Losing Balancing, Regaining Control: Alberta’s Economic Forecast for 2016

 

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When you’re looking for insights that are; reliable, non-emotional, real, and clear, Senior Economist Todd Hirsch is a safe bet.  His ability to see the market and to bring some reality to the tough times has been instrumental in his career growth at a variety of corporate and public sector organizations over the years, most recently ATB. His vision has also kept real estate investors across the country apprised of the latest economic updates, helping them to make informed decisions for their personal portfolios.

Todd was on hand recently at REIN’s Multi-Family & Commercial Investing Summit and he was kind enough to share some of his forecasts around Alberta.

In economic circles, vitality usually comes in September and October but as Hirsch shared it’s been a “wild dramatic summer” for not only Alberta’s economy but also globally in the financial markets and all economies. “I can’t remember a July or August where things going on in the global economy were this unsettled”, Hirsch told the day’s crowd.

“When things are in balance, it’s a beautiful thing”

In life, often things look like they should be in balance but aren’t. It’s the “ying and yang” metaphor, and it’s one that applies nicely to Alberta. Hirsch’s argues that, over the last five years, “It seems we were seeing balance and harmony [in Alberta] but in fact what we were seeing is a lot of imbalances building up.” Now, in 2015, “these imbalances have come home to roost”.

This imbalance naturally leads to feelings of uncertainty, nervousness, fear, and anxiety (similar to what was felt in Fall of 2014 with dropping oil prices).

Current Global Economic Imbalances

Europe

In the tenuous economy of Europe, the following bail-outs occurred within the last year: the negotiations between Greece and the rest of the European Union, and the troika of the IMF and the European Central Bank and the European Parliament. These bailouts were all spearheaded, in the words of Hirsch, by “Angela Merkel and the taxpayers of Germany”.

The bailout that is most concerning, according to Hirsch, is the one that provided Greece with “hundreds of millions in bailouts, just so they can remake the minimum payment on the loans they’ve already taken”.  He is expecting to see even worse outcomes in Europe going into 2016 and proposes that it may even mark the “eventual exit of Greece from the European union.” He remarked on the nervousness already taking place in the European stock market.

Russia

It’s also crossing over to Russia where things remain “very troubling and very worrisome, especially for the rest of the Western world who’s watching every move of Mr. Putin” according to Hirsch.  This is because no one can tell exactly what the President is thinking or scheming. The geopolitical experts Hirsch knows personally have shared that they believe, when it comes to Putin, “that this is all going to kind of wrap up nicely and [he] will suddenly just play nicely in the sandbox with everyone else”. If he doesn’t however, it will prove to be another source of imbalance in the global economy.

China

It’s only this past summer that China has started to see some imbalances. In the past, growth had moderated around 7% – 8% after coming off double digit growth rates a decade earlier. Now questions such as “Are they really immune from the stock market volatility as they thought they were?” are being asked. Back in 2009, when the rest of world was watching the stock market crash in New York, Frankfurt, and Toronto, the markets in China were barely wobbling. It was easy to assume then that that their “command and controlled economy” was immune from volatility. This isn’t the case now. Their economy certainly is not immune as evidenced by the “very poor economic news” coming out of the country and the “government devaluing the Yuan about 2%”, shared Hirsch. Because of this lack of immunity, China will likely see even more volatility and economic slowdown.

United States

The US, like Europe, is always seeing a tenuous balance, even though the country gives off an illusion of being in control and “advancing and progressing as people would hope”, according to Hirsch. In his opinion, the illusion is slowly being shattered with the “Federal Reserve watching all this stock market volatility around the world”. In September, the Feds were also “sounding a little bit cool towards raising interest rates”.

This has led to uncertainty for investors, especially in New York, who are wondering when, and even if, the Feds will move and what this will mean for borrowing costs in the US and the overall state of the economy.

Hirsch feels that, even given that US still has its “training wheels on”, it’s economy is still in “much healthier shape certainly than it was five years ago and probably healthier shape than any of the other industrialized countries in the world at the moment”. That doesn’t mean that the economy won’t continue to be unstable though.

Canada

It was only a few years ago that everything in the Canadian economy was looking rosy: the Canadian dollar was at par (and people were okay with it), people were investing in real estate, and holidays were affordable. Today, we’re in a recession after experiencing two consecutive quarters of contraction with the Canadian dollar closing at 75 – 76 cents to the US dollar. Hirsch feels that Canada is “a victim of all the up talk of interest rate increases in the United States.” Furthermore, he thinks “the decline we’ve seen has really been more a US dollar strength story than a weak Canadian dollar story.”

