Spotting the "green shoots" in Alberta's economy
Provincial Finance Minister Joe Ceci delivered Alberta's second quarter fiscal update today. The good news: the province's deficit has narrowed from a projection of $10.9 billion in Q1 to $10.8 billion in the second quarter. The bad news: that's still $400 million higher than the forecast delivered last spring. Losses in royalties, tax revenues and fire-fighting costs associated with the Wood Buffalo wildfires are squarely to blame for the gap.
After two consecutive years of recession, GDP is expected to return to 2.3% growth next year, revised lower from a previous forecast of 2.4%. The government is banking on an average oil price of US$45 a barrel (for West Texas Intermediate), which is pretty close to the year-to-date average.
Although Ceci says the economy remains "challenging", the finance minister sees several "green shoots" sprouting throughout the province:
1. Employment data not getting worse
The province added 25,000 jobs in the past three months, a sign that the labour market might actually be improving. In fact, employment in natural resources increased by almost 10,000 in October, the first notable increase since March 2015. Although that doesn't come close to making up for all the jobs lost in the past year, it's a step in the right direction.
Alberta's unemployment rate hit a 20 year high of 8.5% this year, in part due to more people entering the labour market as conditions improve. The province estimates the unemployment rate should start to ease through the remainder of the year, averaging 7.8% in 2017.
The loss of good paying full time jobs in the energy patch has also dragged weekly earnings lower in the province. Year-over-year, incomes are down 1.7%, but that number seems to have flatlined. Despite the declines, wages in Alberta (excluding taxes and payroll deductions) remain over 15% higher than the national average.
2. Population growth still strong
Despite the province's soft labour market, Alberta still has the highest population growth in Canada. Net outflow to other provinces has begun showing signs of easing, while international inflows continue to be strong. The province's relatively young population also means Alberta has a high rate of natural increase (births minus deaths).
3. Housing showing some improvement
Not surprisingly, Alberta's housing market has been less than stellar in recent years, although no where near as bad as many have predicted. After several soft quarters, new housing starts, home sales and home prices have started to show signs of recovery. The government's expectations for new home construction was revised higher for next year, partly due to reconstruction activity in Fort McMurray.
4. Manufacturing on the rise
Manufacturing bottomed in the spring of this year and has also begun to show signs of recovery. Most of the province's manufacturing sector is focused around the energy patch, so those increases in capital spending seen in the oil patch (however modest) should begin to trickle through. Rebuilding efforts in Fort McMurray are also expected to provide a boost next year.
5. Drilling activity finally recovers
Drilling activity hit historically low levels this summer, due in part to unseasonably wet weather. But recent numbers have shown considerable signs of improvement. And that bodes really well for the province's oil field service providers, which remain one of the hardest hit sectors of the energy patch.
6. Oil production meaningfully improves
2016 will be the first time in a long time the province will actually see a dip in oil production. Most of the large oil sands facilities around Fort McMurray were taken offline for almost 6 weeks, adding to the province's declining royalty and tax revenues. But oil production has rebounded nicely since then, and is expected to see strong growth through the end of this decade.
7. GDP growth back to black
The past two years have been nothing short of dismal for Alberta. The economy contracted 3.6% in 2015 and expected to shrink another 2.8% in 2016, making this downturn one of the longest in the province's history. The spring wildfires unexpectedly shaved 1.4% off 2016 GDP numbers but that's all set to improve next year. Real GDP is expected to forecast 2.3% next year, boosted by reconstruction in Fort McMurray, public sector infrastructure spending and (hopefully) an rebound in oil prices.
Although private sector investments are still far below normal, Ceci points out Alberta still sees more private-sector dollars than any other province.
8. At least one pipeline likely to get built
Although the finance minister declined to speculate if and when any new pipelines would be approved, it's obvious additional pipeline capacity will be added over the next few years. The odds are now in favour of TransCanada's Keystone XL (+830,000 bbl/day), Enbridge's Line 3 Replacement (+370,000 bbl/day) and Kinder Morgan's Trans Mountain Expansion (+590,000 bbl/day) actually getting built. Although it's too early to estimate the exact impact on the heavy oil discount, undoubtedly the selling price of heavy oil will improve over the next few years. That should translate into more corporate revenues, which means more royalty payments, higher corporate taxes and more capital investments in the energy patch, all reasons to be optimistic.
Minister Ceci says his government remains committed to staying the course and will slowly return to balance without cuts to health care or education. However, Ceci refused to hazard a guess as to when life in Alberta will to return to "normal", whatever that means.
GOVERNMENT OF ALBERTA ECONOMIC DASHBOARD
GOVERNMENT OF ALBERTA 2016-17 SECOND QUARTER REPORT
STATISTICS CANADA LABOUR FORCE SURVEY, OCTOBER 2016
STATISTICS CANADA PAYROLL EMPLOYMENT, EARNINGS AND HOURS, SEPTEMBER 2016
STATISTICS CANADA THE IMPACT OF LOWER EARNINGS IN ALBERTA ON EARNINGS GROWTH AT THE NATIONAL LEVEL