Can Alberta keep good times rolling?

Alberta’s economic prospects are pretty good right now.

Glen Hodgson, Conference Board of Canada – Troy Media

Alberta’s economic prospects are pretty good right now. In fact, they are better than in every other state and province in North America, including booming Saskatchewan next door.

The province’s average growth is forecasted to be 3.8 per cent in 2012-13, a rate of growth that reflects underlying strength in investment and employment growth, and will lead the unemployment rate to dip to 4.6 per cent in 2013. Alberta is also quickly closing the output gap caused by the 2008-09 recession and getting back to its full growth potential.

The boom/bust cycle

But Alberta has enjoyed booms before, eventually followed by a bust. The booms, of course, usually began because of the strong demand for what Alberta produces, led by oil. This, in turn, led to an excessive exuberance in resource and other investment and an upward pressure on wages and input prices, followed by strong increases in government revenues and in spending. The boom eventually ended because of a downward global adjustment in the price of energy and other commodities.

Will it be different this time? Chinese and American demand for energy and other resources appears to be limitless, and Alberta is well placed to be a preferred energy supplier from the oil sands and from more sophisticated conventional oil and gas production.

But the idea that “this time is different” sounds naïve, unless you are in possession of the “perfect” crystal ball.

Let’s assume that Alberta will face another cyclical downturn at some point in the future, even if that does not seem possible right now. Government policies and business practices should be designed to anticipate and reflect that reality.

What does that mean specifically? To begin, the province should adopt a fiscal policy that balances the budget while banking a growing portion of its expanding energy royalties, rather than spending them all today. It means expanding the tax base and — although it would be unpopular — taxing current activity (such as consumption) to pay for current government services. It means a measured expansion in public services, recognizing Alberta can still grow spending on health and education faster than almost anyone else in the industrial world. And it means steady growth in private investment, while being careful to avoid excessive exuberance through regular dialogue among the key players.

This kind of advice was offered a year ago by David Emerson and his fellow commissioners in their report Shaping Alberta’s Future. The advice was solid then, even if it was generally ignored, and it remains solid today.

To further complicate matters, Alberta (along with the rest of the country) is facing two major structural challenges. First, the dollar is expected to be at par or even a bit stronger against the U.S. greenback for the foreseeable future, driven by solid commodity prices and the relative weakness of most other major economies and their currencies. This outlook constrains the Canadian dollar revenue earned from exporting, while providing the benefit of lower import prices for investment and consumption.

Second, and more importantly, Canada is being confronted by an aging population and workforce that will make it increasingly difficult for growing Alberta firms to find the talent they need to sustain their business path. The days of tight labour markets and rapidly rising wages in Alberta experienced in 2005-07 are coming back, and they will be even more demanding for employers this time because of aging demographics across the country and much slower projected growth in the available labour force.

Complacency a danger

There are ways for Alberta to mitigate the impact of aging demographics. Options include: sustained investment in advanced and applied education; active and employment-focused immigration policies; encouraging older workers to stay engaged longer; better integration of Aboriginals into the workforce; continuing to attract other Canadians to Alberta; and private and public organizations adapting their business operations, concentrating on their core functions while shifting non-core operations outside the province where possible. All of these options will be needed if Alberta’s firms hope to sustain their growth curve.

There is a danger, of course, that employers and governments will be complacent, enjoy the good times today, and not act on the range of policies needed to prevent the boom from turning into another bust, as has happened in the past. Albertans are aware of their economic history – how they manage the boom will determine whether the good times continue to roll.

Glen Hodgson is senior vice-president and chief economist for forecasting and analysis, with the Conference Board of Canada.