You might think that a province whose all-important energy exports \u2014 the very thing credited for our dollar being at par with the U.S. dollar \u2014 go almost entirely to the U.S. would look fearfully at the sudden economic deterioration south of the border. But Alberta doesn\u2019t; at least, not much.
Confidence in continued if moderated economic growth remains high in Alberta \u2014 U.S. slowdown or outright recession be damned. Instead, it\u2019s the unrelated factors that weigh most heavily on the economic outlook in Wild Rose Country: low natural gas prices, inflation and the reversing trend of interprovincial migration. If anything, Albertans have more to fear from U.S. politics than the U.S. economy, some observers believe.
\u201cI think a slowdown in the U.S. will have some, but not a very big impact,\u201d says Adam Legge, director of research with Calgary Economic Development<\/b> in Calgary. In essence, this is because, although the U.S. takes all of Alberta\u2019s exported oil, the \u201cblack gold\u201d is the most portable of energy sources and is thus priced on a global basis.
So, even if demand sags in the U.S. \u2014 and, historically, energy demand has been inelastic in the short term \u2014 it continues to accelerate in developing economies. \u201cWhen countries such as India are introducing a $2,500 car,\u201d Legge says, \u201cyou have to think oil demand will increase.\u201d
As for natural gas, the other major component of the energy equation, its North American price depends significantly on weather patterns and has been mired in a slump for almost two years. The consensus in the oilpatch is that it has nowhere to go but up.
Put simply, Alberta\u2019s economic prospects have more to do with the famously cyclical energy industry than with the U.S. business cycle \u2014 and the two are not in sync.
Even the much publicized increases in oil and gas royalties, which take effect in 2009, will have no effect in 2008 beyond a possible drilling spurt before the rates go up. After that, their effect will rank behind cost increases, which includes the exchange rate on US$ to C$ and the price of natural gas.
That said, economic forecasting has become interesting in Alberta for the first time in ages. For at least four years, the indicators have shown a boring sameness, almost universally trending upward.
Today, however, there are a number of trend lines going in the opposite direction: oil and gas exploration activity and share prices; home values and starts; and population movements, for starters. The overall momentum continues upward, but this boom is clearly in late innings.
\u201cI\u2019m expecting the Alberta economy to slow down pretty noticeably in 2008,\u201d says Todd Hirsch, senior economist for ATB Financial<\/b>in Calgary. \u201cIt won\u2019t be anything that looks like the traditional bust, however. Just a nice slowdown.\u201d
\u201cNice\u201d slowdown? Given the labour shortages and cost escalation of the past few years, even the business community favours a bit of a breather right now \u2014 time to fill vacant positions, cut down on overtime costs and catch up with back orders.
There is still ample momentum: oilsands projects committed during the energy cycle\u2019s peak in 2006, and now in mid-build; 71.9% of adults are in paid employment; hourly wages have jumped 8.8% this past year; and a cash-flush provincial government that is belatedly addressing its infrastructure deficit.
\u201cAlberta is pretty well positioned to weather a short, contained recession in the U.S.,\u201d Hirsch adds. \u201cBut the key words here are \u2018short\u2019 and \u2018contained.\u2019 A lot of it has to do with oil prices. Regardless of the offsetting consumption in China and India, the price of crude oil will still be affected negatively if the U.S. economy really crashed hard. I\u2019m not expecting that kind of scenario.\u201d
Nor are most other economists. The major banks\u2019 latest forecasts for growth in gross domestic product in Alberta this year range from CIBC<\/b>\u2019s 4.7% to TD Bank Financial Group<\/b>\u2019s 2.8%. Locals tend to credit TD with paying the closest attention to what\u2019s going on in Alberta. TD chief economist Don Drummond and his team were the ones who made the observation back in 2003 that GDP per capita in the Calgary-Edmonton corridor (what they called the \u201cWestern Tiger\u201d) was not only leading Canada but had surpassed the U.S. This at the time of a US70\u00a2 loonie. The fact that TD now offers the most conservative forecast going for the province may be telling, but it\u2019s still far from recessionary.
