Todd Hirsch Open House, ATB Entrepreneur Centre – Update on the State of Alberta Economy, Dec. 9, 2016
Todd Hirsch Open House
We’re putting on the coffee…
Please come and join Todd to chit chat about anything you’d like (economics related, of course).
We hold these coffee chats at Calgary’s Entrepreneur Centre (almost) every month (when Todd is not out of town speaking). It’s your chance to bring up questions or issues that have been on your mind.
Grad school friends when the while about the economy it’s a big topic on everyone’s mind right now in Alberta. There’s no question that having service struggled through two years of recession. The question that’s on everyone’s mind is what comes next for a further twenty seventeen really the question Are things going to prove or turnaround and the answer to that Israel we say away with being a communist good.
It’s a bit complicated when we think of what I guess triggered the recession for over there was only really one way in on a change and that was the oil prices went from one hundred seven dollars a barrel down to twenty seven dollars a barrel at the beginning of this year and then having recovered modest but certainly struggling to you know get above fifty or stay above fifty. So it’s a challenging price environment for producers promise and that has been the whole reason.
In fact while it is fun to these two sectors years. Tracking the drop in oil price. I think it’s a stark reminder of how dependent this problem still is on one simple commodity. But talk a little bit about you know do we need to diversify or how does that happen. You know a little bit but of course we are we remain very dependent on the petroleum crude oil to kill. So twenty fifteen twenty sixteen two consecutive years of contraction and over. This economy.
You have to go all the way back to the one nine hundred eighty S. find a situation that is as serious as this in almost every respect the way you look at the data and then teach what works more hours and I think we will in fact get to a situation where it’s as bad as the T.V. spot for a lot of people if you were the work rate the arrow or your kids are without work or you’re watching your friends loose or jobs. Absolutely. Meals as bad as the 1980’s.
Even though statistically it may not be but when it comes to the job market in the labor market that is where people actually connect with what a recession means for them first. So I guess there’s two questions. How do we reach the bottom in the energy sector and how do we reach the bottom. You know for this economy for the first question or for the answer to that first question I would say that the worst of the price downturn we believe is close behind us so we don’t think we’re going to test the oil at twenty seven or thirty years the U.S. benchmark price again not in this cycle. Anyway I mean that who knows in the future but we do think the oil prices are likely to remain in this forty maybe fifty five dollars range.
That said we have to recognize anything is possible. Anything could happen. Two years ago I would not have said it was likely that oil was just thirty dollars a barrel but it. So we have to always keep in mind that you know anything could happen a year from now or even by six months from now we could see oil at thirty dollars we could see that eighty dollars. I don’t think those scenarios are very likely Instead our analysis suggests that we’re going to see these prices continue to trade trade between about forty five maybe fifty five dollars a barrel. And they are thinking and I’m not I’m not an energy economy so it’s not my area of expertise I collect my information from other smart people around me but in our estimation OPEC does not become as morning to factor going forward as the U.S. shale oil or oil.
So although OPEC if they decided once again that they don’t that they want to flood the market with well they could push prices back lower hasn’t worked out really great for them and in fact I think that’s one of the reasons why OPEC has decided to agree to. Some supply because they too suffer with thirty dollar oil going forward I think the more limiting here the more important factor is the U.S. shale oil production and that doesn’t change. I mean OPEC gets a bit unpredictable and depending on who’s giving a speech on any given day agreements come in agreements go with OPEC. But what doesn’t change is that U.S. shale oil production and that in fact is what I think will limit oil prices on the upside and that’s why they’ll struggle any time they get above fifty fifty five dollars a lot of that shale oil comes on the market.
So we think that’s the environment we’re going to be looking at here for at least the next few years in Alberta is probably a coward oil prices at around that fifty or fifty five dollars range. I mean where they’re at right now. So that’s I guess the good news and bad news is the good news is fifty dollars oil is better than twenty seven dollars oil are the bad news is fifty dollar oil for a lot of producers in this province that’s still a challenge to price. Now we’re starting to see some green shoots we’re starting to see some optimism come back very gradually into the energy sector we saw some of this announcement yesterday some positive signs that
they’re going to resume some bits of their investment in their projects and that’s positive. But going forward. I don’t think we can count on the energy sector in this province to be that really super strong driving force in growth and that’s what we all sort of got used to between twenty ten and two thousand and fourteen when this province was growing at four or four and a half percent real G.D.P. every year and that’s because this the energy sector and the piles of investment into oil sands projects and conventional projects. That’s what was driving all of the activity. Going forward with oil. Maybe more permanently at around forty five to fifty five.
