Blue Book: 2021 Prairies Outlook

Share this page

Share this page

Share page link via email

Share page link via Facebook

Share page link via Twitter

Share page link via Google Plus

Share page link via Linkedin
bookmark
print

Prairie Provinces. Click here to play video.

Robert Kavcic | March 31, 2021 | Economic Insights

Robert Kavcic | March 31, 2021 | Economic Insights

BMO recently held a virtual event to provide an in-depth discussion of the annual Blue Book. Douglas Porter, BMO Financial Group’s Chief Economist, provided an overview of the macroeconomic indicators across Canada, while I discussed the provincial economic trends.

The Prairies represent a good news-bad news situation. Alberta, for example, is expected to stage a rebound slightly better than national growth, led by a rebound in oil prices and a strengthening housing market. Keep in mind that Alberta experienced one of the bigger declines in 2020 due to the pandemic and a significant shock to oil prices.

Saskatchewan’s outlook, however, has to be put in the context of the fact that the province was less impacted in 2020 than other regions. Its projected 4.4% growth lags the 5% expected nationwide. And while unemployment should remain below the national average, continued population loss will likely damper momentum.

Meanwhile, Manitoba’s growth is also expected to trail the national increase. The fact that the province has implemented some of the most aggressive COVID-19-related measures means an economic recovery could take longer than usual.

All told, while the region still struggles with diversification away from the oil industry, a rebound in energy prices and favourable demographics should act as a boost to the Prairies in 2021.

Read the entire Blue Book here.

Transcript

Robert Kavcic:

Great. Thanks a lot, Doug. I'll pick it up there and I'm going to focus on a couple of themes; the labor market, the housing market, and the backdrop for government finances as we come out of the pandemic. Obviously, as I go through this, I'm going to focus specifically on the Prairie region as we cover these topics. First of all, you look across the provincial growth landscape last year and over this year into 2022. A very similar picture to the one Doug described with respect to the global economy.

That is no province was spared from the pandemic. Everybody was down historically in 2020. The flipside of that is every province across Canada is going to post some exceptional growth numbers this year. Just a quick comment on each of the Prairie provinces. First of all, you can see in 2021 that we do have Alberta at the top of the leaderboard with growth pushing about 6.5%.

Two sides of this story. Partly it comes after the fact that Alberta did see one of the bigger declines in 2020. Not only did the province deal with the pandemic, they also dealt with very significant shocked oil prices and shutting in of some production. The flip side of that is that the bounce back is just going to be that much stronger. That's one of the reasons Alberta pushes to the top of the leaderboard here. Just by the nature of some of that production coming back online, we see much stronger GDP growth there.

The energy price backdrop makes us a little bit more constructive beyond just this year. This is not just going to be a one-time bounce, but some of this growth momentum should persist into 2022. Look at Alberta. We're still looking at about 4% by 2022. It's a decent medium-term story. A big question here, is this a return to prior boom-type levels of economic growth? I would say definitely not at this point. I don't want to overplay the optimism here. I think with oil prices in the mid $60 range and we suspect they're going to back off a little bit from current levels as the market settles down.

It's great news for producers on the ground today with projects at completion and producing oil. It's from a cash flow perspective, the sector's in good shape there. It's not quite the level that drives the amount of capital spending that we've seen over the last 10 or 15 years. That is really the big driver of economic growth and job growth and housing market performance over time. I see it as the province settling in somewhere in between those two extremes with a decent growth profile going forward as the pandemic passes. We're not going back to the consistent 4%, 5%, 6% growth prints that Alberta has been known to produce. Saskatchewan has a very similar story. I think of it as a lower beta version of Alberta, so not quite as big a decline, not quite as big of a rebound, and then settling into something that looks pretty decently around the 3% range in 2022, and then backing off a little bit from there. Interestingly enough, Saskatchewan, from a COVID perspective, did have one of the tougher pandemic outcomes from a healthcare perspective, but they took a different tack than a lot of the other provinces, choosing not to aggressively shut down a lot of sectors of the economy like, say, a Manitoba, or an Alberta, or even to a greater extent in areas like Toronto and Montreal. From that perspective, the hit in Saskatchewan wasn't quite as deep.