@page_break@\u201cOne of the dynamics going on here that I\u2019m not sure the big banks are tracking very well is interprovincial migration,\u201d Hirsch says. \u201cAlberta has been bleeding people to Saskatchewan, of all places, a province that has traditionally been a source of all kinds of young, educated workers for us.\u201d
Indeed, over the latter half of 2007, Alberta showed net out-migration, not only to its neighbour to the east but also to British Columbia and the Atlantic provinces. These were the very places on which Alberta employers drew heavily in the early stages of the 1998-2005 energy boom, which leads to the conclusion that these are the same people returning \u201chome\u201d as job prospects there improve.
This trend reversal in interprovincial migration was observed by Statistics Canada in the third quarter of 2007. For the first time since the fourth quarter of 1994, Alberta posted negative net interprovincial migration of 3,300.
\u201cPerhaps, on the surface, that speaks poorly of Alberta\u2019s powers of retention,\u201d Hirsch says. \u201cBut for most migrants, leaving their home province was never a choice they wanted to make. They simply followed the opportunities.\u201d
Those with aging relatives in need of care, for example, are going to want to return home at the soonest opportunity.
But the trend also reflects the way cost-of-living increases have altered the personal economic advantages of moving to Alberta. At the start of 2005, the average home in Edmonton cost about $200,000; in Calgary, maybe $250,000. Rents were similarly moderate. Combine that with nation-leading wages and the argument for relocating to Alberta was very compelling. Today, however, home prices are pushing double those figures, despite the real estate market correction of the past six months. The economics of moving to \u2014 or staying in \u2014 Alberta are no longer as attractive.
Says Hirsch: \u201cWith in-migration from other provinces falling, sectors of our economy will be affected \u2014 things such as retail sales, services, housing, and so on.\u201d
Thanks to still-growing immigration and Canada\u2019s highest provincial birth rate, Alberta\u2019s population will continue to grow, but not at the almost 3% pace of recent years.
Considering that recent population increase and a consumer price index that has been running at 4%-5%, retail unit sales per person were essentially flat in 2007, even as the dollar value rose 7.6% in the 12 months ended Nov. 30, 2007. This compares with the astonishing 16% retail sales growth in 2006. Those fast-rising incomes have gone into serving larger mortgages and rental payments instead.
Ironically, it\u2019s in the see-saw housing market that the slowdown has been most apparent to ordinary Albertans. Following a 50% hiccup in urban home prices in the 12 months ended June 30, 2007 \u2014 values at one point were rising in the tens of thousands per month \u2014 the market retrenched over the second half of 2007.
Today, both Calgary and Edmon-ton have the better part of a year\u2019s worth of unsold inventory on the market, with investor-bought condominium towers still going up. Boom towns such as Grande Prairie, which have been hard hit by the slowdown in gas drilling, have half-framed suburban palaces sitting on their fringes.
With the population still rising (if slowly) and incomes still growing, both TD and the Canadian Real Estate Association expect real estate price appreciation in 2008 in the order of 10%. But the market has a number of kinks to work out. Canada Mortgage and Housing Corp. predicts housing starts \u2014while still leading the country on a per-capita basis \u2014 will fall by 12% in 2008, which should further contribute to the slowdown. Or relieve the labour shortage, depending on your perspective.
Factor in the out-migration, though, and the labour market will probably remain tight this year \u2014 the unemployment rate hit a new low of 3.2% in December \u2014 and wages will continue their upward trajectory. Forecasts for employment growth range from Bank of Nova Scotia<\/b>\u2019s 1.9% to the 2.5% foreseen by TD and CIBC. As for disposable income, economists at Royal Bank of Canada<\/b> predict an increase of 6%, down from an estimated 8.7% increase in 2007.
With natural gas drilling and housing soft, the Alberta economy\u2019s driver will be non-residential construction, especially of oilsands plants and their attendant facilities (upgraders, pipelines, petrochemical plants) and public infrastructure. With the former concentrated around Fort McMurray and the \u201cupgrader alley\u201d around Fort Saskatchewan, northeast of Edmonton, companies\u2019 expectations for growth are stronger in the northern half of the province than in the south, says Ted Chambers, research professor with the University of Alberta\u2019s Western Centre for Economic Research. The centre conducts a quarterly survey of business sentiments, the most recent in late November and early December, when two-thirds of the 400 respondents said they expect revenue growth in 2008, including 40% who expect a double-digit increase over 2007 revenue.