I think we can. No I don’t think we can expect the energy sector to be that strong driving force. It will still be there. It will still operate the better equipped with the better position companies will will operate profitably. But we’re not going to see a lot of investment come back we’re not going to see a lot of employment come back and that is in fact what’s going to sort of pull growth backing up early twenty’s. So in other words we’re expecting the energy sector the petroleum sector in twenty seventeen to stabilize with oil around fifty dollars stable is better than two years of a contraction. But it doesn’t yet bring back growth. Now a lot of people in this province are going to be waiting and watching course when when this employment sometime in the energy sector. So that’s the first question have we reached the bottom of the petroleum sector I think we’ve seen the very worst of it stable will be the new word for twenty seventeen and maybe with some modest growth from twenty thousand and be on. However when we look at Albertus macro economy and when we look at the labor market ticket here is where I don’t think we have quite reached the bottom yet. And this is the part of the chap that I don’t like talking about because it is around the job market where people do become very emotional vested in what’s going on because obviously people are concerned about jobs jobs for themselves opportunities again for their kids or their neighbors. Now if the current president were sitting at nine percent unemployment in Alberta ten point three percent in this city that is the highest since the early one nine hundred ninety S. and Calgary now has the dubious honor highest unemployment rate of any major Canadian city. This is not a scar used to being in that certainly not one we like being in but the reality is there are tens of thousands of people right now with no jobs and if you pile on top of that the people who are technically employed but there may be employed part time. There may be employed doing some contract. Work. It’s not permanent. It’s not full time when you pile on top of that people who are perhaps underemployed. They’d like to be working more hours or better pay then of course it’s not just ten point three percent. It’s probably closer to twenty percent of health care. It’s rather without work altogether or they’re struggling underemployed. So when you start to think about that. I mean that’s a fifth of Calgarians and it’s no wonder that that the mood in the city in two thousand and sixteen has been has been quite dark and in some cases kind of an angry mood but I think we are reaching I don’t think we’ve reached the very worst of it yet with the labor market. I do think the unemployment rate is going to climb a little bit higher into early twenty’s seventeen the way these economic cycles work when oil prices started to turn down where it was until about eight months. The fact that Congress on one point started to rise there was a lag going into the recession coming out of the recession and twenty seventeen and by the way our expectation of coming out is very very modest growth but coming out of the recession in two thousand and seventeen. We think the labor market will also play in other words we’re likely to see it climb a bit higher before it stabilizes from somewhere around nine and a half or ten percent or were offered up and then gradually start to improve after about. So we’ve seen the worst of it. We think in the energy sector but for Alberta the some macro economy and for the labor market. We think we have a few more months of tough sledding here before things stabilize and start to move before I start talking. There are some sectors in the province. Pardon me. There are some sectors in the province second T.V. view quite well and we think that this is where the modest growth is going to come from in. Seventeen. It’s not going to come from the petroleum sector but we do think we will see some continued growth in sectors like Egger culture neighbor food forestry all of that one comes with Macau the help talked about and tourism which is probably set for another record here and twenty seven thousand now we have to understand forestry agriculture tourism. These are the second third and fourth largest industries but even taken as a group they are more by the petroleum industry. I mean it’s not even close. How far they trail behind. Nonetheless they do provide some some balance and some diversity and those are the sectors that are growing right now. Now the cabinet with the forestry sector and forestry much more important for our communities and sort of the West and Northern Africa. But the cabinet. There is the software lumber agreement with the United States has expired. There is no agreement in place and expired over a year ago and now with the new with ministration coming into the White House. You may have heard there was an election about a month ago and some interesting changes on the way but it’s anyone’s guess. In fact how that softwood lumber agreement is going to be negotiated. But I would I would suggest that on balance it’s probably bad news for the forestry sector in our fantastic course with Mr Trump being more operational they were there in dollar terms I don’t know that’s a good question and it’s not it’s not large especially I get compared to the petroleum sector it’s it’s miniscule. I mean it’s much more B.C. but there are there are communities that grab her Peace River Rocky Mountain House there’s a swath of communities along the western and northern fringe where it is an important driver. So I wouldn’t I wouldn’t consider it. You know a large industry but it is one of those base resource industries and it’s one of the industries by the. That tends to do better when oil prices are weak because the forestry sector keeps for labor almost directly with a lot of those oil and gas providers produce so it’s not huge but it is it is