Manitoba we always say is a very stable province through economic shocks, typically the best performer on the way down but a bit of a laggard on the way up. Obviously, the province couldn't escape this one. From a pandemic perspective, again, the healthcare outcome wasn't great on a per capita basis. It was one of the leaders for a while there through 2020 in terms of COVID cases, and hence some of the more aggressive lockdowns that we saw in the province.

Manitoba actually contracting a little bit more than 5% last year. It's not the worst province on the board, but historically, Manitoba tends to do quite a bit better during downturns. This has been a pretty tough shock. The flip side is we've already seen some of these restrictions come off and we do think that there is a pretty good rebound in the very near term for the province before eventually settling down again to what is a very, very stable growth path for the province.

It's never hitting it out of the park, but it's never really struggling too much with any kind of external shocks, just simply because of how diversified the economy is there. That's the broad perspective. With respect to the labor market, we have seen the shock hit pretty well across the country to some degree. I would say, just to neatly summarize here that the Prairie markets, the Prairie provinces have been kind of stuck around the middle of the pack. Not as sheltered as obviously somewhere like Atlantic Canada, where they were able to close off with an Atlantic bubble and not really implement some of the stricter lockdowns like, say, Manitoba or Alberta did, but not quite as extreme as the declines we've seen in Quebec and Ontario, simply because they don't have the exposure to as big of an urban center like Toronto or Montreal. The employment impact just fit neatly in between.

When you look across the sector level, things get a little bit interesting here too, as well. The first thing to do here is, look across this chart from left to right. On the left side of the chart are the hardest-hit industries. As you go to the right, those are industries that have recovered quickly. Anything past that vertical bar has not only recovered all of the COVID-related losses but has actually pushed forward. Finance insurance, professional services, for example, are looking at employment levels already comfortably above where they were pre-COVID. Accommodation, food, anything related to travel, smaller storefront, retail, information, culture, recreation, anything related to entertainment type face-to-face services, the energy sector as well, those industries are still quite a bit back of where we were pre-COVID.

As this expansion progresses, and as we see vaccination roll out more widely, it's definitely those industries on the left that are still dealing with this L-shape recovery. Those are the ones that are going to start to snap back later this year and into 2022. The second aspect of this chart is if you look up the scale on the left, from low to high, you move higher up the wage scale. What stands out pretty clearly here is that the hardest-hit industries are still generally the lowest-paying industries in Canada.

The flip side is if you look at the five or six highest paying industries in Canada, they've all more than recovered the job losses we've seen through COVID. It's fractured the economic recovery a little bit. One of the reasons this is important is when you look over at the housing market story, there's a little bit of a mystery out there about how was the housing market able to snap back so quickly when we had such a historic increase in the jobless rate and historic job losses?

Well, the reality is that the vast majority of those job declines have been and are still persisting in industries that are relatively low paying. Not typically industries where a lot of home buyers reside, typically more of a renting population. The higher-paying industries in Canada, as we said, have fully recovered. The demand curve for housing snapped back very, very quickly. You can see on the left side of this chart that we are seeing record sales activity across Canada, and really all regions of the country are participating in this. Where this hits home in the Prairie markets is that- I mean, yes, on this chart here, Calgary, Edmonton, Regina, 2% year-over-year for price growth. In Regina, we're up to about 7% to 8% on price growth, Winnipeg around 10%. On a relative basis, those numbers look pretty subdued compared to some of the just incredible gains we're seeing across other markets in Canada.