In fact, the oilsands continue to be the largest concentration of capital investment in the world, with an expected $35 billion being spent in 2007 and 2008. Anticipated legislation to limit emissions could actually increase that figure by spurring investment in things such as carbon capture and sequestration.
Unfortunately, not all of that spending is staying in Alberta, or even in Canada. At the unveiling of Connacher Oil & Gas Ltd.\u2019s new Great Divide project south of Fort McMurray this past August, for example, company managers proudly pointed out how they were containing costs: a boiler made in Nebraska, huge tanks from Washington state. Others are sourcing equipment and even whole structures from the Far East.
\u201cForeign exporters are benefiting more than other Canadian provinces from Alberta\u2019s supercharged economy,\u201d CIBC economists lamented in a provincial forecast in October.
More worrying still for the Alberta government, majors such as EnCana Corp., Husky Energy Inc. and Marathon Oil all made deals last year that will see unprocessed bitumen (heavy oil with soil and other contaminants still in it) shipped to retooled refineries in the U.S. Such is the fallout from the high C$ and Alberta\u2019s inflationary spiral.
The wild card for Alberta is not the U.S. economy so much as the U.S. political landscape in this election year. The University of Alberta\u2019s Chambers foresees a convergence between the steadily building environmental movement and the drive for energy security that could cut the oilsands out of the economic equation.
\u201cEnvironmentalism linked to border security \u2014 and one key element of border security is greater energy self-reliance,\u201d Chambers says, \u201chas a lot of implications for Alberta.\u201d
Already over the past year, California has moved to ban the sale of \u201ccarbon-intensive\u201d fuels, including those derived from oilsands. Meanwhile, there have been environmental protests in the U.S. Midwest, where refineries are being refitted to handle oilsands feedstock, and in Washington, D.C., during Alberta Premier Ed Stelmach\u2019s recent visit.
Regardless of who wins the U.S. presidential election, Chambers foresees the emergence of a wide-reaching energy self-sufficiency plan \u2014 he compares it to the Manhattan Project \u2014 that would include conservation, expansion of renewable sources and domestic oil shale, and limits on carbon-intensive fuels. Such a transition might take 15 years to 20 years, but any policy announcements in that direction could have a chilling effect on oilsands investment far sooner, and would pull the last major prop out from under Alberta\u2019s long-running expansion.
So, what could the province do to escape this fate?
\u201cIf I was the Alberta government,\u201d Chambers says, \u201cI would be making absolutely every effort to address the emissions problems that are associated with the oilsands \u2014 and do it quickly.\u201d\tIE<\/b>
<\/p>\n","protected":false},"excerpt":{"rendered":"
Economic growth will continue but be tempered by low natural gas prices, inflation and negative interprovincial migration<\/p>\n","protected":false},"author":4,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":[],"categories":[3013,3130],"tags":[2684,2446],"yst_prominent_words":[],"acf":[],"_links":{"self":[{"href":"https:\/\/www.investmentexecutive.com\/wp-json\/wp\/v2\/posts\/324975"}],"collection":[{"href":"https:\/\/www.investmentexecutive.com\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.investmentexecutive.com\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.investmentexecutive.com\/wp-json\/wp\/v2\/users\/4"}],"replies":[{"embeddable":true,"href":"https:\/\/www.investmentexecutive.com\/wp-json\/wp\/v2\/comments?post=324975"}],"version-history":[{"count":1,"href":"https:\/\/www.investmentexecutive.com\/wp-json\/wp\/v2\/posts\/324975\/revisions"}],"predecessor-version":[{"id":362132,"href":"https:\/\/www.investmentexecutive.com\/wp-json\/wp\/v2\/posts\/324975\/revisions\/362132"}],"wp:attachment":[{"href":"https:\/\/www.investmentexecutive.com\/wp-json\/wp\/v2\/media?parent=324975"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.investmentexecutive.com\/wp-json\/wp\/v2\/categories?post=324975"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.investmentexecutive.com\/wp-json\/wp\/v2\/tags?post=324975"},{"taxonomy":"yst_prominent_words","embeddable":true,"href":"https:\/\/www.investmentexecutive.com\/wp-json\/wp\/v2\/yst_prominent_words?post=324975"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}