Alberta ready to defy boom bust cycles of the past: TD Economics



    CALGARY, Sept. 27 /CNW/ - Are Alberta's boom-times setting the economy up
for a classic bust? TD Economics says "no" in a report released today at the
Calgary Economic Development's Economic Outlook luncheon.
(www.td.com/economics).
    There are a number of "flashing warning signs" such as the decline in
natural gas prices and drilling output levels, as well as slower growth in
home and consumer goods sales, but TD economists Don Drummond and Derek
Burleton consider the "odds of a hard landing to be one in four." They cite
the massive surge in oil sands investments and related activities as a key
driver for the province's ongoing expansion.
    Specifically, the report states the Alberta economy will yield another
solid advance in real GDP of 4.3 percent in 2007. In the Calgary Edmonton
Corridor - Alberta's main economic engine - growth is estimated to surpass
5 percent. Over the coming years (2008-09), projected growth rates will
moderate to 2.5-3 percent, largely due to the dampening forces on demand
stemming from rising labor, producer and infrastructure costs. While this
equates a sub-par performance, it is far from the bust scenario that has
followed past periods of euphoria.

    Growth has been good...

    Indicative of Alberta's stellar growth is the emergence of medium-sized
urban centres. During the past five years, seven of Canada's 15 fastest
growing centres (10,000-100,000 population) were located in Alberta: Okotoks,
Wood Buffalo, Grande Prairie, Red Deer, Canmore, Medicine Hat and Lethbridge.
Notably five of these centres were outside the Calgary Edmonton Corridor.

    in the Calgary Edmonton Corridor

    The Calgary Edmonton Corridor is emblematic of the boom's benefits. Among
19 large North American urban centres, this region ranked 4th in terms of job
creation and enjoyed the lowest unemployment rate (3.5 percent in 2006) in
Canada. This region could build upon its enviable standard of living position,
as measured by GDP per capita. With the purchasing power of US$57,000 in 2005,
individuals in the Corridor surpassed the American average by US$15,000, and
are ranked second among OECD countries after Luxembourg in terms of
prosperity.

    and across Canada

    Some Canadians outside of Alberta look at the province's recent drive to
prosperity with envy and are even critical that Alberta's gains have hurt the
rest of Canada by raising overall costs and, in turn, leading to a tighter
monetary policy setting than would otherwise be the case.
    The TD report, however, points out the tremendous spin-off benefits on
the rest of Canada. For instance, it notes a study that estimates 60 percent
of the total output and employment benefits from oil sands development will
migrate to other parts of Canada through higher demand for manufacturing
goods, such as steel. Alberta's above average income level finances
redistribution in Canada and helps to keep taxes down lower in the other
provinces. Indeed, the net contribution of Alberta residents to federal
coffers is about $9 billion per year, or almost $3000 in per-capita terms.

    But prosperity comes with a price tag

    There are some negative consequences to the economic boom. Labour market
shortages abound, partly spurred by an increasing number of baby boomers
heading into retirement. This will likely curtail economic growth. Shortages
are also found in housing and materials' across the province. Prices are
rising fast and enormous strains have been placed on infrastructure and the
environment.
    For instance, the vacancy rates for lower end rental units in the
Edmonton market declined from 5-6 percent to 1-1.5 percent in 2006, pushing up
rents sharply. Homelessness has soared - up approximately 20 percent in 2006.
In Calgary, estimates of the number of homeless show a near five-fold increase
over the past decade. Smaller markets in the Corridor are now experiencing
similar shortages of affordable housing.

    Governments at work

    Governments have worked hard to keep up with the demands for new
infrastructure and public services. Accommodating growth has been particularly
apparent at the provincial level, where revenues have poured in on the back of
a rising resource and non-resource. Indeed the government's overall
discretionary spending has forged ahead at 12 percent per year since fiscal
2004-05. However in some cases this is like throwing fuel on a fire. In the
construction industry, the burst of public capital spending has competed
head-to-head with private projects, driving up materials and labour costs.
    This unfortunate outcome illustrates the difficult challenge facing
policy makers in Alberta. Public consultations have done little to clarify the
future direction. For every Albertan that has called for restraint, at least
one has supported immediate measures to alleviate service and infrastructure
deficiencies in the province. There is no easy solution, but in some cases
spending should be moderated in order to avoid exacerbating the rise in costs.

