Download: 2018-19 Second Quarter Fiscal Update and Economic Statement
Published November 30, 2018 (PDF, 1 MB)

See below for economic outlook highlights from the publication.

Overview

The Alberta economy is on track to post solid growth in its second year of recovery. The province has added more than 42,000 jobs since October 2017. However, transportation bottlenecks – if left unchecked – will continue to cripple Alberta oil prices and create challenges for the economy.

Alberta’s recovery following the 2015-16 recession has been a key driver of the Canadian economy. A lack of progress from Ottawa on pipelines has resulted in a slowdown in economic activity heading into 2019 and lost income to the country.

Through the first 3 quarters of 2018, Alberta’s economy expanded in line with Budget 2018 expectations. Heading into the fourth quarter of 2018, however, Alberta crude oil is trading at record discounts to global benchmarks, and economic conditions have deteriorated markedly.

As a result, after nation-leading growth of 4.5% in 2017, real GDP is expected to be 2.5% in 2018, down from the 2.7% growth forecast at budget.

With market access issues persisting in 2019, weaker corporate profits and slower oil production growth will dampen investment and exports next year. Based on recent developments, 2019 growth is forecast to slow to 2.0%, down from 2.5% at budget.

Alberta oil prices tumble

Alberta oil producers are grappling with weaker global oil prices and severe discounts for their crude. West Texas Intermediate (WTI), the benchmark North American crude oil, has fallen below $55 USD per barrel in recent weeks, a decline of more than 30% from a 4-year high reached in early October.

Global prices have come under pressure as concerns over a supply glut have intensified. At the same time, persistent transportation bottlenecks and rising inventories have caused severe discounts for Alberta crudes. The differential between WTI and Alberta’s Western Canadian Select (WCS) widened to a record high in October (Chart 1).

The WTI-WCS differential is forecast to remain volatile and elevated in 2019, until rail capacity increases and Enbridge’s Line 3 pipeline expansion comes online. As a result, the WTI WCS differential is expected to average $29.25 USD per barrel in 2018-19, up from $22.40 USD at budget. The price of WTI oil is forecast to average $64 USD per barrel in 2018-19.

Chart 1: Daily oil prices

Chart 1: Daily oil prices
Sources: Kent Group Limited, Financial Times, Haver Analytics

Corporate profits aided by weaker Canadian dollar

A lower Canadian dollar is cushioning the blow of weaker oil prices on corporate profits for Alberta oil producers and other exporters. After a brief uplift in early October from the conclusion of the US-Mexico-Canada trade negotiations, the Loonie has since slipped to around 0.76 USD / CAD.

The 2018-19 exchange rate is now forecast at 0.775 USD / CAD, two and a half cents lower than expected in Budget 2018.

Pipeline constraints lower investment

The run-up in oil prices earlier in the year brought the prospect of continued improvement in oil and gas investment in 2018. However, the collapse in WCS prices is hitting corporate profits and weighing on investor sentiment.

Efforts to curb costs and reduce production have weakened the energy investment outlook. Oil sands investment in 2019 is forecast to remain weak after 4 years of decline, while growth in conventional investment is forecast to slow.

Labour market resilient

Employment gains have been moderating compared to last year’s strong pace, but still remain solid. The province has added more than 42,000 jobs since October 2017, reflecting broad-based gains (Chart 2).

A stronger economy has drawn people back into the workforce, lifting the participation rate to a 10-month high. This, along with a pick-up in population growth, pushed the unemployment rate to 7.3% in October.

The unemployment rate has averaged 6.7% year-to-date, in line with budget expectations. It is expected to decline to 6.3% in 2019.

Chart 2: Change in Alberta employment from October 2017

Chart 2: Change in Alberta employment from October 2017
Source: Statistics Canada

Exports aid growth

Despite recent difficulties, solid business activity has been the linchpin of Alberta’s economic growth so far this year. Manufacturing sales are at a 4-year high and are up 8.5% through the first 3 quarters of 2018 (Chart 3).

Energy exports have also risen by more than 19% over the same period, bolstered by the improvement in prices and strong growth in oil production prior to the recent slide in WCS prices.

Given the year-to-date strength, exports are expected to grow by 7.4% this year. However, oil producers have already started to slow production in response to the wider differential. This is expected to carry into 2019, dragging down exports and overall real GDP growth in 2019.

Chart 3: Alberta business indicators

Chart 3: Chart 3: Alberta business indicators
Source: Statistics Canada

Non-energy investment shift

There are some positive signs for investment outside the energy sector. The decline in private-sector construction spending over the past 3 years looks to have abated, led by a recovery in industrial construction, which climbed to a 2-year high in the third quarter of 2018.

The decline in real non-energy business investment is expected to moderate to 2.9% this year before turning to modest growth in 2019.

Housing market slows

Tighter mortgage regulations, rising interest rates and elevated housing inventories are weighing on residential housing activity. Resale activity across most regions of the province has slowed markedly in recent months, with the number of units sold falling below last year’s levels and prices softening.

Households cautious

Rising costs and weaker sentiment are slowing the pace of consumer spending in Alberta. While retail sales remain at record levels, they are being propped up by higher consumer prices. Inflation remains elevated due to higher gasoline and electricity prices, along with a weakening Canadian dollar.

Inflation has been revised to 2.5% in 2018, up 0.4 percentage points from budget. On an inflation-adjusted basis, growth in consumer spending in 2018 is now forecast to rise 2.2%, compared with 2.9% at budget.

In 2019, growth is forecast to increase slightly, buoyed by a growing population and employment gains.

Economic and energy price assumptions

Fiscal Year 2017-18
Actual
2018-19
6 Month Actual
2018-19
Budget
2018-19
2nd Quarter
WTI Oil Price
(US$/Barrel)
53.69 68.69 59.00 64.00
Light Heavy Differential
(US$/Barrel)
14.40 20.76 22.40 29.25
Natural Gas
(Alberta Reference Price Cdn$/GJ)
1.82 0.98 2.00 1.50
Exchange Rate
(US cents /Cdn$)
78.0 77.0 80.0 77.5
Source: Alberta Treasury Board and Finance

 

Calendar Year 2017
 
2018
Forecast
2019
Forecast
Economic Growth
(% change in Real GDP)
4.5* 2.5 2.0
Employment
(% change)
1.0 1.9 1.4
Unemployment Rate
(%)
7.8 6.7 6.3
Source: Alberta Treasury Board and Finance; * - estimate

 

Read the 2018-19 Second Quarter Fiscal Update and Economic Statement (PDF, 1 MB).