August 25, 2019

Alberta economy may moderate in coming year

alberta economy

Alberta economy may moderate in coming year

By Ben Brunnen  

While the Alberta economy will continue to be the envy of the country in 2014, national and international economic forces could dampen its outlook.

Three of them are:

1. Rising interest rates

Even though the Canadian and U.S. central banks have pledged to hold their benchmark lending rates for commercial banks at near record lows (essentially 0 in the U.S. and 1 per cent in Canada), interest rates are set to rise.

Why?

It is important to recognize that interest rates are not the only rates (or monetary policy levers) at play in the economy. In December, the U.S. Federal Reserve decided to begin withdrawing the third round of its qualitative easing (QE) program. QE essentially purchased long-term securities to expand the money supply and stimulate the economy. One of the effects of QE was the reduction in the interest rates on long-term bonds, which are the basis for financing durable goods (e.g. cars, furniture) as well as mortgages. Now that QE is coming to an end, interest rates will start to rise.

Given the integrated nature of the North American financial system, this will result in rising interest rates in Canada. In fact, Canadian interest rates have been on the rise since 2012. The Bank of Canada’s 10 year benchmark bond rate has increased from an average of 1.85 in 2012 to 2.23 in 2013, and mortgage rates at some of the larger lending institutions have begun to inch up this past year.

As Albertans have had the largest rate of mortgages in arrears since the 2008 recession, Albertans should use caution in the use of debt to finance consumption moving forward, and may also want to consider renegotiating their mortgages now, as opposed to one of two years from now).

2. A strong real estate market

But the anticipated rise in interest rates is expected to have little effect on Alberta’s residential real estate market in 2014.

Through the first three quarters of 2013, Alberta welcomed nearly 38,000 net interprovincial migrants from across Canada. At that rate the province should exceed the record it set in 2006 when 46,000 Canadians from the rest of Canada moved to Alberta. All of these new Albertans need a place to live and with low vacancies and high rents prevalent across the province the only other option is to buy.

According to the Alberta Real Estate Board, residential real estate prices increased by 5 per cent across the province from November 2012 to November 2013, with the biggest gains in North Eastern Alberta (+20 per cent), Alberta West (+14 per cent), Grande Prairie (+10 per cent), Central Alberta (+9 per cent) and Calgary (+8 per cent).

And with subdued economic growth expected for Ontario and Quebec in 2014, but strong activity in the Alberta economy, expect this trend to continue. That said, if the U.S. economy grows above 2 per cent this year (as many are predicting), watch for a resurgence in central Canadian exports to the U.S., which could stem the tide of new Albertans from these provinces by mid-year.

3. A moderation in energy sector investment

Finally, the competitiveness of the Alberta energy sector is under threat from competition for capital from unconventional plays in the U.S. (with shorter capital recovery cycles) combined with the prospect of rising interest rates (and, correspondingly, higher returns to other investments). This is forcing companies to become increasingly cost conscious.

In 2013, the province took in the lowest amount in oil and gas land sales ($680 million) in 11 years, which suggests that drilling activity could be substantially reduced in 2014. Rather than invest in new leases, companies are looking to develop existing assets and/or improve performance through restructuring or strategic asset sales. EnCana, BP and Devon are just a few examples of companies re-positioning in this regard.

And while the sector is by no means in dire straits, investment growth will level off in 2014, leading to a few more restructures along the way.

Troy Media columnist Ben Brunnen is a policy, economic and advocacy consultant with over 10 years of experience working on public policy, economics and government relations issues.

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