Overview

Alberta’s economy is turning the corner with modest economic recovery expected for the first time since oil prices began their unprecedented decline more than 2 years ago.

Growth in 2017 will be driven by exports, which will be fuelled by increased drilling activity, oil production and manufacturing. Reconstruction in Fort McMurray and government capital spending will also support growth.

The recovery is expected to be moderate, as unprecedented declines in income during the downturn will continue to weigh on business investment and consumer spending. Real GDP is forecast to increase by 2.6% over the year, but will remain below pre-recession levels until 2019.

This graph shows the year-over-year change in the Alberta Activity Index and Real GDP.

Alberta has started to emerge from one of its worst recessions, caused by the steepest and most prolonged oil price shock in Canadian history. The Alberta Activity Index (AAX)* indicates that the economy has entered recovery mode.

* Developed by Alberta Treasury Board and Finance, the AAX tracks economic activity closely. It is a weighted average of nine monthly indicators (employment, average weekly earnings, retail trade, wholesale trade, manufacturing, new truck sales, housing starts, rigs drilling, oil production).

Sources: Statistics Canada and Alberta Treasury Board and Finance, e-estimate, f-forecast

Transition to a lower oil price environment

As the provincial economy transitions to a lower oil price environment, several factors will help smooth the adjustment. Business costs in the province have moderated, and a lower Canadian dollar will continue to support exports. Meanwhile, a slower expansion of the labour force and a return to employment growth are expected to result in a steady decline in the unemployment rate.

In 2017, increased infrastructure spending is expected to boost activity and improve productivity. Alberta’s population growth is slowing, but is still forecast to grow at a faster pace than the Canadian average, supporting consumer spending and housing.

Despite a modest economic recovery, incomes and private investment in Alberta are expected to remain higher than in other provinces.

Exports

Overall, real exports are expected to expand by 4.6% in 2017, supported by production growth in several sectors, rising oil prices and a lower Canadian dollar. Overall, trade is expected to add 1.8 percentage points to real GDP growth in 2017.

This graph shows the contribution to change in Alberta Real GDP by expenditure of exports, imports, total domestic demand and real GDP

Alberta’s recovery will be fueled by exports in 2017.

Sources: Statistics Canada and Alberta Treasury Board and Finance, e-estimate, f-forecast

* Includes total household, business and government spending

A surge in oil sands output will drive exports. Two major mining projects, the Suncor Fort Hills and the CNRL Horizon Phase 3, are expected to come online this year, in addition to several other projects. Overall, more than 600,000 barrels per day of new production is expected to lift real oil exports by 16% over the next 2 years.

Alberta real manufacturing exports are expected to grow between 3.6 and 4.0% annually over the forecast period as well. Machinery and equipment manufacturing, which primarily serves the energy sector, will benefit from increased drilling activity in the United States. In addition, food processing - which has been a bright spot in Alberta’s economy - is forecast to continue expanding.

This graphic shows shipments of Alberta's agriculture commodities and agri-food products is on the rise.

The proportion of value-added food processing is increasing in Alberta’s agri-food sector and supporting export growth.

Sources: Statistics Canada and Alberta Agriculture and Forestry

Conventional oil and gas investment

The number of active rigs began to rise in mid-2016 with the improvement in oil prices. By January 2017, this number had reached its highest level since early 2015. This recovery is expected to continue in 2017 and lift conventional investment by over 20%.

The increase in conventional oil and gas drilling in 2017 is expected to lift overall energy investment by 4.9% in 2017, before slowing to an average of 3.3% growth over the forecast period.

This graph compares Alberta's conventional oil and gas investment, oil sands investment and production between 2009 and 2020 (forecast).

Conventional oil investment is responding to the improvement in oil prices, while oil sands investment is expected to fall again in 2017.

Sources: Statistics Canada and Alberta Treasury Board and Finance, e-estimate, f-forecast

Construction activity

Outside the energy sector, investment continues to be hampered by declining private sector construction spending. There are a number of major commercial and industrial projects that were recently completed or are nearing completion. Building permits have fallen significantly since the end of 2015, suggesting there will be fewer projects breaking ground this year. As a result, investment outside of oil and gas is expected to decline by 5.8% in 2017.

This graph shows Alberta non-oil and gas investments and non-residential buildings permits between 2010 and 2020 forecast.

Private sector construction activity is expected to slow in 2017 as large projects continue to wind down. This will be offset by higher government infrastructure spending.