still a base industry that does help provide some diversity. Yeah. So the hockey season you want to be out there but playing back to the culture was one of them is a pretty useless for the cows will need to replace just need them but now as a warning of these orders are you talking about the bowing to Bergamo says yes yeah. This isn’t good news at all. I would say at the present. It’s not a catastrophe because it’s still contained but we don’t know I mean it’s already spread more than two to one branch and I think the last count is ten thousand have to be put down. So that’s not good news at all and we’ll have to watch the story to see how it evolves. If it does turn into a bigger issue and it eventually leads to perhaps a closure or a ban on exports. It’s not at that point yet but it’s not to say I couldn’t get their souls I’m quite sure for them but yeah it’s and it’s not it’s not good news for the cattle. So one more thing. What I think about that the better business and agriculture. So we can think about traditional agriculture is how we can know those are the three kind of cattle prices wheat prices are kind of weak right now and although it’s it’s it’s kind of OK wasn’t a fantastic product here in Alberta depending on where you are especially around Edmonton and central orders to where they had a hard time getting their crops are better conditions in southern Alberta. It’s always kind of money even for our poor farmers that way but we’re more optimistic these days is in the opportunities around Small me shagger food producers they’ve actually been doing really really well and I think there are sort of. Capitalizing on a trend around more a growing consumer demand for locally produced goods in some cases organic foods in all cases smaller meat production where there is no better information about the food in other words trends consumer trends around food are moving away from highly processed manufactured food succumbing to big factories and Mississauga and they’re moving more towards the niche locally produced players and I think Alberta is capitalizing on that now we have to you know keep in mind it’s still a very very small and organic honey production in fact the hour this morning was about and it’s increased seven fold thirty years and over down. I’ve worked supporting it. So but you know seventy million dollars in honey does not start to replace you know crude oil as a drive her in this economy but to starts to help when you start to see you know thousands of Agra who producers all each players all at the local small low level but it does start to provide more of that first of the income and industrial mix products. So just to wrap up and then I’ll stop talking turn it over to you our forecast our most recent forecast came out November second and we’re now calling for a real G.D.P. growth of two point one percent in two thousand and seventeen about half a percent of that comes from the rebuilding for me which is not the best kind of G.D.P. that you would like to see because we’re really just rebuilding to get to where we work but nonetheless that will provide or that will involve some spending and some some boost to the G.D.P. in two thousand and seventeen and the other one and a half percent comes from those other sectors so we talked about Agra Foods tourism up some forestry. You know none of that growth there. The energy sector does not yet make any contribution to G.D.P. growth in two thousand and seventeen. But on the bright side it’s no longer an says a drag pushing over a bit into truck. So two point one percent that is I guess good news we think that technically the recession will end next year but again elevated unemployment rate for a lot of people. The fact that the economy is now growing again will be cold comfort. It will still feel pretty recession with an unemployment rate of around nine or higher percent. So with that I’ll turn it over to you if you have a question observation of your own. Yes What’s so well it depends on the year prior to the oil price downturn it was at about twenty five percent. So I don’t actually know what it is going to be in two thousand and sixteen. I mean we’re still twenty sixteen but my guess is it will be somewhere closer to about ten or twelve percent that’s only a guess like roughly where it was enough to really direct threats to all the other things that struck an industry manufacturing which you know where it is largely refining of energy products. That’s all kind of separate so that twenty five percent two years ago or maybe ten or twelve percent now that it’s just oil and gas production sale time I actually don’t know what that is probably someone some estimates have been made but you know you don’t have to it’s. It’s hard to find anyone in this province who is not directly or at least one degree of separation away from the energy sector. You know even financial services. You know like to be worked back to by the energy sector. We have a lot of clients who are energy sector providers and in business services all of those drilling contractors water hauler they’re all considered as business services when stats can be calculates the P.D.P. but there are business services that feed directly into the energy sector so they really had an extension of it. So once you start to count all of that even the restaurants downtown Calgary you know while they’re full of oil and gas for a cocktail hour or so in that respect those those particular restaurant to really kind of the heart of the industry to go for that ten year green ten years might be a bit big yeah. Several years. You know and I always caution people not to get too worked up about this is this is a typical powder. I’m going to carry nine hundred eighty nine and at that time Kalra had just gone through another building boom and they were all sitting empty. You know when this happens you know six here is the big and serious highly actually work or not for