The collapse in oil prices will send Alberta’s economy into a tailspin, with the province’s economy forecast to contract 1.5 per cent this year, according to the Conference Board of Canada’s latest provincial outlook report.
“The party appears to be over in Alberta, at least over the medium term, as low oil prices send chills through the economy. Several oil-industry firms have already announced sharp reductions to their capital plans and to employment,” said Marie-Christine Bernard, associate director of the provincial forecast, in a news release.
“In the next couple of years, a return to four per cent-plus growth is not in the cards, since oil prices will not hit triple-digits any time soon under current market conditions.”
The outlook is a complete reversal of what the board forecast last November when it said Alberta’s economy was “firing on all cylinders” and was expected to lead the nation with 4.4 per cent growth this. year.
But in the latest forecast, the province is now expected to have the worst economic performance in the country this year.
Prince Owusu, senior economist with the board, covering Alberta, said the full picture of oil price decline was not evident last fall.
“We have a completely different picture going forward than we had assumed in the past,” he said, adding that the decline had just begun last fall. “We didn’t think it had that momentum to drop (that much).
“We are assuming that prices are probably going to bottom out and begin to gradually move up. We expect oil prices to average $56. We think that by the spring we should see some slight upward movement.”
Early Monday, the price of West Texas Intermediate crude was just under $50US.
According to the board, since 1988 Alberta has experienced negative economic growth only once when it contracted by 4.2 per cent in 2009. Calgary has seen a decline in its economy twice in that period – by 1.9 per cent in 1989 and by 4.1 per cent in 2009.
Over that period, the highest rate of growth for Calgary was 7.9 per cent in 1997 and 8.1 per cent for the province in 1997.
Last year, Calgary’s economy grew by 4.4 per cent while Alberta’s was up by 4.0 per cent.
Todd Hirsch, chief economist with ATB Financial, said all forecasters are moving in the same direction to either much weaker growth or contraction in Alberta.
“The Conference Board I think they’re probably the outlier at this point with the forecast for the deepest contraction,” he said. “But we still think that energy prices are going to rebound somewhere in the second half of the year and Alberta will avoid an outright contraction.”
Hirsch said the bottom for oil prices has not yet been reached due to the volatility in the market.
“For me, once I see that volatility kind of end then I think investors will realize that the floor has been reached and will be probably a bit more emboldened to start buying into it again,” he said, adding he wouldn’t be surprised if oil tested the mid-$40 range. “I don’t think we’re through the volatility.”
Bruce Graham, president and chief executive of Calgary Economic Development, said predicting economic growth based on oil prices is extremely difficult as demonstrated by the reversal that the Conference Board has made.
“I wouldn’t be surprised if the predictions change again as things evolve,” he said. “That said, obviously the sudden drop and the significance of the change has caused a lot of people to be concerned and to make very significant responses to the changing economy in terms of both reducing capital spending, cutting costs including layoffs. Certainly we’re seeing a very immediate impact on that.”
Graham said CED is focusing its efforts on support innovation and growth in opportunities to reduce costs of production. It is also examining other parts of the economy that benefits from lower oil prices and a lower Canadian dollar for exporting.
The Conference Board report, released Monday, said planned reductions in oilpatch investments are already being felt, with the oil rig count down 40 per cent in the first week of February. It said layoffs will hit the housing market and overall consumer confidence as well as slow in-migration to the province.
The report said the slowdown in Alberta’s economy has far-reaching effects, as many out-of-province workers fly in and out of the province to work in the oilpatch or in construction. It estimates $375 million in income is generated in Atlantic Canada from these workers.
The Conference Board said the provincial government has benefited from 29 per cent of its revenues coming from the resource sector over the past 10 years, but will obviously be hit this year with the slowdown in that industry.
“One bright spot for Alberta producers is strong demand for heavy oil in U.S. Gulf Coast refineries. Thanks to past investment, the energy sector has available capacity and it is able to increase non-conventional production,” said the report.
“Oil prices are expected to gradually rise as the global supply glut eases and worldwide demand improves. Prospects in the oil industry, both for capital expenditures and jobs, should gradually improve later this year and in 2016. The Alberta economy is expected to grow by a moderate 1.2 per cent next year.”
Nationally, the Conference Board said the Canadian economy will drop to 1.9 per cent growth this year from 2.4 per cent in 2014.