Economic outlook

Updated forecast and analysis of various economic indicators that show signs of how Alberta's economy is performing.

Overview

Alberta has emerged from the worst recession in a generation, caused by the steepest and most prolonged oil price shock in Canadian history.

Alberta's economic rebound surpassed expectations in 2017. The resurgence was broad-based, with nearly every sector of the economy expanding:

  • real Gross Domestic Product (GDP) grew an estimated 4.5%
  • exports increased by nearly 30%
  • housing starts grew by 20%
  • retail trade expanded by 7.5%

The labour market also strengthened throughout the year, recovering all the jobs lost during the recession.

Building off the surge in economic activity in 2017, the economy is forecast to expand at a solid rate of 2.7% in 2018.

Beyond 2018, Alberta's economy will move from recovery to expansion, with continued growth of around 2.5% per year expected from 2019 to 2021.

Chart 1: Economy moves from recovery to expansion
Alberta real GDP

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

Exports will continue to propel growth as oil production rises and capacity expands in the manufacturing sector.

Real exports are forecast to increase by nearly 5% in 2018 and by about 3% between 2019 and 2021.

Chart 2: Exports continue to drive recovery
Contribution to change in Alberta real GDP by expenditure

Sources: Statistics Canada and Alberta Treasury Board and Finance; e-estimate, f-forecast
* Includes total household, business and government spending.

As the pace of production moderates, however, growth will be driven less by exports and more by investment. Business investment, which has lagged the rest of the recovery, is expected to turn around starting in 2019.

Although the outlook for oil and gas investment is muted, investment in non-residential construction, in particular manufacturing, is expected to help fuel the economic expansion.

Beginning in 2019, the service sector is expected to contribute more to real GDP growth than the goods sector, as rising business activity and consumer spending will boost demand for various services such as finance, real estate, wholesale and retail trade.

Households will also contribute to Alberta's economic expansion, with increased consumer spending supported by rising household incomes and solid population growth.

Labour market renewal

In the last three months of 2017, employment increased sharply, marking a full recovery of the number of jobs lost during the recession.

This improvement was due to increases in full-time and private-sector positions which are expected to extend into this year.

Building on the momentum in the labour market from the second half of 2017, employment growth is expected to accelerate in 2018 to 2.0%.

Solid employment growth is expected to continue, averaging 1.7% per year by 2021.

With more full-time employment, average weekly earnings (AWE) are forecast to expand by 2.4% in 2018 and around 3% annually between 2019 and 2021.

This will support household income growth in 2018 and lift household income above pre-recession levels.

Unemployment falls gradually

With more Albertans working by the end of 2017, Alberta's unemployment rate responded quickly.

It fell from an elevated 8.1% in August 2017 to a two-year low of 7.0% by December 2017.

As employment rises again this year, the unemployment rate is forecast to fall further, to average 6.8% over the year.

However, given the depth of the recession and the prolonged recovery, the unemployment rate will not move near pre-recession rates until 2021, when it is forecast to average 5.3%.

The improvement in the unemployment rate can be attributed to rising employment over the next four years, as the expanding economy provides jobs for people entering the labour market.

Chart 3: Unemployment rate easing
Alberta labour market indicators

Sources: Statistics Canada and Alberta Treasury Board and Finance, f-forecast
* The number of people working or looking for work

Population growth picks up

Alberta's population continued to grow throughout the recession, but it is set to pick up as the effects of the recession continue to fade.

Interprovincial migration was positive in the third quarter of 2017, following two years of net outflows. This is expected to continue in 2018.

In addition, Alberta's relatively young population is producing a robust natural increase of about 0.8% per year, faster than any other province.

Continued strong natural increase and solid immigration into the province are expected to support population growth of 1.4% in 2018, well above the national rate of increase of about 1%.

Income and population growth fuel household spending

Following a surge in 2017 when retail sales reached a new high, Albertans are expected to keep spending in 2018 and over the next few years.

The increase is being driven by rising employment, wages and population.

On the housing side, elevated inventories, higher interest rates and tighter mortgage rules are expected to keep housing starts contained this year at around 30,000, almost the same level as 2017.

However, construction that began in 2017 will continue into 2018, which will support nearly 9% growth in real residential investment.

Residential building activity is forecast to pick up over the next 4 years, on the back of Alberta's more affordable housing market and a net inflow of over 42,000 people by 2021.

Chart 4: Expanding population sustains demand for housing
Alberta housing starts and total net migration

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

Importance of market access

The Alberta economy is on its strongest footing since 2014. However, just as the effects of the oil price collapse have started to fade, the challenges of market access have moved to the fore.

Pipeline bottlenecks and the increasing reliance on rail are lifting transportation costs for Alberta heavy oil. Alberta heavy oil prices are once again trading at a large discount to global prices.

Alberta bitumen is priced lower than West Texas Intermediate prices because of the lower quality of heavy oil and the cost of transporting it to market.

The discount is measured through the light-heavy (L/H) differential. Without sufficient pipeline access, producers pay more to ship their crude by rail.

Lack of market access is hurting heavy oil producers, government revenues and the Canadian economy.

Two pipeline projects approved by the federal government, TMX and the Enbridge Line 3 Expansion, would add almost one million barrels per day of transportation capacity by 2021 and alleviate bottlenecks.

Keystone XL would provide additional longer-term access.

Chart 5: Pipeline access needed for oil sands production
Pipeline and refinery capacity and western Canada heavy oil production

Source: Alberta Energy, f-forecast

Market access also allows for Canadian oil to reach markets where heavy oil attracts the highest price, reducing the discount on Alberta bitumen prices relative to global prices.

Currently there is limited pipeline capacity to the two largest heavy oil markets in the world, the US Gulf Coast and Asia.

TMX is critical, as it would allow producers to sell into the lucrative Pacific market. Keystone XL would provide additional access to the US Gulf Coast, a key market for Alberta's heavy crude.

The economic impacts of market access are very significant.

Additional pipeline capacity would lift capital investment by an estimated $10 billion and production capacity by 190,000 barrels per day between 2018 and 2023, compared to a scenario without additional pipeline access.

Additional pipelines would boost Alberta's real GDP by an estimated 1.5 - 2% by 2023.

Higher production and prices would also boost resource royalties by up to $10.5 billion between 2018 and 2023.

Economic and energy price assumptions

Fiscal Year 2017-18 Estimate 2018-19 Estimate 2019-20 Target 2020-21 Target
WTI Oil Price (US$/Barrel) 54.00 59.00 60.00 63.00
Light Heavy Differential (US$/Barrel) 14.50 22.40 21.00 22.30
Natural Gas (Alberta Reference Price Cdn$/GJ) 1.90 2.00 2.20 2.40
Exchange Rate (US cents /Cdn$) 78.0 80.0 80.0 80.0
Source: Treasury Board and Finance

 

Calendar Year 2017 Estimate 2018 Forecast 2019 Forecast 2020 Forecast 2021 Forecast
Economic Growth (% change in Real GDP) 4.5 2.7 2.5 2.4 2.6
Employment (% change) 1.0 2.0 1.7 1.8 1.6
Unemployment Rate (%) 7.8 6.8 6.2 5.7 5.3
Source: Treasury Board and Finance

 

Read the complete economic outlook chapter from the 2018-21 Fiscal Plan