profit at the time in the early one nine hundred ninety S. and we had fantastic work with Rob We’ve had plastic office space and what this can tear a tower. I mean this is way too much as a brand building way too nice a space for it. Scrappy. Not probably work but it was donated office space and we just had to pay the heat the lights and it was a charitable donation for whoever held the lease on that. So you know you see the stuff in time and time again. This time around. Yeah twenty five percent or even those towers it’s going to fall higher. It’s more severe than other downturns. But this is this is a normal cycle. What it will be a little push on the rigs or the rents. On that space which three years ago. I mean companies from outside of oil and gas they would have looked at Calgary because office space was just too expensive and now it’s all on sale. I mean you get some really neat space so that helps you know promote more diversity that way but it is it is going to be rough for the leaseholders on the space ship so much of the port has not been flipped over on doing good and we know that we are the show here was not good for so many cuts over with for people out there so can you just explain how do you see this because this is a minute. Exam before anybody of us would like to figure out what has to go. So what are the kind of fall for this perfectly of course how they can for the away from the oil short because we just of these are largest. Robin and gas shores and this is how we want to put it on the street you know it was not stand it was just so how we move how they would like what sources they get the car if they were able to get like on other other other other kinds of trade shows or other sorts of tourism work. Well that’s a good question. I don’t know I have to make you refer to someone in the travel and tourism industry the ones who actually work on trying to advertise the gallery and sure of these big groups. I do know that our Rotary International is Calgary it’s now exploring making another bid to have rotary come the very last international one in Calgary once I think in the ninety’s and it was the single largest bench tourism forecast ever. Still I mean by anything else. So there. Looking at it another big sometime in the I think in twenty twenty or beyond. So there seems like doubt but the outside of the energy sector if you’re looking at the different industries. I don’t know exactly how the tourism. You know Calgary conventions tourism convention how they would go about doing that there are other opportunities. Oh well the Canadian dollar. Well it has been moving sort of lockstep with oil prices to some degree but the bigger influence I think on the comedian dollar will be any surprise surprise from the U.S. Federal Reserve. Now they’re largely expected to raise rates next week. I think it is a research interest rates in the United States or a surprise move or even a statement by the Bank of Canada which is not expected to raise rates for a long long time to cover and that’s why the Canadian dollar is no lower than than its traditional value about eighty to eighty three cents right now it’s lower than that because the markets are anticipating that rates in the states are going to go out and they’re not going to go up in Canada in that time. Yes. So if there was a surprise move or even you know say the benefit Canada loses all sense. Tomorrow it makes a speech saying we’re going to raise rates in January and catching markets you know are they’re not going to do that by the way but if they did do that. Well that would you know really drive the comedian dollar up some who are if there was another really dramatic change in the oil prices or maybe some of those other prices a little more and then yeah OK I’ll stay out here the other issue being everything. Like oh my goodness. Suddenly Yeah. So we’re talking presidential real yes officer right. You know actually I mean we’re two years into a recession that real estate prices. I was in prices have been remarkably stable. I would not have expected them to be stable as they are certain segments of the market especially here in Calgary the condo market is down and the ten million dollar properties are down but that’s because they have a there’s a thinner market for those buyers anyway and they built a condos. But even those I mean condo prices and in downtown Calgary. There are boat you know five or ten percent but those single be touched bungalows that kind of mid range. They haven’t even really much at all. They’re down maybe two or three percent in Edmonton they’re not even down at all so adamant and it’s not getting hit as bad as calories in this downturn and I think it’s because going into the recession. Both cities real estate markets were very healthy balance. It’s not like we were going into a recession with a bubble already built built in and that would have been the case back in two thousand and six two thousand and seven. Then you could see house prices in that five percent or so are coming out of it. I don’t see a lot of growth in housing prices and twenty seventeen. But you know you could also imagine a situation where it becomes clear to everybody that OK the downturn in the energy sector is behind us oil prices are back above fifty. We have some pipelines in place the group shoots of optimism start coming back and then you could start to see that spillover effect. What’s driven Vancouver’s real estate which is foreign buyers. You know then you can start to see them stepping up trying those already experience and you know car is only an hour flight from Vancouver so you could start to see some improvement real estate buying because of that importance. But I think it’ll be a while yet before. Calgarians are starting to feel comfortable enough to start beating up on was because I don’t know when the rates are going to be. I know it’s a possibility. It’s a possibility. Sure yeah I mean we