In the past decade, Alberta has experienced three deep recessions. With the prolonged oil price slump and persistent unemployment Alberta’s economy was already struggling; COVID-19 has stalled economic recovery further. Many Alberta businesses do not have the cash flow to weather this crisis and government hand-outs may not be enough to provide financial stability.
Energy sector
Oil analysts are predicting oil demand will outstrip supply resulting in an increase in the price of Brent crude that ranges from $46-66 per barrel by year-end and up to $83 in 2021. Although Western Canadian Select (WCS) continues to trade at a steep discount, the demand increase will also affect heavy oil pricing – reassuring news for Alberta’s oil sector. Canadian oil producers are already increasing production to take advantage of higher pricing.
On the flip side, many energy companies took advantage of cheap financing, borrowing heavily to finance operations and that debt is now coming due.
Data
TD Economics forecast an annual negative 7.9% real GDP and an unemployment rate of 12.2% for 2020. Although 2021 is expected to improve, this will depend upon oil pricing, COVID-19, and business confidence (see the table to the left).
The $7 billion 2020 provincial deficit forecast has ballooned to $20 billion; it remains to be seen how this will affect tax rates and government spending going forward. The UCP is expediting a much-needed stimulus package and it’s expected that any tax increases will be suspended until we see economic recovery. Albertans should prepare themselves for a day of reckoning, which may include a provincial sales tax.
On the Horizon
The recently announced $10 billion government stimulus package is projected to create 50,000 new jobs, lure business investment, diversify the economy, and promote long term growth. However, many businesses will suffer the fall out from COVID-19 as they struggle with operating costs that exceed revenue and carry the burden of unaffordable debt. Oil companies will need to choose between debt and equity financing and capital investment, or short-term survival. Furthermore, high debt loads carried by Canadian households, combined with reduced income, will impact consumer spending. With household consumption taking up the lion’s share of GDP – around 58% – and business investment comprising of 18%, it’s understandable that growth will hinge on both consumer and business confidence.
Alberta is the second-largest exporting province. In 2019, we exported $88.7B US in goods and services, primarily comprising of energy (oil and gas) and agriculture products. Export growth will depend upon global economic health and the effort of large economies being able to successfully navigate market uncertainty, reopen businesses, and promote socially responsible trade.
Looking Forward
Alberta’s Economic Recovery Council was appointed to assist the government with policy development, economic strategy, and accelerated diversification. Input from qualified policy and industry experts focused on the economy will help guide recovery. While provincial and federal governments have been grappling with both domestic and global unpredictability, they remain focused on creating stability and reopening the economy responsibly. It’s a difficult position for any government party to be in and there is no clear cut tried and tested solution. Any public policy change implemented will result in trade-offs and consequences that will affect all of us to some degree. We can only hope that it will lead to a return to prosperity.