A recession is the most likely scenario for Alberta in 2015, concludes the Conference Board of Canada’s new provincial economic forecast.
In a commentary released Monday, the board’s chief economist, Glen Hodgson, writes that oil prices will put a significant dent in oil industry revenues.
A slight rebound in prices is expected this year: “Based on the available evidence, our forecast makes the reasonable assumption that oil prices will eventually bottom out and then slowly strengthen to US$63 a barrel by the end of 2015,” Hodgson wrote.
“Oil production costs for a growing number of energy companies exceed the available market price for their product, leading them to pull back their new investment spending plans and, in some cases, ramp down actual production. The same effect is taking place globally, eventually curtailing new supply and strengthening oil prices.”
In an interview with the Herald, Hodgson said the impact of falling oil prices will start to be felt fairly quickly in Alberta.
“We’re going to see it probably in the January numbers coming out from StatsCan,” he said. “We’ll see it in the jobs numbers and investment numbers for January. The fact you’re already getting major companies talking about pulling back their investment plans, the fact that Suncor has announced 1,000 (layoffs) and there’s more to come, that will reveal itself very quickly,” said Hodgson.
He said for the oil sector, which is a large part of the economy, revenues could be down 30 to 40 per cent.
“The dollar falling against the U.S. dollar helps because that acts as a little bit of a cushion. So it protects your Canadian revenues. Whenever the exchange rate falls, your Canadian dollar earnings go up,” said Hodgson.
Hodgson said the board is forecasting business investment will be 25 per cent down from the planned investment three months ago for Alberta in 2015.
“So that takes out $12 billion from the economy,” he explained. “Then you start to see the ripple effect into profits, clearly impacted for that sector . . . There will be workers laid off and then it ripples into consumption, all the way through the economy. The sharpest impact is just on revenues and how that flows into business investment.
“This is going to be difficult for the province. I appreciate the fact that the premier (Jim Prentice) is now sort of evolving his thinking. But I think fundamentally it’s going to be really hard to get any fiscal action in place to close the gap. That would kind of staunch the flow and accepting the fact that when your revenues drop you cannot cut spending as rapidly because that just actually feeds the recession. Withdrawing government spending is actually a net negative for the economy.”
Recently, a report by ATB Financial said the precipitous drop in the price of crude oil has hurt the outlook for Alberta’s economy in 2015, but even with the expected slowdown, an outright recession is highly unlikely.
In its Alberta Economic Outlook, ATB predicted real GDP growth to fall by nearly half from 2014 — dropping from 3.9 per cent to two per cent. Growth in 2016 and 2017 are forecast at two per cent and 2.1 per cent, respectively.
“I think it’s pretty brave for the Conference Board to put out this prediction (of a recession) because they don’t know as yet what the response of the Alberta government’s going to be,” said Ron Kneebone, area director for economic and social policy with the University of Calgary’s School of Public Policy. “So if Alberta, for example, decides to dramatically cut spending then that would support the idea that we might be heading for a recession but on the other hand if the government decided ‘do we just tighten our belt and run a deficit for a couple of years’ then that would support the notion that we wouldn’t head to a deficit. So I don’t know what it is they are assuming the Alberta government is going to do.”
Kneebone said that while the oil price plunge has dramatically affected Alberta, the U.S. economy is picking up and the fall in the Canadian dollar helps the Canadian economy which in turn will help Alberta.
“There is something to support the economy. We’re a fairly resilient economy. Alberta is not what it once was, just a totally oil and gas play. We’re a much more diversified economy than we were 20 years ago and I suspect we’re a little more resilient than we were in the past and maybe we can handle this but we need to know what the government is going to do before we really know,” he said.