could see you know lower prices in the first quarter of the year which is traditionally a lower buying season by the time anyway. So yeah. Depending on the exact property that you’re looking at it’s possible for sure but I wouldn’t see you know I wouldn’t see another five percent drop out of. Oh oh well I guess when we think about that oil price I’m I’m referencing that US dollar West Texas Intermediate range price as one of the prices. You know there is Brant prices for Europe and Asia but that W T I. Prices mostly influenced by well two basic game supplying demand we think demand will continue to grow modestly. I mean will conditions start looking slightly better than they were a year ago especially in the United States right now with the new profit ministration coming in cuts to taxes spending on the structure that’s expected to have a stimulative effect on the U.S. probably energy consumption. So we think demand is going to be at least a modest positive for the price but then the other bigger issue has been supply and that’s where I mean over the last three years we’ve seen by really come on to the market and that’s what’s driven prices so supply. Then again it gets back to those two things. OPEC what OPEC going to do is OPEC really going to agree to these supply limits are they really going to hang together because Mr Putin and Russia are going to cooperate. Sounds like I mean from their most recent talks it sounds like yeah they’re going to agree to withhold some supply and that’s a positive price but we don’t know with OPEC precisely I mean like I said earlier they could meet tomorrow and decide no we’re struck on that whole agreement and you know well prices could fall back down with more supply but probably the single biggest factor right now for that town on oil prices and in our estimation is that is the U.S. shale oil because under no scenario does that go away for a while its technological advances under a lot of the oil in the United States. They keep finding more oil a big discovery in Texas. What happened to this explorer all of Texas already I mean now you’re finding this but it’s because of the new the new shale technologies that they’re there. Now even if you extract oil reserves. So those are the two big things three years old this one is not really like three years. Yes All right. All right. All right last word yes. You’re getting it and you’re absolutely right. And this question of diversity comes up all but the question that’s never answered it was the word we need to go first. By This is where the problem was we need the provincial government to say the energy sector it’s hard it’s hard to say if there’s a profit motivation to do a business will buy person if there’s not a profit motive how we meet that pronoun. How do we make this happen. And this is not that we’ve been trying for forty years and I think really well maybe we should always look at the ones. Take a look at how life was right. You were right all right. If you say no they just really sustain this true. Here’s my wife three years. Yeah yeah yeah yeah probably. Back inside those plates where they didn’t touch. The well that’s a good question. I don’t know if I’m the best one to answer. I would find it hard to believe that there would be a slew of outside capital coming in simply the amount of investment to be made. It’s going to be quite small. At least compared to where it was three or four years ago where we did see a lot. So I guess increases in capital spending are going to be pretty marginal I think the combined seventy but I don’t think it’s going to meet the level of the cycle. But other people in the industry might have more knowledge that. Well there’s a lot of things actually favor of tourism candidate over every one of them of course it’s the other it’s the U.S. economy’s doing well the point six percent unemployment. They’re not every one of us doing well but by and large the economy it’s kind of back on its feet and that for most tourists tourism especially China. I think there’s a lot of scope for expand there. We hope that the name of the airline from Beijing has a nonstop calorie there’s a lot of you know consumer dollars trying to get down there. I think more of them are going to be looking for those experienced kinds of trouble and I think what this is about. Now the other thing that starts to place. Twenty six calling this magazine. There was some trouble website and I don’t know if you’re probably right. The front cover of the twenty best place for all this point except by the city. I mean this is National Geographic and it’s radio so I mean all of that helps for sure in the twenty fifteen twenty six consecutive years in a row of record tourism business and I think twenty seventeen now is the new Y Y C. I know comedy right now. I don’t see why we just can’t disprove everything you know really just true sets every year but you never know. Every everybody else. Great pressure and interest obviously somebody in the movie more so there is going to be a big push from the government industry for today and I think you’re smart people but I’m also interested in what they don’t know better when it’s. Already here so far I don’t think we meet your ratings right now. So I think there’s a lot of those poster children for their technology for free from free trade very well. Yeah there. I mean you can always there really last dance where you are sitting there a shower while I was terminal is also not true but I mean you’re sitting senator I’m not really in will be the player and that it really is the Chinese word technology but it requires leadership three years old prove it’s right not to do that you know I’m just saying you know what people are afraid that there’s a lot of very old players throughout all this for three years. All right. All right all right. I don’t know it’s a great group. Oh this theory was here in this file here a lot of it right. So I just call home.