Category Archives: Opinion/Research

Opening Comments – Alberta’s Recent Economic Transition to FMI Seminar- Alberta’s Economic Horizon,  Sutton Place Hotel, Edmonton, Thursday 9 February 2017

 

My presentation is concerned with the past five to ten years with a focus on 2012 to 2016. We first begin with the current biggest source of investment and income…

This ten-year period shows the magnitude of the oil price fall in real terms since the start of the financial crisis –the dark shaded area.  In real terms we are only back to the low point coming out of the financial crisis of 2007-09.

crude-oil-price-history-chart-2017-02-11-macrotrends1

[Chart from http://www.macrotrends.net/1369/crude-oil-price-history-chart%5D

I wanted to illustrate the very real consequences of the material decline of oil prices on this and the next slide. The breadth of the recession has also touched Stampede parties hosted which have been scaled back as revenue dropped in the oil and gas sector.

An important impact has been the difficult adjustments in the work force arising from the downsides of an economy that relies too heavily on one economic sector.  We saw this over-reliance during the 1930s with wheat and again in the 1980s with oil and natural gas. This movie seems to repeat itself like Bill Murray in Groundhog Day!

The next few charts show the impact of the recession on key sectors. Housing starts have been relatively strong over the past two years given the weak employment picture. Note that the last part of 2016 shows the sector’s activity gearing down.image003

Given the layoffs in the energy sector, this chart is not surprising. What I think is surprising that more people have not been leaving the province.  The tendency to remain is, I think, related to ambiguous job prospects outside Alberta and high housing costs in metropolitan Ontario and British Columbia.

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Employment insurance has cushioned the economic impact on the housing and retail marketplace up until now. The spike late last year in claims allowed was due to a policy decision to extend EI coverage.  Claims are at levels last seen in the early 90s.

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This chart and the next chart show different measures of unemployment. The top line is the official rate and the lower lines reveal unemployment rates of one year or more and three months or more. The numbers continue to trend higher in spite of some strengthening of oil prices and promising drilling activity levels.

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This somewhat busy chart, coming again from the monthly Labour Force Survey data, reveal more unsettling information of a labour market which is weak. Lower incomes, absent stimulative fiscal policy or new investment, portend weaker growth in consumption.

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Consumer bankruptcy numbers provide a sense of financial stress on households. The upward creep implies added stress on families, financial institutions, and knock-on effects for retailers, real estate markets and the hospitality industry. As discretionary incomes fall, the services sector, excluding government, suffers.

image001This reality is borne out by this next chart. The numbers are in nominal terms and seasonally adjusted.  Tough times for Alberta retailers who have become accustomed to Albertans’ high consumption levels.

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Given the foregoing depressing indicators of gloom, rising unemployment, falling housing investment and climbing consumer bankruptcies, I am still trying to figure out what is keeping the economy from falling further.  As I just said, Albertans have a reputation as big spenders. With a more frugal oilpatch, provincial government fiscal policy has been stimulative especially cushioning the Edmonton economy.  Part of the answer has been continued borrowing by consumers, businesses and governments.  But how long can this borrowing go on?

I conclude with a few of the policy challenges facing not only government and industry, but institutions and individuals in this province.  As our next speaker will discuss, a new administration to the south will probably place federal and provincial governments in difficult positions concerning taxation and climate change. Secondly, the natural economic order in Alberta – oil and gas and energy- will recede and replaced by artificial intelligence, robotics, driver-less cars, and more meaning fewer physical jobs and greater emphasis on human capital.

albertas-recent-economic-transition

Boom and Bust Economy- Opinion/Research

On 14 September, I had the privilege to present an economic overview to members of the Municipal Government Board, municipal assessment review boards and the Surface Rights Board. I was given considerable latitude in addressing the current and future economic conditions that assessment appeal boards faced. Ratepayers (commercial, industrial, residential) have the ability to object to annual assessments and significant sums of money can be at stake over disputes about zoning and the use of property, including buildings and machinery.

The presentation-to-municipal-government-board-and-assessment-boards recorded the three boom and busts the province has “endured” over the past century.  These booms and busts were rarely policy induced. Rather external factors- the stunning decline of wheat prices in the 1930s, and oil prices in the 1980s and 2010s- were instrumental in driving the Alberta economy into recession. While I argue that Manning and Lougheed were Keynesians, in my presentation I acknowledged that Lougheed’s fiscal policies were in fact pro-cyclical, making more difficult the adjustments that became necessary after Ralph Klein became Premier. In hindsight both Lougheed, in particular,  and Klein, did not save enough resource revenue to enable succeeding provincial governments to have more flexibility. The saving of resource revenue of course would have affected the size of government (programs and infrastructure) and likely reduced inflation of public goods.

That said, the Sustainability Fund did enable Stelmach, Redford, Prentice and Notley some fiscal flexibility but fiscal rules were amended again and again to avoid making tough fiscal choices.

The presentation also laid out some of the key factors that financial analysts use in considering the value of a property. Key factors include interest rates and the “cap rate” used by analysts to discount future cash flows. Macroeconomic factors such as GDP growth, employment growth, and disposable income are especially important for retail space in malls. On the residential property side, in-migration, interest rates, and disposable income are critical factors in demand for housing. Key charts are found on pages 15- 21.

[Readers are also encouraged to read the comments and view the slide deck supplied by City of Edmonton’s Chief Economist John Rose commenting on this website back in May.]