BAD ECONOMIC NEWS COMES IN THREES FOR CALGARIANS
Falling oil prices, the collapse of an iconic retailer and rising taxes spell trouble
They say trouble comes in threes.
This week provided a good example of the phenomenon with falling oil prices, an iconic retailer closing stores, and new signs that the city tax burden will continue to shift out of the downtown — and on to businesses in other areas of Calgary.
Each downer is worthy of examination.
AN OILY DILEMMA
Oil prices sank Wednesday to their lowest point in 10 months, with West Texas Intermediate crude closing at US$42.53 per barrel, before rebounding slightly Thursday.
This came as the U.S. Energy Information Administration reported shale production south of the border continues to accelerate.
Global crude markets have been on a toboggan ride downhill since members of the Organization of Petroleum Exporting Countries agreed a month ago to extend production cuts.
Such a step would usually be positive for prices, but traders are looking for deeper reductions to bring the market back into balance.
“People are saying (the cut) is a step in the right direction, but it’s still not enough,” said commodities analyst Martin King of GMP FirstEnergy in Calgary. “Implicitly, the market is demanding either bigger inventory changes or more action from OPEC.”
The trend is bad news for Canadian producers and provincial finances. While drilling activity is increasing this year, oilpatch boardrooms will be closely watching prices through the summer.
In its March budget, the Notley government projected a $10.3-billion deficit this fiscal year based on oil at $55 a barrel. Every $1-a-barrel drop in the average price of crude over the course of the year translates into a $310-million dip in provincial revenues.
Based on oil futures, prices for the next year are expected to be about $10-a-barrel lower than what the province anticipated, eliminating about $3 billion in expected revenue, said economist Ron Kneebone at the University of Calgary.
Other factors will affect Alberta’s finances in the weeks ahead, such as the positive impact of the lower Canadian dollar and an improving economic recovery.
“I would be willing to bet that they are looking at a $12-billion deficit this year,” Kneebone said. “The thing that swamps everything else is the loss of oil and gas royalties.”
SEARS CLOSING
Trouble came to a head at Sears Canada on Thursday as the company announced it’s been granted creditor protection and embarked upon a major restructuring.
The iconic retailer will close 59 stores across Canada and plans to cut 2,900 positions, including 222 full-time and 792 part-time jobs in Alberta. Nine stores will shut down in the province.
The company, which lost $144 million in the first quarter, has been trying to reinvent itself over the past 18 months.
But liquidity pressures, “as well as legacy components of its business, are preventing it from making further progress in its brand reinvention efforts,” the company said in a statement.
Lynne Ricker, a senior instructor of retail management at the U of C’s Haskayne School of Business, said Thursday’s announcement means fewer jobs and more empty retail space in Alberta. It will also diminish competition in smaller centres where Sears is shuttering stores.
“They’re in trouble because they’ve failed to keep up with changing consumer needs and the retail environment has changed a lot,” she said.
Ricker noted some older Sears stores need updating, while the company sold off leases in some prime locations in recent years. With more consumers shopping online, it’s imperative department stores give consumers a reason to visit their locations.
“It’s actually harder to reposition a brand like Sears that is sort of a Canadian icon. It’s been around a very long time and everybody thinks they know what Sears stands for,” she concluded.
“To make it something different in the minds of consumers is very hard to do.”
Earlier this year, many Calgary businesses outside the downtown faced the prospect of massive increases in their municipal tax bills due to the steep drop in the value of downtown office towers.
Because of the recession, the assessed value of office buildings in the core dropped by $3.8 billion last year as vacancy rates increased.
A decrease in taxes paid by office building owners normally means other non-residential taxpayers — office, retail or industrial businesses — would have to make up the difference during the city’s annual property tax reassessment process.
In early January, city hall said almost three-quarters of all nonresidential properties would see a tax hike, and more than 3,500 commercial owners would face double-digit increases.
Council later decided to create a $45-million program to cap these increases at five per cent.
But businesses could face the same problem next year.
A new report by the Conference Board of Canada forecasts the assessed value of the downtown office market will plunge another 15 per cent in 2017.
In turn, property tax revenue from downtown office buildings is expected to slide by $24 million, or nine per cent.
“This means there will likely be a … tax rate increase on non-residential properties to compensate for the falling assessments on downtown office buildings,” the report states.
Coun. Ward Sutherland said many Calgarians aren’t thinking about the issue today, but it could affect local businesses next year come tax time.
“If these values continue to go down (in the) downtown, we are going to run into the identical circumstances that we had this year,” Sutherland, vice-chair of the city’s finance committee, warned Thursday.
The report should serve as a “reality check” for councillors when they examine spending plans for next year, said Amber Ruddy of the Canadian Federation of Independent Business.
“We thought we had already experienced the worst of it,” she said. “It’s troublesome.”
On Thursday, with a trifecta of gloomy news, there was plenty of trouble to go around.