TD study shows Alberta recession at 80s levels

Economist Warren Kirkland reveals why his team downgraded their forecast for the Alberta economy with a contraction of -3 per cent for 2016

There hasn’t been much in the way of good news for Alberta recently and the report from TD Economics this week certainly conformed to that trend.

Canada’s second largest bank downgraded its 2016 economic forecast for the province with a real GDP contraction of 3 percentage points. That will mean the Albertan economy has fallen by 6.5 per cent since the beginning of the oil shock in 2014, which harkens back to the long and painful recessions of the 1980s.

Warren Kirkland is provincial economist with TD Bank and one of the authors of the study. He explains the conditions that led to his team downgrading their forecast for Alberta.

 “At the start of the year we were predicting a contraction in the ballpark of -1 per cent,” he says.  “The impact of the wildfires meant we have now set that at -3 per cent. The fires had a massive disruption on the supply of oil – about a third of Canadian production came offline during that period.”

One of the more eye-catching passages in the report concerned employment in the province. While the GDP contraction has been among the worst in modern times, the labour market, while suffering, hasn’t fallen to such depths. According to Kirkland, however, the statistics don’t tell the entire story. 
 “There is a number of factors influencing the employment rate,” he says.  “Firstly government hiring has held up a lot better than in previous recessions. More people are moving to British Colombia for work and there’s also the shadow labour market where people flying into Alberta from Newfoundland and Nova Scotia were laid off, but that wasn’t captured in the Alberta figures when they returned home.”

The study doesn’t exactly make for happy reading for Albertans, but the data presented does point to a recovery being in the cards, although it likely won’t materialize until the winter months.

“You can expect things to start to improve towards the end of this year,” says Kirkland.  “There was a very weak hand-off at the end of 2015 into the beginning of this year and growth was hampered a lot by the Q2 dip caused by the wildfires.”

It’s quite clear that Alberta’s growth will inextricably be tied to the energy industry. Research from TD shows that over the last five years, oil and gas extraction in Alberta represented roughly 28% of real GDP. Approximately 8% of employment meanwhile is directly tied to oil & gas extraction, and that figure does not capture construction activity related to these projects. Considering that, a rise in the price of oil certainly would prove greatly beneficial to the province’s prospects heading forward.

“There’s varying oil production that happens in Alberta,” says Kirkland. There is conventional that has one price, then there is oil sands that is much more expensive. Something in the $60–70 range would help a lot. The one caveat I would put on that is the cost of production is coming down right now through innovation and reduced labour costs.”

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