Keep in mind that Calgary, Regina, Edmonton, these were markets that over the last five or six years were effectively stagnant if not gradually declining over time. Of course, it depends on the sub-segment a little bit, and it depends on the market, but basically, these markets peaked back in 2014 and it's been a slow grind down since then. The fact that we're just getting even 2% or 3% price growth in these markets now does just speak to how quickly this pandemic has in a roundabout way really shifted out the demand curve for housing and actually helped tighten up these markets that have been struggling for so long.

The other factors that are helping demand here, the mortgage markets. We're looking at five-year fixed rates that are in the 1.5% to 1.7% range right now, those are historically low. Obviously, a lot of home buyers have tapped that. Honestly, we're probably looking at cycle lows for five-year fixed-rate mortgages at the moment. In fact, we have seen some of the banks start to nudge those higher. I do suspect that we're probably going to see the five-year fixed move higher from here, going forward over the next couple of years. That could take a little bit of steam out of it.

The other factor is that we've seen a big shift in preferences as well. If the last decade or so was characterized by a lot of demand converging in the core of the big cities, that's really turned itself out now. People are looking for space. They're looking for single detached homes, and they're looking with an ability to work remotely. Now they're looking at markets that are typically one to two hours outside of the core of the major cities just simply because we're not as tied to tight commuting lines as we were pre COVID, and there's some expectations that that's going to stick around.

Where we go from here, it's an interesting situation. I do think over the next six months that there's quite a bit more room for markets to run. It's going to take some time for this backup and longer-term interest rates to filter through to the mortgage market for a lot of the pre-financing to roll off. We do have room to go in terms of just the outright strength we're seeing here. There's not a whole lot of supply coming on, to be honest. This is more of a concern. I say concern because I do think things are getting a little bit heated in markets like Toronto, Montreal, Vancouver. It's less of a concern for markets like Calgary, Regina, Edmonton, Winnipeg because these markets are just not stretched from an affordability perspective. We've already- as I said, we've gone through a five or six-year consolidation. The fact that we're getting some upside here, I don't think, is a bad thing.

That's the story where we are right now with respect to residential real estate.

To shift gears a little bit and look quickly at what's happening on the government finance side, starting at the provincial level, this is just a quick chart to stack up how the province is ranked from a fiscal perspective very quickly. As you go up the left scale here, you're looking at a bigger budget deficit. As you go across the bottom scale, you're looking at a higher net debt burden, both of them scaled for the size of each individual economy. The short story is where you want to be on this chart is down in the bottom left corner and a couple of things stand out right away.

First of all, look at Saskatchewan, the province is still in a very solid relative fiscal position despite the fact that we have been hit by COVID and we have been hit by a decline in oil prices, and from a net debt perspective, it's actually the lowest burden in Canada right now. Alberta looks- as much negative attention as the province gets from a fiscal perspective, on a net debt basis, it's still a relatively favorable situation. The thing about Alberta is that if you were to rewind this chart for about five or six years, Alberta would be not only off the scale, probably off your screen and down on your desk or on the side of your wall somewhere. Alberta has moved up into the right very, very quickly. The good news is that they started in such a favorable position with not only no net debt, but sitting on a bunch of net assets, as bad as the deterioration has been, they still find themselves in a position of decent strength.

Manitoba is similar to the economic story, it's always stuck in the middle there from a fiscal perspective. They have made some pretty decent progress pre-COVID. There's not too much to be overly optimistic about, and on the flip side, not too much to be overly concerned about with debt levels still kind of hanging in there below provinces like Ontario and Quebec. The bigger takeaway here though I would say is all of these provinces have moved on this chart, they've moved up into the right. They've deteriorated from a fiscal perspective, but the key here is that Ottawa has absorbed the vast majority of the responsibility or the support from a fiscal perspective in Canada. It could have looked a lot worse for the provinces, but the federal government stepped in and said, "Look, we're going to roll out, to this point, $275 billion worth of direct spending measures." You all know the programs that serve the wage subsidy and various derivatives and modifications over time. These were programs that were more or less designed to keep households and businesses solvent through the pandemic, so that when policymakers come out and say, "Let's restart the economy," that they're actually still businesses there to turn the lights back on and still places for people to go shop. That's where we are today and because Ottawa has absorbed the vast majority of this burden, the deterioration in provincial finances has been quite a bit smaller.