    Down the road

    The report states that Alberta is in a strong position for future
prosperity, citing for instance that the price of oil is likely to remain
elevated. Moreover the strength of the oil patch has allowed Alberta to
establish a competitive overall tax environment, which should support growth
in other industries.
    But some important challenges remain that will need to be addressed to
ensure sustained prosperity for all Albertans. Challenges cited in the report
include:

    Advancing diversification

    The oil and gas industry now represents 19 percent of the province's GDP,
down from 23 percent in 2001. This bodes well for the province as it is less
dependent on fluctuating oil and gas prices. The province must ensure
diversification continues around a thriving oil and gas sector. Yet, if not
managed carefully, a number of recent policy decisions could impact the
sector's long-term viability, including changes to royalty and tax programs as
well as the environment. The provincial government's response to the Royalty
Review Panel's report will also have significant implications.
    The most powerful way to foster diversification is to continue with
Alberta's past formula of creating a winning business climate, including
further improvements to the province's tax competitiveness at both the
personal and corporate levels.
    These measures should be complemented by actions to spur trade
opportunities and reduce regulation. The 2006 Trade Investment Labour Mobility
Agreement (TILMA) between B.C. and Alberta is in its early stages. Continued
efforts to cement the details and to bring other provinces on board could
provide significant rewards to Alberta's exporters.

    Climate change

    It is widely considered that a price of $30 per tonne of greenhouse gas
emissions is the minimum to achieve meaningful reductions. This would
translate into an extra $3 per barrel of oil, which could substantially change
the economics of production. But the National Roundtable on the Economy and
Environment has estimated that in order to achieve a 45 per cent reduction in
emissions by 2050 - in line with stated federal objectives - the carbon price
would ultimately need to be at least $200 per tonne, or $20 per barrel (in
2003 dollars). This underscores the urgency of accelerating initiatives to
achieve energy efficiencies in the oil patch.

    Skilled labour shortages

    While the Corridor is home to one of the most highly-skilled workforces
in the world, only 43 percent of high school students move on to Post
Secondary Education - the lowest rate in Canada. Although high school drop out
rates had been following a downward track they remain above the national
average. This suggests Alberta's high average education attainment is being
supported by inter-provincial migration of educated workers.

    Heritage Fund

    If non-renewable resource revenues decline in the future - which is a
real risk - an inadequate savings endowment to fund services would imply
higher taxes, reduced public services and a lower standard of living. This is
why reviving the Heritage Fund is a smart policy decision. The fund has grown
by $5 billion since 2003, to $17 billion. In total, the government's
endowments add up to about $40 billion.
    An independent assessment of the current investment strategy and
recommended changes that would maximize the returns is a smart step forward.
It is hoped that Alberta draws lessons from Norway's Petroleum Fund, which
boasts $200 billion in assets. For instance, moving forward it would be wise
to diversify investments to markets outside of Alberta as well as Canada. This
will mitigate the problem of too much capital chasing relatively fixed
resources, resulting in the inefficient allocation of resources.
    According to Mr. Drummond: "The promise of oil sands projects, combined
with assets such as a young, educated population and an excellent business
climate, bodes well for the region. Yet Alberta needs to focus on addressing
some of its vulnerabilities - most which stem from the pressures that flow
from a burgeoning economy - in order to lay the seeds for prosperity well into
the future. Progress has been made, but more needs to be done to ensure the
province sustains its enviable economic position."

    A copy of The Tiger that Roared Across Alberta can be found at
www.td.com/economics.





For further information:

For further information: or an interview with TD economists, please
contact: Daorcey Le Bray, NATIONAL Public Relations, Office: (403) 531-0331,
Mobile: (403) 813-4742, dlebray@national.ca


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