With 0il prices plunging almost 6o per cent and job cuts mounting within companies like Suncor Energy and Shell Canada, the spectre of recession has suddenly emerged in Alberta.
After gushing about the “superstar” local economy at a speech in Calgary last November, the Conference Board of Canada’s chief economist, Glen Hodgson, ominously warned this week that “it’s going to be very hard for Alberta to avoid a recession this year.”
Hodgson’s stark prediction came before Suncor, Canada’s largest energy company, announced Tuesday that it’s cutting $1 billion from 2015 spending plans and will eliminate 1,000 jobs due to lower oil prices. Shell revealed last week it was cutting up to 300 jobs while Canadian Natural Resources said Monday it would cut $2.4 billion from its planned spending this year following similar cuts from other major producers.
Hodgson is more pessimistic than most economists, who have predicted slower growth for Alberta’s oil and gas based economy this year but not outright recession. He is also far more bearish than his own outlook at Calgary Economic Development’s 2o15 Economic Outlook luncheon in November.
“You’re frankly the superstar of the national economy,” Hodgson said two months ago. “I wouldn’t be worried at all about Calgary’s economic situation.”
At the time, West Texas Intermediate crude was trading for more than $80 US a barrel. On Tuesday, WTI closed at $45.89, its lowest level since April 2009. Since Jan. 1, oil prices are down 15 per cent.
Premier Jim Prentice — who has warned his government could face a budget shortfall of as much as $7 billion due to the falling oil price — rejected the Conference Board’s prediction of a recession in Alberta as out of line with the outlooks from most economists.
Nonetheless, it’s not an optimistic time for the long-booming province.
“I don’t think there is any way to sugar coat it: it is going to be a soft year for Alberta’s economy,” conceded Todd Hirsch, chief economist at ATB Financial, during a speech Tuesday to the Calgary Chamber of Commerce.
Hirsch has forecast Alberta’s GDP in 2o15 will see about half its 3.9 per cent growth of last year. A recession would mean two consecutive quarters of negative economic growth.
The Bank of Canada added to the pessimism Tuesday when Deputy Governor Timothy Lane warned in a speech that oil “prices could go lower, or remain low, for a significant period.” He said the impact of the falling oil price will be felt throughout Canada’s but is unlikely to have a drastic effect on overall economic growth.
The influential U.S. investment bank Goldman Sachs sent oil prices lower Monday when it forecast WTI “would hover around $40, potentially dipping into the high $30s” this year.
It is worth noting Hodgson isn’t alone in his about face.
Few analysts predicted the dramatic oil price plunge before it began last June, Just two months earlier, with WTI trading at more than $100 a barrel, Goldman published a forecast that concluded “we do not expect a material collapse in oil prices.”
Times have changed, in a hurry.
After a string of announcements from producers and service companies about spending cuts in 2015 budgets and RBC Capital Markets calling it “an ugly start to 2015″ as the 455 drilling rigs active in Western Canada is down 28 per cent from this week a year ago.
To make matters worse, the already depressed price of natural gas has fallen again and Calgary investment firm FirstEnergy Capital “sharply lowered” its outlook for Alberta gas Tuesday from $4.50 per thousand cubic feet to $2.30 for 2015.
In fact, Hodgson cautioned that even if WTI recovers to $65 a barrel that investment, profits and consumer spending are all in decline.
Bank of Canada Governor Stephen Poloz had estimated in December cheaper oil would take about one-third of a percentage point off economic growth in Canada this year. His deputy, Lane. told the audience in Wisconsin on Tuesday that the current oil price trough and the challenges it poses for oilsands development won’t last forever.
“Over time, higher-cost oil is still likely to be needed to satisfy growing global demand,” he said.
With the spate of negative news emerging from the oilpatch — and seeming to be gathering steam — that is about as optimistic of an outlook as you’re likely to get these days.
Stephen Ewart is a Calgary Herald columnist