoing a pronounced retreat after several years of significant appreciation in home prices. Housing starts in 2008 were down by 50%-60% compared with the previous year, and home prices were down in the neighbourhood of 15% year-over-year. Economists are expecting continued softness this year.

“The housing market has completely stalled in the past six months,” says Robert Kavcic, an economist with Bank of Montreal’s investment banking group in Toronto.

Alberta’s commercial real estate sector, for its part, has so far managed to resist the effects of the downturn. But, Kavcic says, it’s just a matter of time before negative economic forces affect that sector as well.

Other sectors are feeling the cascading effects of weakness in the oilpatch and in construction. According to Statistics Canada, retail sales in Alberta were down by 3% year-over-year to $5 billion as of November 30, 2008, and manufacturing sales were down by 8.8% to $5.5 billion in the same period.

Cancelled projects and a declining construction sector, along with weakness in other sectors, are also causing a sharp rise in job losses.

In December, the unemployment rate in the province rose by 0.7% to 4.1%, which nevertheless represents the lowest jobless rate among all the provinces and is well below the national average of 6.6%. However, declining employment numbers indicate that Alberta may no longer be the job-generating powerhouse that it has been in recent years.

@page_break@“This bottleneck, in terms of access to skilled labour,” says Jason Brisbois, chief economist with the Western Centre for Economic Research at the University of Alberta in Edmonton, “which has been a focus of the construction industry and of the government for the past two years, is apparently no longer an issue — at least, not in the construction sector.”

A survey of firms in Alberta published in December by the WCER indicates that hiring intentions for the first quarter of 2009 were lower across all major sectors than they were in the preceding quarter.

Despite rising unemployment figures, net migration into the province is increasing. “I would attribute that to the sharper economic downturn in Ontario and elsewhere, as compared with Alberta,” says Hirsch. The net migration increase is a turnaround from the trend in 2007, when a scarcity of affordable housing drove many job seekers out of the province despite the hot economy.

The fall in the price of oil and the shelving of major oilpatch projects, however, means a significant decrease in royalty revenue for the Alberta government. The province had been projecting a surplus of $8 billion for fiscal 2008-09, which was later revised to just $2 billion. Many observers feel that the province will finish the fiscal year at the break-even point.

ENVIABLE FISCAL STRENGTH

But with no debt and billions in contingency funds, Alberta is considered to be in one of the best situations in all of North America, in terms of having the fiscal strength to deal with a downturn. Even so, the province is somewhat constrained by political realities. By law, the Alberta government can’t run a deficit, and raising taxes during a recession would be politically unpopular. Yet the province will be under pressure to join with the federal government in spending money on infrastructure and other economic stimulus.

The Alberta government does have $7 billion in a sustainability fund — a pool of money set aside for emergencies — as well as $6 billion in a capital fund meant for infrastructure spending into which it can tap. There is also $15 billion in the Heritage Fund, although that will be touched only as a last resort.

In any event, experts appear to agree that spending contingency funds won’t be a workable solution if the province endures a lengthy recession.

Despite the negative economic news, most experts feel that the province has the built-in resiliency to withstand the downturn. In fact, many business leaders in Alberta were relieved when the downturn in oil prices and the world economy began to take some of the froth out of the provincial economy in 2008.

In 2006-07 especially, Alberta’s economy had overheated, leading to labour shortages, a spike in housing costs and strains on infrastructure. But with the continuing decline, that relief has been replaced with worry and even gloom, experts says, but not dread.

“Most long-standing companies in Alberta have learned how to live through this scenario,” Brisbois says. “The rapidity with which firms are putting projects in ‘safe’ mode — that is, on hold — is an indication that these downturns don’t come as a shock to big oil developers anymore. They have contingency plans. When commodity prices bounce back, cash flow starts again and the projects are resurrected.”

Adds Hirsch: “There isn’t a sense of panic. Alberta has been here
before.” IE