In June, this column reported on Metropolitan’s Edmonton’s “Goldilocks” economy, which, despite the calamitous drop in oil prices, continues to chug along.
A Goldilocks economy is not too hot, not too cold. Not great, but not bad.
But if oil prices stay low, City of Edmonton chief economist John Rose warned at the time, “we could be in a real pickle by this time next year.”
I disagree. Rose’s “real pickle” is not conditional.
Oil prices will stay low and all Alberta will head into a serious recession by January/February of 2016.
The price of oil – the mega-driver of the regional economy – is not going to recover. The analysts were hopeful things had bottomed out at $60 a barrel in June. This week, the price has dropped to under $45.
CFCW’s Making Money show host and financial advisour Ron Hiebert of ScotiaMcLeod has researched oil prices from 1894 to 2011. Historically, there have been four extended periods of low global oil prices, for 73 of those 117 years. Each lasted an average 18 years.
This one is still a baby, just one year old. There’s no sign of a price recovery. Increased production and a plateauing of demand means the world is awash in oil. The Organization of Petroleum Exporting Countries (OPEC), controlling 40% of the world’s daily oil output, is not cutting back.
Signs of an impending serious economic slowdown are creeping up on us.
Heavy industry construction – oil sand projects, petrochemical plants, pipeline construction – drives this province. New heavy industry expansion is moving into slow-down/stop mode. Oil sands projects announced but not underway are being indefinitely postponed. Those now under construction are being extended over longer time periods.
Increased provincial corporate and carbon taxes are biting into Big Oil’s capital budgets. Bitumen producer CNRL is paying an extra $575 million in corporate taxes this year – equal to 10% of its capital expenditures.
Residential vacancy rates in Fort McMurray are at an alarming 9%. One year ago, beds were so scarce that workers were sleeping in their trucks. Fort McMurray house prices are down 9% to 10% from 12 months ago.
Opportunity beckons elsewhere. B.C. will soon need thousands of tradespeople to build the first $10 billion LNG (Liquid Natural Gas) plant on the coast, to send Canadian natural gas overseas. New Brunswick’s Irving Oil is wooing Fort McMurray Maritimers. Come home to work on new east-coast energy projects.
Higher-end consumer trends – how much the rich guys are spending or not – is a bellwether. They’re usually good money managers.
In Metro Edmonton, houses worth under $450,000 – both new and re-sale – are selling, thanks to low interest rates. The sale of homes worth over $650,000, however, has considerably slowed down.
With the increase in personal provincial income taxes for the wealthy, Hiebert is seeing affluent retirees or semi-retirees exiting the province. “The Alberta tax advantage is gone, so these guys are selling their Alberta condos and moving to the west coast. Financially, why would they stay?”
Overall in Alberta, luxury vehicle sales are down, as are vehicle sales in general. Shares in the publicly traded AutoWorld, with 48 dealerships primarily in Western Canada, have slumped from $77 a year ago to $32.
Net migration within Canada to Alberta has dropped like a rock. In the first three months of 2014, Alberta had, overall, 19,300 new arrivals. Fast forward to the same time period this year, it’s 7,700. That’s far fewer new arrivals needing accommodation, food and fuel.
No one knows when a recession will come crashing down. Who knows when and why a few loose pebbles turn into a landslide.
But the warning signs are blinking.
We’ll get through Christmas thanks to consumer spending. But it says here that Northern Alberta will find itself in a serious recession by early 2016.
Hope for the best. Prepare for the worst.
Warning signs Alberta is close to recession: Year-to-date economic comparisons, 2015 to 2014. (Source: Alberta Government Economic Dashboard,www.economicdashboard.albertacanada.com)
Total value of MLS (multiple listing sales) home sales, down -15.1%
Total value of motor vehicle sales, down -13.7%
Total value of manufacturing sales, down -11.6%
Number of housing starts, down -24.2 %
Number of building permits, down -8.2%
Number of job vacancies, down -35%