While the oil and gas sector has taken a dive, other sectors in the province are faring well, absorbing some loses in the labour market
RED DEER, Alta. — The biggest threat to the Alberta economy is uncertainty, not $55 oil, says the chief economist of ATB Financial.
“I really don’t think Albertans should worry about the economy. I am not saying we shouldn’t be prudent and we ignore what is going on because 2015 will be a challenging year for a lot of operators in Alberta and we are expecting the worst growth in six years,” said Todd Hirsch.
ATB Financial expects economic growth of 0.8 percent in 2015, a considerable slowdown from the faster pace of 4.4 percent in 2014.
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“There is a level of anxiety in the province,” he said at the Alberta Agricultural Economics Association annual meeting in Red Deer April 30.
This current downturn with limited growth and oil patch layoffs is not a new experience for long time residents of the province.
“This is a broken record repeating itself over and over again,” he said.
Oil and gas fortunes may have flagged but industries like forestry, tourism and agriculture have rallied.
“Oil and gas is not the only sector in the province. There are other sectors that will do quite well and help offset the softness we are seeing in the petroleum sector,” he said.
Rather than dependency on one commodity, more consideration should be given to diversification within the core industries of agriculture, forestry and energy rather than trying to attract industries that do not fit here.
No one can predict the price of oil but the current situation is not sustainable.
Soft oil prices are due to the decision of OPEC members to flood the world market. There is too much supply hitting the market and insufficient demand.
Saudi Arabia is a low-cost producer and wants to weed out the high cost producers. However, some of the other 11 members of OPEC like Venezuela, Libya and Nigeria are high-cost producers and they cannot play this game indefinitely.
By late summer or early fall, OPEC production will have to pull back because some of its own members’ economies cannot continue to support the Saudi policy.
He anticipates less volatility and oil could go back to $60-65 a barrel by year end.
“That is still a really low price for producers in this province,” he said.
Many companies need $85-90 a barrel oil to break even due to high extraction and labour costs.
The average weekly earnings for Canadians across Canada from 2004-2014 increased 13 percent, but Alberta oil and gas employee wages increased 67 percent for the same period.
“In 2015, these wages and costs are going to have to ratchet downward,” he said.
Rebalancing of the energy sector is uncomfortable. Oil prices will increase but the cost structure must come down, especially on the labour side. This will present a discouraging labour market for young graduates entering the workforce seeking high paying jobs.
ATB forecast calls for an average six percent unemployment rate in Alberta for 2015. Some months will crest up to seven percent by June or July.
“Seven percent is too high for sure but we did hit 7.5 percent only six years ago,” he said.
“Even in our worst day here in Alberta our labour market is matching the Canadian average,” he said.
Other big issues like interest rates and the currency add to anxiety.
Canadians are holding record levels of household debt. In the fourth quarter of 2014, household debt was record high at 163 percent. For every $100 of disposable income brought in, they owed $163 on mortgages, lines of credit and credit cards.
However, his observations show Canadians are not adding new household debt.
“The debt-to-income ratio will start to come down in the coming quarters,” he said.
The loonie is fluctuating but is probably sitting in the right place in the low eighties.
When the dollar was at par 18 months ago, exporter crowed they could not compete. Now, importers are struggling because the loonie depreciated against the U.S. greenback.
“Where the Canadian dollar is right now on balance is good news for the Canadian and Alberta economy,” he said.
“Everything would be 20 percent more difficult if that Canadian dollar was still sitting at par. We are export oriented into the U.S. economy,” he said.
For the rest of 2015, it will probably hover in the 80-83 cent range and may strengthen to 87 cents in 2016. He is certain it will not achieve par any time soon.
Interest rates also remain low.
In January the Bank of Canada lowered the overnight rate and it has remained unchanged at .75 percent.
The economy showed no growth in February over January, but was in line with what the bank expected.
He does not expect another rate cut or increase for the rest of this year. It may be another 18 months before the bank tightens its monetary policy and the overnight rate is not likely to increase beyond one percent before the last quarter of 2016.
barbara.duckworth@producer.com
