Economic outlook

Economic indicators that show signs of how Alberta's economy is performing.

Overview

Alberta’s economic recovery is firmly underway, with nearly every sector of the provincial economy strengthening.

Alberta is widely expected to lead all provinces in growth this year, with real GDP growth revised up to 4.0% from 2.6%. This growth has been fuelled by robust numbers over the first half of 2017.

Oil production is boosting exports, and an improving labour market – with over 70,000 full-time jobs added since mid-2016 – has fuelled retail sales and demand for housing.

Economic activity, as measured by the Alberta Activity Index (AAX), is up by 5.4% so far this year, boosted by rapid growth in the first half (Figure 1).
 

Contribution to year-over-year change in the Alberta Activity Index
Source: Alberta Treasury Board and Finance

Growth is expected to moderate to 2.5% in 2018, as the economy shifts gears and the recovery becomes entrenched.

Several economic indicators have eased in recent months from the torrid pace set in the first half of 2017.

In addition, some indicators such as average weekly earnings and non-residential construction continue to lag. This highlights the impact that the oil price shock continues to have on the economy and government revenue.

Oil prices below budget forecast

Oil prices have improved in the last three months. The recovery has been driven by ongoing rebalancing in the oil market, OPEC production cuts, a geopolitical risk premium in the Middle East and stronger demand, especially in advanced economies.

Despite these developments, oil prices in the first two quarters of 2017-18 were much lower than expected at budget, and responsive U.S. production is likely to keep a lid on prices.

As a result, the West Texas Intermediate (WTI) price – the North American light crude benchmark price – is forecast to average US$49/bbl for the fiscal year, US$6/bbl lower than the budget forecast.

Heavy oil producers in Alberta have benefited from a narrower light-heavy (WTI-WCS) differential, as heavy supply reductions from OPEC production cuts and declining heavy production in Venezuela have supported heavy oil prices.

Despite the differential widening recently due to unexpected refinery outages and robust growth in oil sands production, it is forecast to average US$12.10/bbl in 2017-18, US$3.90/bbl narrower than forecast at budget.

Stronger oil and gas activity

The recovery in oil and gas activity is one of the principal factors driving Alberta's recovery in 2017.

Conventional investment is forecast to grow by 40% in 2017, up from 22% at budget. Drilling activity for much of 2017 has been double 2016 levels, and increased interest in liquid-rich conventional development has boosted Crown land sales.

Non-conventional investment, on the other hand, is expected to fall in 2017 as construction wraps up on the last of the large oilsands projects that began before prices declined. As these projects move into the operation phase, oil production is expected to increase by 311,000 barrels per day in 2017-18.

The ramp up in production highlights the need for additional pipeline capacity to diversify markets and improve returns for Canadian crude oil.

Non-residential investment to stabilize

Investment outside the energy sector, particularly in commercial construction, has lagged behind improving economic conditions elsewhere in the province.

As the province moves into a second year of sustained economic growth in 2018, non-residential investment is expected to stabilize and begin to recover.

This is similar to the 2008-09 recession, when non-residential investment did not begin recovering until late 2011.

Manufacturing base expands

Alberta's manufacturing industries have seen a solid improvement this year.

Manufacturing sales, while still below their pre-recession peak, have posted substantial gains since early 2016.

Higher oil prices have boosted prices for petroleum and petrochemical products.

The forestry sector has been bolstered by higher lumber prices, in part due to market disruptions caused by hurricanes Harvey and Irma and wildfires in western North America.

Manufacturing volumes are also expected to be higher this year as a result of capacity expansions at two chemical processing facilities and the reopening of a beef packing plant in Balzac earlier this year.

Alberta's manufacturing base will be further expanded in 2018 with production starting at the Sturgeon Refinery.

These factors, combined with stronger oil production, are expected to support real export growth of 5.7% in 2017 and 3.4% in 2018.

Labour market gaining strength

Alberta's labour market continues to recover. As of October 2017, the provincial economy has regained 41,000 of the 62,000 jobs lost during the recession.

This has been led by gains of more than 70,000 full-time positions, which offset part-time losses (Figure 2).

The economy is projected to see employment growth of 1.0% in 2017 and 1.5% in 2018, closely in line with the budget forecast.
 

Cumulative change in Alberta employment since July 2016
Source: Statistics Canada

The budget forecast for the unemployment rate is also closely tracking the actual rate, so it is unchanged for 2017 at about 8.0%.

As the economy improves and employment growth accelerates, the unemployment rate is anticipated to decline to 7.6% in 2018.

Average weekly earnings (AWE) have finally started to recover, though at a weaker pace than what was expected at budget. AWE are expected to grow by a modest 0.8% in 2017 before growth rises to 1.4% in 2018.

Consumer confidence improves

An improving economy has consumers returning to the tills. Retail sales have returned to pre-recession levels and are up to 8.0% year-to-date.

As a result, the forecast for real household consumption growth has been revised up to 2.4% for both 2017 and 2018.

The increased demand from consumers has yet to translate into significantly higher prices, with CPI inflation in Alberta well below 2%.

Housing market on the rebound

Rebuilding in Fort McMurray (Figure 3) and robust demand for single-unit dwellings are fueling residential investment.

House prices and the number of sales have been growing this year, and rebuilding efforts in Fort McMurray are ahead of schedule.

Consequently, the forecast for housing starts in 2017 has increased from 24,500 at budget to 28,700, and the forecast for residential investment has been revised up from 1.7% to 14%.

In 2018, housing starts are forecast to hold steady at 29,000.
 

Alberta housing starts
Sources: Canada Mortgage and Housing Corporation and Treasury Board and Finance
*Seasonally Adjusted at Annual Rates

Updated economic and energy price assumptions

 
Fiscal Year 2016-17 Actual 2017-18, 6 Month Actual 2017-18 Budget 2017-18 2nd Quarter
WTI Oil Price (US$/Barrel) 47.93 48.25 55.00 49.00
Light Heavy Differential (US$/Barrel) 13.93 10.53 16.00 12.10
Natural Gas (Alberta Reference Price Cdn$/GJ) 2.01 1.99 2.90 2.20
Exchange Rate (US cents/Cdn$) 76.2 77.1 76.0 78.3
Source: Alberta Treasury Board and Finance
 
Calendar Year 2016 2017 Forecast 2018 Forecast
Economic Growth (% change in Real GDP) -3.7 4.0 2.5
Employment (% change) -1.6 1.0 1.5
Unemployment Rate (%) 8.1 8.0 7.6
Source: Alberta Treasury Board and Finance

For more information, read the Economic Outlook section of the 2017-18 Second Quarter Fiscal Update and Economic Statement

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