Ottawa – The Conference Board of Canada’s new provincial economic forecast concludes that a recession is the most likely scenario for Alberta in 2015. This assessment has been widely reported in news and social media. The Board says it feels it is appropriate to describe briefly its underlying analysis for this outlook.
In this forecast, the collapse in global oil prices is the central factor in the revision of the outlook for the provinces (and for Canada as a whole). Oil prices have been cut in half in only three months due to geopolitical forces, coupled with expanded oil supply.
There is no single authoritative source for forecasting oil prices. But, based on the available evidence, the Board’s forecast makes the reasonable assumption that oil prices will eventually bottom out and then slowly strengthen to US$63 a barrel by the end of 2015. Other oil price scenarios — both higher and lower — could be modelled.
The oil-price scenario used in the forecast points to a sharp reduction in 2015 revenues for the Canadian oil industry (largely based in Alberta), its suppliers, and the labour force across the country. Oil production costs for a growing number of energy companies exceed the available market price for their product, leading them to pull back their new investment spending plans and, in some cases, ramp down actual production. The same effect is taking place globally, eventually curtailing new supply and strengthening oil prices.
Based on these emerging trends, the Board’s Alberta outlook projects that overall investment spending this year will be $12 billion lower than previously planned. This investment pullback represents a significant loss to the Alberta economy, but it is also consistent with reports of Alberta-based firms reducing their planned investment spending in 2015.
A sharp reduction in investment spending will have a negative knock-on effect for the province — for employment, incomes and business profits, resulting consumption and savings, and for specific sectors, such as housing. There will also be a related fiscal impact beyond the loss of royalty revenues due to sharply lower oil prices. Read the full commentary by Glen Hodgson, Chief Economist, Conference Board of Canada.