After two years of recession, one Alberta economist is saying the province is evolving rather than recovering and that tourism has an important part to play in the changing economic landscape.
ATB chief economist Todd Hirsch provided a province-wide economic forecast at a recent Bow Valley Builders and Developers Association luncheon and said many headlines these days point to recovery, but it is better to be cautious and take a closer look at the overall picture.
He said many people are focused on economic recovery for Alberta after oil and gas prices tanked in 2014, sending the entire province into a recession. While only a few isolated places like the Bow Valley have weathered the last few years without significant detriment, according to Hirsch, there were areas hard hit by lost jobs and revenues from an oil and gas-based economy.
But now that the province seems to have turned a corner economically, with increased retail sales, new construction, and growth in urban centres like Calgary and Edmonton, there is talk of the economy recovering and Hirsch said that’s not what he sees happening.
“In 2017, I do not actually think our economy is recovering, not in the sense that we are going back to where we were in 2014,” Hirsch said. “Rather, I think our economy is evolving. By definition, evolving is going to take a little longer than recovery and there is discomfort in evolving because there is ambiguity – what are we evolving into? How are we evolving?”
Hirsch called himself an optimist, but said that doesn’t always serve him well as an economist. While many are pointing to indices for Alberta as signs of economic recovery, he is not convinced everything happening currently in the economy can lead to that conclusion.
“That optimism, that glass half full sort of outlook, is fine as a personality, but not as an economist, it actually does not serve me well,” he said. “I have to guard against my optimism blinding me to what is actually going on.
“Is the recovery real, or am I just wishing a recovery is taking place when in fact it might not be?”
Clearly, oil and gas as an economic driving force in the province affects all other sectors and when prices tank, like they did a couple years ago, everyone is affected. The result was a 2015-16 recession that came after oil and gas prices fell drastically from just below $107 U.S./barrel (West Texas Intermediate, or WTI price) in 2014 to $30 U.S./barrel at the beginning of 2016, was the loss of a quarter of all jobs in that sector.
“That drop in oil price was the single economic factor that threw this province into two years of a nasty recession and it is a reminder to everyone in Alberta how dependent we are on one sector,” Hirsch said.
The 2008-09 global economic crisis also resulted in recession for Alberta’s economy tied to oil and gas prices, with 4.5 per cent retraction in 2009. But by 2010, with oil prices back up, the economy recovered, according to Hirsch, with an average growth rate of four per cent per year until 2014.
He said in 2013, Alberta’s economy grew by 5.5 per cent, and those rates are not sustainable compared to what he predicted would be the new rate of growth of 2.5 per cent per year moving forward.
“We think growth rates are set to moderate,” said Hirsch, adding the two areas to watch for growth are tourism and the agriculture and agri-food sector. “There is a lot of talk about new sectors, or growing new sectors.
“Sectors that are already strong in Alberta, like tourism, agriculture and agri-food sectors, they will be responsible for a lot of the growth we are going to see in the coming years. But it is a process of evolving and that does mean it will take a little time.”
While there are jobs returning to the oil and gas sector, he said they are at a lower wage, resulting in average weekly earnings for the sector going down about 20 per cent from where they were in 2014.
Hirsch said the lower wages might be bad news for Alberta household earnings, but he is happy to see the industry making $57 U.S. a barrel oil work. He said the sector has reduced costs and stabilized, and overall it has shifted from being the engine of the overall economy to the backbone.
“In 2017, I believe the energy sector has shifted its role and it is no longer an engine, it is a backbone,” he said. “A backbone is also very important. If you do not have proper health for your back, you are not in good shape, it is enormously important.”
That means energy is no longer fuelling growth for Alberta like it did between 2010 and 2014. That growth is coming from other sectors and Hirsch pointed to retail sales and new construction as areas that have recovered as well.
With economic growth fuelled by high wages, the retail sector was seeing increased sales from 2011 to 2016, when that major drop in oil prices affected it. But since then, Hirsch said, it has steadily climbed back up and as of May this year, retail spending reached a new all time record high.
“An overly optimistic economist might look at this and say, ‘surely this is evidence Alberta’s economy has recovered,’ ” said Hirsch, adding if there had not been a recession, retail sales would have taken a different course.
While spending has returned, he said labour costs, energy and insurance have all increased since the recession. Even with a new all time record high in spending, he said retailers are not in the same boat they were in a few years ago when it comes to expenses.
As for construction and new home development, Hirsch said generally it is a good indicator of the mood of Albertans about the economy. If they are confident, he said, they build new homes.
Housing starts in Alberta went from 42,000 a year to 18,000 a year as a result of the recent recession. For the first half of 2017, however, that has increased to 32,000, a small rebound according to Hirsch.
But for places in the province like Canmore that were somewhat isolated from the recession’s effects, he said housing was less affected overall.
Other economic factors that affect everyone, albeit differently, include the Bank of Canada’s fiscal policy and changes to interest rates, as well as the Canadian dollar compared to the U.S. dollar.
He predicted the governors would not change the interest rates again until mid-2018, and that the Canadian dollar would remain in its historic normal range of 75-80 cents U.S. if all other factors remain unchanged.