Where does this leave us? It leaves us with a $380 billion deficit at the federal level, which is historically highest. It's over 17% of GDP. Let's call it what it is. It's massive. It's almost wartime levels of stimulus and deficits here, but a couple of factors make us maybe a little bit less concerned immediately. One is that we've got to keep in mind that everybody was in this together. Similar to the global growth backdrop, all provinces have had to roll out some form of stimulus and have seen government finances deteriorate very quickly.

Yes, Canada was on the high end, but keep in mind, Canada came into this period in a relatively favorable position. The deterioration has been large, but we started in a pretty good place, to begin with. Debt service costs, as much as we're borrowing today, and as big as that deficit is, the reality is that with interest rates where they are, and with some past debt consolidation, Ottawa spends about 7 or 8 cents on every dollar of revenue to service the debt. To go back to a real problem in the 1990s, we were spending about 33 to 35 cents on every dollar in Canada to service that debt. We have a long way to go from that perspective. Of course, it helps that the Bank of Canada is in there buying a very good portion of the net issuance that Canada has had to put out to support some of these stimulus measures.

That's where we are now. I do think that consolidation here, in terms of the deficit, can be relatively quick. If Ottawa just-- Think about it this way, if Ottawa just does nothing for a couple of years, if they stopped extending a lot of the big support programs that they have been extending over time, if they allow the economy to run hot as we do think it is going to and build back revenues, and if they just decide that maybe they don't have to actually spend another $70 billion to $100 billion on stimulus over the next three years because the economy is recovering quicker than they thought, then right away, that's going to take a pretty significant chunk out of the deficit and get us down to 5%, 6%, 7% percent of GDP, or something that is-- It's not all the way back to where we would probably want it to be, but on its own, it takes us much closer to something that's more sustainable longer term.

Just to wrap it up, I'll just cover a couple of key points here to summarize. On the positive side for the Prairies, I think the commodity story is the biggest one. Doug covered it. I think I covered it as well. It's not a return to $100 oil and 5%, 6% GDP growth, but it's enough to keep that industry churning out cash flow and keeping capital spending from a project maintenance perspective going on. That's a positive story as well. I think the demographics are underplayed as well. If you look at Alberta and Saskatchewan, those are the youngest populations in Canada.

Typically, from a labor force growth perspective, as it is a factor that drives potential economic growth, that's really the strongest area of the country. Contrast that to somewhere like Atlanta, Canada, where over the medium term, it's going to be a struggle to get much more than 1%, 1.5% of real GDP growth because their population is that much older. Well, that's not the case at all in Western Canada. There are challenges. Yes, the oil price backdrop is great, but at the end of the day, when we look five or six years down the road, we still need a way to get a lot of this production to market, and that's really the biggest overhang for the Prairies from an oil perspective. Another reason why we're not looking at a lot of new project development, because there is still a lot of uncertainty out there about pipeline access, and actually getting the pipeline of new production that is coming on stream already now out to the market over the next couple of years. There are some concerns about that going forward. That's going to possibly limit potential growth in that industry as well. I will leave it at that and I'll turn it over. I'm sure there are questions out there we can circle back and cover some of these in a little bit more detail.

Robert Kavcic

Director and Senior Economist

Robert has been with the Bank of Montreal since 2006. He plays a key role in analyzing economic, fiscal and real estate trends in Canada. Robert regularly contribut…(..)

View Full Profile >

All told, while the region still struggles with diversification away from the oil industry, a rebound in energy prices and favourable demographics should act as a boost to the Prairies in 2021.

Read the entire Blue Book here.

This is part 6 of a 7-part series on

Blue Book: 2021 Prairies Outlook

PART 1