By Derek Burleton
Deputy Chief Economist, TD Economics
Two years after one of the most severe economic downturns on record, Alberta’s economy continues to grind and claw its way back.
Last year’s rebound in activity proved surprisingly strong, but more recent indicators suggest that the pace of expansion has since fallen back to a more moderate growth track. By our estimates, Alberta’s economy is within a year of returning “home” – a moniker used to characterize full recovery from recession.
However, in terms of the job market, a return in the unemployment rate back to its estimated trend level is unlikely to occur before 2020, about 4 years after the end of the recession.
As Alberta’s economy continues to make up lost ground, the focus will likely be reoriented from the recovery to the state of the economy’s longer-term growth foundation. In particular, questions surround the viability of the economy’s cornerstone – its oil and gas sector.
Despite these uncertainties, in our new white paper "Alberta's Economy Making its Way Back Home,"
TD Economics outlines eight reasons as to why we remain constructive on the future of the provincial economy. Below
1. Resilience of global oil demand
The prospect of a looming structural decline in global demand for consumption – or “peak demand” – has been a hot topic within oil markets over the past decade, especially as automakers continue to ramp up investments in electric vehicles. Still, any talk about the imminent “death” of oil is proving to be greatly exaggerated, as world oil demand proves to be more resilient than many forecasters had envisaged.
2. Oil production costs have fallen
The oil sands have been synonymous with high costs for years. And there are legitimate concerns about investment attraction and retention within the sector, particularly in light of the lure of the less regulated (and now less taxed) U.S. oil industry. But the latest expansion projects suggest that Canadian heavy oil producers are more competitive than many believe.
3. U.S. demand for heavy oil and limited supply outside Alberta
Alberta has something that will continue to be demanded over the foreseeable future: its large bounty of heavy crude bitumen. The province has been adding to refining capacity in recent years: currently home to four refineries that process heavier oil grades, with a fifth one projected to begin operations in 2018 (i.e., Sturgeon refinery). Nonetheless, the most captive market for bitumen remains the US Gulf coast, which along with China is the largest supplier of heavy oil refining products in the world.
4. LNG Potential has grown
In addition to structural demand growth from North American power generation, there are hopes that Alberta’s natural gas industry will benefit over the medium-to-longer term by access to new markets outside of the U.S. It appears that the $40-billion LNG Canada natural gas terminal on the northeastern coast of B.C. is gathering momentum, with final approval expected by the end of this year.
5. Petrochemical boom helping to drive energy diversification
In the current environment, where both prices and output for oil and natural gas are constrained, there is a growing incentive for jurisdictions such as Alberta to climb the value-added curve. And, indeed, the province has been achieving success in diversifying energy activities away from primary oil and gas to both downstream and midstream activities.
6. A number of non-energy related industries taking flight
The fortunes of Alberta’s economy remain – and will continue to be – deeply tied to those of its energy sector. Nevertheless, the province has recorded some progress in growing its economic base outside of oil and gas over the past few decades, notably within the service sector. More recent trends have cast the spotlight on some budding pockets of expansion in non-energy industries, including tourism and food products manufacturing.
Alberta’s relatively young and growing population adds to the economy’s longer-term growth potential. Indeed, the province’s median age and dependency ratio continues to run well below that of Canada, while its more youthful disposition contributes to its nation leading employment and labour force participation rates. The province’s in-migration and overall population growth rate suffered during the economic downturn but is showing signs of re-accelerating.
7. Alberta still enjoys fiscal flexibility
The province is now running a sizeable budget deficit and tapping debt markets for about $9-billion annually in net borrowing requirements. Yet the silver lining is that the province still enjoys a relatively favourable position. At 7% of GDP, its net debt burden is still the envy of the country. Moreover, gone is its sizeable corporate and personal income tax advantage. However, it has no sales tax, no health premium and no payrolls tax. As such, it retains its strong tax competitive overall, as evidenced by its nation-lowest revenue to GDP levels.
Bottom Line:
Alberta’s ability to reassert itself as a leading growth engine will depend largely on how a number of challenges are addressed – inadequate pipeline capacity, regulatory hurdles, eliminating the provincial government’s budget deficit, competition form US shale industry for investment and addressing climate change chief among them. Arguably, the most pressing challenge relates to the degree of social acceptability of resource development in this country, which Canada has long enjoyed a comparative advantage.
We cite eight reasons for optimism that the province remains well positioned to re-establish itself as a leading growth area in Canada. Perhaps the most compelling reason didn’t even make our Top Eight list: that being the success of the province in the past to overcome its challenges. Through five difficult recessions, it managed to not only turn in strong recoveries but outperform other Canadian provinces on a 10- 20- and 30-year average. There is no reason why this won’t be the case looking well into the future.
Read the full report.