Sources: Statistics Canada and Alberta Treasury Board and Finance, e-estimate, f-forecast

Non-energy business investment is expected to return to growth in 2018, as the economic recovery takes root and business confidence increases. It is expected to grow by 1.1% in 2018 and climb to over 6% by 2020.

The Petrochemicals Diversification Program will help drive investment in petrochemical production capacity. Two projects - totalling almost $6 billion in investment - have already been approved under the program, and construction is expected to start in the next 3 years.

Corporate income

With oil prices strengthening and producers reducing costs, corporate profits are expected to improve. Net corporate operating surplus - a measure of corporate profits and a driver of corporate income tax revenue - is anticipated to grow by more than 60% in 2017 after an unprecedented decline over the past 2 years. This will boost nominal GDP (a broad measure of incomes) by more than 5% this year.

This graph shows Alberta's labour income, net operating surplus, other income and GDP between 2010 and 2020 (forecast)

A return to corporate income growth will lift nominal GDP in 2017.

Sources: Statistics Canada and Alberta Treasury Board and Finance, e-estimate, f-forecast

* Includes net operating surplus of corporations and net mixed income.

** Includes consumption of fixed capital and taxes less subsidies.

Labour market

Employment in the province is expected to improve in 2017, carrying momentum from the second half of 2016. Following a decline of over 62,000 jobs from the September 2015 peak to the low in July 2016, the province added about 18,000 jobs by January. Growth was mainly driven by the resource sector as oil prices and drilling activity began to recover.

With conventional oil, gas and manufacturing activity increasing this year, the goods sector is expected to fuel the jobs recovery in 2017. Reconstruction efforts in Fort McMurray and ongoing government infrastructure spending are also expected to contribute; however, lower private-sector and oil sands construction spending will limit the gains.

Employment is expected to advance by a modest 0.9% in 2017 and climb by 1.4% in 2018 when the total number of jobs in Alberta is expected to surpass its previous peak.

Even as employment declined in 2016, people continued to join the labour force. This caused the unemployment rate to rise to 8.1%. Although employment is expected to increase in 2017, the number of new entrants in the labour force will rise at almost the same pace. This will keep the unemployment rate at 8.0% in 2017.

This graph shows Alberta's unemployment rate, labour force growth and employment growth between 2001 and 2020 (forecast)

The unemployment rate will fall gradually as employment grows faster than the labour force.

Sources: Statistics Canada and Alberta Treasury Board and Finance, f-forecast

* The number of people working or looking for work

Population growth

Population growth remains above the national average, but the pace is slowing due to weaker migration. The number of Albertans leaving for other provinces grew through 2016. This trend is expected to continue in 2017, with the net outflow of interprovincial migrants forecast to reach 11,000. However, natural increase and elevated international migration are forecast to more than offset this, and will drive Alberta’s population to grow by 1.3% in 2017.

This graph shows the change in Alberta's population from natural increases, net international immigration, net interprovincial migration between 2005 and 2020 (forecast)

Solid immigration has offset net outflows of migrants to other parts of Canada.

Sources: Statistics Canada and Alberta Treasury Board and Finance, f-forecast

Consumer spending

Slower population growth and limited employment gains are expected to limit growth in consumer spending this year. In 2017, household expenditures are forecast to grow by a modest 2.8%, or 0.9% when adjusted for inflation. Over the medium term, an expanding population, relatively low interest rates and Alberta’s high per capita income are expected to support housing and consumer spending.

This graph shows the change in Alberta's household consumer spending and primary household income between 2010 and 2020 (forecast)

Household spending is expected to remain subdued.

Sources: Statistics Canada and Alberta Treasury Board and Finance, e-estimate, f-forecast

Economic and energy price assumptions

 

Source: Alberta Treasury Board and Finance
  2015-16 Actual 2016-17 Estimates 2017-18 Budget
WTI Oil Price (US$/Barrel) 45.00 48.00 55.00
Light Heavy Differential (US$/Barrel) 13.40 14.20 16.00
Natural Gas (Alberta Reference Price Cdn$/GJ) 2.21 2.15 2.90
Exchange Rate (US cents/Cdn$) 76.3 76.0 76.0

 

Source: Alberta Treasury Board and Finance
  2015 Actuals 2016 Estimates 2017 Forecast
Economic Growth (% change in Real GDP) -3.6 -2.8 2.6
Employment (% change) 1.2 -1.6 0.9
Unemployment Rate (%) 6.0 8.1 8.0