A ‘startling’ $10 billion turnaround
Alberta needs to get off royalty roller-coaster
Alberta’s royalty roller-coaster produces stomach-churning moments when the economy suddenly careens towards the ground, as we saw last year when the pandemic began.
Yet, it also brings astounding skyward turns, as 2021 is now delivering, with more potential twists on the horizon, such as from rising COVID-19 cases.
In the Alberta government’s first-quarter fiscal update released Tuesday, virtually every major economic measure is surpassing the tepid expectations laid out six months ago in the budget by Finance Minister Travis Toews.
The economy is growing more rapidly than expected, forecast to expand by 6.7 per cent.
Overall employment is anticipated to increase by 5.2 per cent, while the jobless rate is falling faster than expected.
Housing starts are surging. With higher oil prices, an eight-per-cent bump in oilsands production, along with stronger natural gas markets, total non-renewable resource revenues are projected to hit almost $10 billion this fiscal year.
That easily eclipses the paltry $2.9 billion forecast in February’s budget and would mark the highest natural resources payday in Alberta in a decade.
“Since we’re on the positive side of the royalty roller-coaster and facing a huge provincial deficit, this upswing couldn’t have come at a better time,” said Mike Holden, chief economist of the Business Council of Alberta.
The province’s fickle financial fortunes often follow a familiar boom-or-bust trajectory for those trying to balance the books.
This time, the change is to the upside.
“It’s a startling turnaround for the province,” University of Calgary economist Trevor Tombe said in a message.
“This is the same resource revenue roller-coaster that we’ve been firmly on for as long as any of us remember. Sometimes the roller-coaster goes up, which is fun while it lasts, but we can’t forget that an unexpected decline at some point in the future may still happen.”
And there’s the rub. Last year, as the pandemic crushed global energy demand, benchmark U.S. oil prices tumbled into negative territory, petroleum producers chopped spending and layoffs rippled through the sector.
Alberta’s economy contracted by 8.2 per cent.
When the new budget came out in February, the province predicted West Texas Intermediate (WTI) crude oil prices would only average US$46 a barrel this financial year.
The deficit was projected to hit an eye-watering $18.2 billion.
With Tuesday’s update, oil prices are now expected to average US$65.50 a barrel this year, about Us$3-abarrel lower than Tuesday’s closing price. Corporate and personal income taxes are also anticipated to rise by $1.2 billion above the initial forecast.
In turn, the expected deficit has been hacked down to $7.8 billion — nearly a $10.5-billion drop since budget day — while revenues have increased by almost 26 per cent.
“This is due to almost all of Alberta’s revenue sources exceeding expectations,” Toews told reporters.
“Our economic forecast includes the uncertainty of a continuing pandemic within our borders. We’re not expecting to fully recover until 2022, so we know the next days, weeks and even months will be bumpy from an economic standpoint.”
Higher commodity prices and a stronger-than-expected economic recovery are driving the province’s improving financial fortunes. Several other bright spots have emerged, such as rising consumer spending, higher non-energy investment levels and increased manufacturing shipments.
Yet, the recovery still has a ways to go. Alberta isn’t back to pre-pandemic employment levels and some sectors, such as tourism and hospitality, face profound challenges.
(New data Tuesday indicates the country’s economy actually shrank by 1.1 per cent in the second quarter on an annualized basis, another cause for caution.)
Economists say the rising number of COVID-19 cases in Alberta is a potential risk to the outlook.
The fiscal update pointed out the Delta variant could dampen global recovery and lead to a pullback in commodity prices, while “a resurgence in COVID-19 infections in Alberta could also derail the recovery in the second half of the year.”
TD Bank economist Omar Abdelrahman said the bounce back in provincial GDP has exceeded expectations, although the fourth wave of COVID-19 remains a concern.
“There is always a risk of a pullback in consumer and business confidence, even if you don’t have restrictions,” he added.
“We are not out of the woods yet.”
Higher oil prices and expected GDP growth are welcome changes after last year’s deep recession.
Travis Shaw, a senior vice-president with credit rating agency DBRS Morningstar, said Alberta’s economic outlook is improving and debt levels are growing more slowly than anticipated.
“We’re looking to see really how the spending picture evolves,” Shaw said. “How much of this is a one-time improvement, versus an improvement to the base going forward in future years?”
The fiscal update also highlights the need for ongoing efforts that focus on pandemic response and economic diversification, the Calgary and Edmonton chambers of commerce said in a joint statement.
Just this week, a new survey of business operators and the public released by the Alberta Chambers of Commerce found “diversifying the economy beyond oil and gas” is the top priority for 32 per cent of respondents.
It topped nine other objectives, such as balancing the budget, lowering taxes and reducing emissions.
However, the survey also found 82 per cent of business operators and 76 per cent of the public think the oil and gas sector is vitally or very important to the province’s economy.
For Albertans, it’s hard to know where the economic track is headed during such uncertain times, but the royalty roller-coaster is taking off again, fuelling another surge of revenue into provincial coffers at a time when it’s greatly needed.
“We can’t count on this to happen in the future ... This is a great little boost that helps reduce the amount of debt the province is going to be adding next year,” Holden said.
“But we do need to get off the roller-coaster.”