Hirsch avoided making any definitive political judgements but did mention that in combination with weak commodity prices, crude oil, base metals and copper, the political climate has contributed to the slump over the last 6 to 12 months.

His long-term prediction about the Canadian Economy is that it really depends on where you think the US Federal Reserve will go on rates. It’s likely that we’re in for “more rounds of a slumping loonie”, potentially as low as 69 cents and as long-term as the 80% – 82% range.

Alberta: The Headquarters of Imbalance

In short, Alberta has fallen flat on its butt like a “polar bear falling down on the ice” and it’s been pushed over by the petroleum industry and crude oil prices in particular. With oil prices dipping, it’s very discouraging to be in Alberta, but a normal part of being in the province given that there are always big swells and big dips in oil.

The province has just come off of a remarkably five year strong GDP growth rate of 4%, but as Hirsch states, it’s a “bit of an illusion” that covers up some very dangerous imbalances in salaries and wages and the residential real estate market.

Salaries and Wages

Over the last ten years in Canada the average weekly earnings (for all provinces and territories) has increased by 29%; in Alberta alone they’ve increased on average by over 48%. In Oil and Gas it’s 56% over the last decade. So what does this say about Alberta’s economy? In short, as Hirsch put it, that “the cost structure in Alberta’s petroleum sector has become seriously out of balance,” with three quarters of all petroleum sector costs going to labor.

Funny enough, 11 years ago, oil at $40 or $50 was completely unthinkable. Now, it’s unsustainably low due to the cost structure of wages, salaries, compensation, bonuses, and overtime in the oil and gas sector.

Residential Real Estate Market

The real estate market in Alberta is in suspended animation with the correction to the market yet to be seen. Hirsch sees it as being too early for this to happen since it’s only been 14 months since the beginning of the oil price downturn. It has happened a bit in Calgary causing a 3% price drop, but hasn’t been seen in Edmonton at all, at least on the price side. Housing starts continue to keep up with their normal pace. This is likely due to:

  • Low and still falling mortgage rates which have, as Hirsch explained, “provided an unusual cushion that has provided a bit of a base or some stability for the housing market that in normal downturns we don’t see.”
  • A sense of optimism in people’s thoughts around the situation: “Well, this is temporary and it’s going to improve.”

Going into October, Hirsch believes the province is in for more layoffs in the petroleum sector and a larger negative impact on the residential housing market courtesy of a 5% – 10% price correction.

Regaining Balance

For Alberta to bounce back from instability, the following four things are going to have to happen:

  • A rebound in oil prices must occur, back to at least $100/barrel
  • A rebalancing of wages, bonuses, and salaries, (particularly in the petroleum industry), with layoffs, bonus freezes, and wage cuts occurring. The same applies to cost structures for commercial real estate (lower lease deals are already becoming available).
  • A strong performance in the other non-energy sectors (transportation, forestry, agriculture, and tourism)
  • The Canadian dollar is going to have to continue to stay low

As an interesting side note, Alberta’s transportation and warehousing industry over the last 12 months has grown by about 12% with increased employment of 11%. The forestry sector, although small, is also doing well with forestry prices strong. So, although these industries do not pay comparable salaries to the oil and gas industry, there will always be opportunities for employees from the petroleum sector who find themselves laid off or with shortened work weeks.

In terms of the non-energy sectors, although cattle prices are high they are being crushed at the same time by feed costs, leading to margins and profits being whittled away. Tourism, on the other hand, has been an important driver with Banff having their best tourism season ever. This is largely attributed to the low Canadian dollar attracting US tourists to the area.

Long-Term Outlook

Going into fall, Hirsch is expecting a modest recession in Alberta and higher unemployment (pushing up to 7% over the next 6 to 8 months). In 2016, he forecasts a return to the very modest growth but below the national average and by 2017 “we can anticipate brighter days.” He also sees marginal oil prices returning to the $60 range by mid-2016.

So in short, as stated, right now if your mortgage broker “sends you the renewal document you sign it and send it back”. You don’t negotiate and you continue to be “proactive in your management, whether residential, commercial, and industrial.”

Todd Hirsch can be reached at www.toddhirsch.com or on Twitter at @ABeconomist. You can also subscribe to The Owl, Todd’s daily economic e-update, through his website.

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