The Conference Board of Canada's latest provincial economic outlook has captured the impact of the collapse in oil prices on Canada's regions, and it is not pretty for some provinces.
We are projecting a decline in economic output (gross domestic product, or GDP) in 2015 for two oil-producing provinces – Alberta, and Newfoundland and Labrador. Economic growth in Saskatchewan, which is also an oil producer, will be much slower than previously projected but will remain positive. All three provinces will feel a large negative hit to provincial government finances, due to much lower oil royalties and a drop in other business-related revenues.
Alberta is the province most affected by the sharp decline in oil prices. Alberta's GDP is now expected by the Conference Board of Canada to contract by 1.5 per cent in 2015 – a very significant 5-per-cent reduction in GDP when compared to our forecast early last fall, when oil prices were still hovering near $100 (U.S.) a barrel. Business revenues for oil producers and their suppliers have already been hit hard, and we expect national oil sector revenues to be down by $40-billion (Canadian) in 2015. Investment in the oil patch is being sharply affected and we project that Alberta's oil sector investment will decline by over 30 per cent in 2015. Similar contractions in planned oil investment are occurring in other places around the globe.
Most of the negative impact of reduced oil sector investment in Alberta will be felt in the first and second quarters of the year. Layoffs, squeezed compensation and slower consumption growth will be the knock-on effects for the provincial economy through the year, and sizable fiscal deficits are in prospect in 2015 and beyond. Increasingly, Albertans are recognizing and preparing for the demanding year ahead.
The projected path for oil prices is a critical part of our forecast. Since mid-January, West Texas intermediate (WTI) oil prices have formed a plateau at around $50 (U.S.), although there is debate among energy market analysts on whether this is the market's bottom. Our forecast projects that WTI oil prices will slowly rise through 2015, averaging $55 a barrel for the year and approaching $70 in 2016.
The Alberta economy should respond accordingly as energy companies return to more profitable levels. We expect Albertan firms to recommence increasing their investment in machinery and equipment later in 2015 in order to boost their competitiveness and productivity. Most of the negative hit to investment, employment and consumption will wash through the system during the second half of 2015, and a recovery to Alberta's GDP will begin to form.
In contrast to the negative impact for oil producers, most other provinces will record slightly stronger 2015 GDP growth. Consumers and businesses will benefit from lower oil prices, and the combination of a weaker loonie and burgeoning U.S. recovery will pull along Canadian exports.
What could alter the projected recovery path for oil-producing provinces? Sharply lower oil prices, driven primarily by global oversupply, are the root cause of the slowdown in both Alberta and Newfoundland and Labrador. The path for global oil prices will drive the shape of the recovery. If WTI oil prices get stuck at $50 a barrel or lower, the recovery would be later to arrive, and the path would be flatter. A faster bounce-back in oil prices would help to shift the recovery forward, although the drop in oil sector investment that is now occurring will be hard to replace any time soon.
In short, the Conference Board of Canada expects Alberta to experience a sharp "V"-shaped decline in the first half of 2015, followed by a "Lazy U"-shaped recovery into 2016. A similar but more muted contraction and recovery pattern is the prospect for Newfoundland and Labrador.
We take no joy in providing this sobering forecast, but it does offer an independent reference point for critical decision making by leaders in business and government.
Glen Hodgson is senior vice-president and chief economist of the Conference Board of Canada.