Provincial economic outlook brightening for 2022
Alberta’s economic outlook for 2022 is discussed by ATB’s chief economist with updates on inflation, rising interest rates and the invasion of Ukraine.
24 June 2022
Despite significant headwinds, Alberta's economic recovery materialized faster than expected, thanks to strong commodity prices. Long-term growth is expected to moderate in 2023, based on a trifecta of challenges impacting national and international markets.
The provincial economy is forecast to rebound to pre-COVID levels toward the end of 2022, but inflation, rising interest rates, and fallout from the invasion of Ukraine are expected to temper growth next year. These three factors are currently shaping economies around the world and at home, delivering short-term benefits for Alberta, but increasing uncertainty for the future, said Todd Hirsch, ATB’s vice president and chief economist.
While the human tragedy of war in Ukraine cannot be understated, the invasion is having “an enormous effect” on the Alberta economy, Hirsch said, during the 2022 ATB Business Summit in May. The impact is primarily due to the province sharing similar commodity bases as Russia and Ukraine – energy and agriculture.
“The U.S. (West Texas Intermediate) WTI benchmark oil price trading above US$110 per barrel, without question, has been a benefit for our oil and natural gas producers,” he said.
From US$68 per barrel in late December, to a high of US$116/bbl in early March, about 50% of the increase in global energy prices in 2022 can be attributed to the invasion of Ukraine and the embargoes imposed on Russia. ATB’s quarterly economic forecast issued in May predicts a five-percent increase in gross domestic product this year, primarily on the higher commodity prices. Hirsch cautioned that while revenues have climbed, there is little confidence prices will be sustained, affecting companies’ abilities to commit funds for long-term capital projects.
Strong energy prices aren’t the only economic drivers for Alberta, as “agriculture commodities, particularly wheat and canola prices, are strong now because of the crisis,” Hirsch added. The supply disruption has opened opportunities for Canadian wheat and canola farmers to get into markets they haven’t participated in previously, he noted.
Grain and oilseed prices have surged in 2022 as the crisis in Ukraine –the fifth-largest global exporter of wheat and supplier of 44%of Europe’s canola demand – continues along with subsequent disruptions at its export ports. Ukrainian wheat exports dropped in half, 643,000 tonnes of grain at the beginning of May from 1.8 million tonnes a year prior, according to the country’s agriculture ministry.
Inflation putting the brakes on recovery
Inflation represents the single biggest risk to the global economy, Hirsch said. Most economists, himself included, expected the world was entering a five to 10-year period of deflation, based on what were expected to be soft energy prices. Flat to negative growth was initially expected into 2025 because of supply disruptions and economic slowdowns due to the pandemic.
But Canada’s annual rate of inflation hit 6.7 in April, a 31-year high, surging on higher energy and commodity prices following Russia’s invasion of Ukraine. The pace of consumer price growth had already accelerated this year, prompting the Bank of Canada to start hiking interest rates in an effort to slow inflation. After being near zero for almost two years in an effort to support a pandemic-battered economy, the central bank’s benchmark rate now is expected to reach 2 percent by year-end.
Hirsch noted the Bank of Canada and other central banks were criticized for delaying a response to inflation, which started rising in fall of 2021. But Canada was in the throes of a new wave of COVID and new lockdowns during October and November. To increase interest rates at that time would have received huge consumer and business backlash, he said. As well, inflation was seen as transitory, mainly due to pandemic-related supply chain disruptions.
The biggest risk for the national economy now is a recession, Hirsch said. “If the central bank can get the timing right on rate hikes, we have a good chance that will slow down the Canadian economy, keeping a lid on inflation without pushing us back to a recession.”
Peak oil demand fast-tracked?
For Hirsch, geopolitical factors in play today are accelerating a global trend toward reducing the use of hydrocarbons as Europe weans itself off a reliance on Russian oil and gas. He posits that these factors could bring forward the timeline by which the world's economy reaches peak oil demand.
The conflict and sanctions against Russian oil producers has stimulated a push in Europe to seek alternative energy sources to traditional hydrocarbons. This could see peak oil demand being reached sooner than expected, – pressuring producers to revisit their short and long-term strategies.
“It conceivably tightens the timelines for Alberta producers as we move to a transition energy economy. It potentially hastens the timelines by which we as a province also need to think about transitioning our energy economy,” Hirsch said.
(The day following the ATB Business Summit, members of the G7, representing the world’s largest economies, agreed to “predominantly decarbonize” electricity generation by 2035 – cutting 15 years from previous timelines.)
New growth will depend on transformation
ATB is calling for real GDP growth in Alberta of 5.0 per cent in 2022, moderating slightly to about 3.5 per cent next year. Ordinarily, 5.0 per cent growth would be considered strong, however, Alberta is still rebounding from 2020, when the provincial economy contracted by almost 8 per cent - the single biggest contraction in the province’s history.
Hirsch expects it will take the province into the second half of 2022 to recover from losses sustained over the past two years. At the same time, the provincial unemployment rate continues to be elevated, at 6.7 per cent but it could fall as the year and the economy unfold.
Far from stagnant, he sees the potential for Alberta’s dynamic entrepreneurial spirit transforming conventional sectors into unique and stronger entities. Oil and gas continue to be the backbone of Alberta’s economy, but future growth will be coming out of other sectors such as digital technologies, and clean and renewable energy technologies, Hirsch forecasted.
The contribution of women in business, and the Indigenous economy in Alberta, which generated $7 billion in economic activity and 60,000 full time equivalent jobs in 2019, will also play a strong role in securing a stronger future.
"Alberta's economy has been through a lot in the last eight years; two major oil downturns, three years of recession which peaked in 2020, natural disasters, and a pandemic. With that behind us, we are now in a transition year."
ATB's vice president and chief economist