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The Alberta economic juggernaut: The boom on the rose
by Philip Cross and Geoff Bowlby*
Most Canadians are aware of the boom in Alberta’s economy, and almost all have directly or indirectly felt its consequences. But the unprecedented scale of Alberta’s prosperity is still not widely appreciated. This paper analyzes the reasons behind this surge, now in its fourth year, and the opportunities and challenges it presents.
Alberta is in the midst of the strongest period of economic growth ever recorded by any province in Canada’s history. Its total income (GDP) rose 43% between 2002 and 2005, and shows no signs of slowing down in 2006.1 Alberta’s 12.7% average annual increase since 2002 compares favourably with China’s 14.8%, the fastest growing among the world’s large economies. The composition of growth was different: China’s was mostly volume, while Alberta’s was three-quarters driven by higher export prices.2 Still, its 4% average increases in real GDP were the most in Canada after 2002.
As a result of this unprecedented boom, Alberta’s labour market is the tightest in North America. The resulting labour shortages can be addressed by increasing the population, working more hours, raising the participation rate or boosting productivity. This paper finishes by looking at how Alberta is responding in each of these categories.
Alberta’s per capita GDP reached $66,275 last year, nearly double the $33,553 average income in 1995. This was 56% above the national average and more than twice incomes in some of the Atlantic provinces. The deviation from the Canadian average is the largest for any province in Canadian history.
Many factors contributed to Alberta’s surge in per capita GDP. Most conspicuously, the huge inflow of money into Alberta has been generated mostly by corporate profits. Profits more than doubled from $23.5 billion in 2002 to $53.1 billion last year, directly accounting for over half of all income growth. Most of this increase reflects the soaring price of oil and gas exports. Alberta (some call it Oilberta, others Saudi Alberta) accounted for 27% of all profits in Canada last year, nearly double its share of national GDP.
While profits accelerated, labour income rose steadily over the last three years. Labour income had risen 25% between 1999 and 2002, spurred by double-digit gains in 2000 and 2001. Since 2002, incomes rose ‘only’ 27% (or nearly 10% a year), still by far the most in Canada. Shortages of labour may have restrained recent gains, and indeed labour income growth was increasingly driven by wages rather than employment gains.
Profits fuel investment
Buoyed by ballooning profits, business investment expanded 37% over the last three years, including a 17% jump in volume last year. Firms plan to increase nominal outlays another 11% in 2006. Most of the growth of course was in the energy sector, especially the oilsands north of Edmonton. In the first half of 2006, non-residential building in Alberta surpassed Quebec for the first time ever.
The investment boom shows no sign of ending anytime soon, for several reasons. Oil prices remain high, with futures prices for 2012 near $70 (US) a barrel. Even if prices did retrench, the impact on oilsands development would be different than drilling for conventional oil, because their planning and investment horizon is so much longer and on a much grander scale. For example, while the oil price crash in 1998 triggered substantially less drilling, investment in the oilsands was less affected. In fact, oilsands investment fell sharply only once in the last 15 years, down 25% in 2003 after the completion of the huge Millenium project.
Furthermore, the growth of oilsands output will trigger other investments, notably pipelines to carry the oil to market and upgraders and refineries to process the raw bitumen. And a host of other projects have been spun off, ranging from office buildings (such as EnCana’s planned headquarters in Calgary, the tallest building west of Toronto) to petrochemical plants using feedstock from refiners.3
Another reason investment has been strong relates to the development of coalbed methane (CBM). Alberta is home to over 90% of Canada’s coal. With conventional natural gas output starting to decline as the most productive fields are exhausted, the industry increasingly is turning to CBM to satisfy demand.4
Energy drives exports
Investment was fuelled by exports, which hit $134 billion last year, double their level in 1999. Alberta has less diversity among its exports than any other province, which has been a blessing since energy has become so valuable in recent years. Crude oil and natural gas alone account for almost two-thirds of goods exports, while another 10% is contributed by refined petroleum, petrochemicals and coal.
Non-energy international exports rose 6% in 2005. The largest non-energy exports were agricultural products, notably livestock and grain, followed by forestry products. Metals and machinery and equipment remain small at about 7% of all exports, while auto exports are negligible.
Alberta exports 62% of its GDP to other countries and provinces, more than BC, Ontario or Quebec. The US is the destination for 90% of its international exports, up from 80% a decade earlier. Nominal exports to other countries accelerated steadily, rising 13% in 2003, 11% in 2004 and 15% last year. Most of this increase reflects higher energy prices, as the volume of total exports rose just 4.2% over this period.
The lion’s share of Alberta’s trade surplus comes from trade outside Canada, where exports exceed imports by $33 billion. Alberta runs a surplus of only $7.5 billion with the rest of Canada, as deficits with Ontario and Quebec offset surpluses with all other provinces.5 This reflects a number of revealing features of Alberta’s trade.
First, about three-quarters of its energy exports go to the US, especially crude oil destined for the midwest and Rocky mountain states (much of the oil in eastern Canada is imported from Europe, due to lower costs as well as its older refineries are designed to process lighter grades of oil than Alberta’s). Conversely, Alberta exports more refined petroleum and less crude oil to the rest of Canada, especially the west, reflecting the concentration of large refineries in the province (Edmonton has almost three-quarters of all western Canada’s refining capacity). Overall, energy exports to the rest of Canada have about the same weight (71%) as those to the rest of the world.
Second, Alberta imports more capital and consumer goods from other provinces, leaving it to specialize in resource exports. Alberta bought almost as many goods and services from the rest of Canada ($41.8 billion) as it did from the rest of the world ($51.1 billion) last year. While international imports supply the lion’s share of machinery and equipment (including electronics), imports from the rest of Canada have risen faster since 1999 (up 36%) to meet surging investment demand. Alberta itself has a thriving machinery and metal fabricating industry that supplies the oilpatch.
And finally, Alberta runs a deficit in trade in services with the other provinces, especially financial, business and computer services. Partly, this reflects Calgary’s rise as the headquarter of North America’s energy hub. International imports of services are small outside of travel. Alberta does receive more travelers from abroad than from elsewhere in Canada.
Household spending accelerates
Consumer spending in Alberta remains by far the strongest in Canada. After rising about 4% in volume every year from 1998 to 2003, it picked up to 5% in 2004 and 7% last year (the largest in any province since its own 8% gain in 1998). So far this year, nominal retail sales are running an astonishing 17% ahead of 2005, on track for the best year of any province ever. Vehicles spearheaded the gain, led by the more expensive truck segment.6 Growth was boosted by a drop in the tax burden since 1998, capped by the $1.4 billion in prosperity cheques issued earlier this year.
Despite this spending splurge, Albertans have the highest personal savings rate anywhere in Canada, at 5.1% last year. In fact, it was the only province other than Ontario where savings were not negative.
Meanwhile, housing demand exploded 17% last year, partly in response to more people moving from other provinces. Housing had been little changed over the previous two years after a double-digit gain in 2002. Housing starts in Alberta recently surpassed Quebec, despite having less than half its population, a testament to the rapid increase in Alberta’s population.
Higher prices, especially for energy, have been a boon to the Alberta economy over the last three years. But Albertans are beginning to feel the pinch from higher prices for what they consume as well as produce. In the past year, consumer prices have accelerated from a 2.1% to a 4.3% increase. Most of the hike reflects the soaring cost of new homes, especially in Calgary and Edmonton where prices jumped 49% and 28% respectively in the year ending in June.
There are other manifestations of a growing housing shortage, especially in Fort McMurray, the epicentre of the oilsands. Retailers report sharp increases in sales of motor homes in Alberta as a short-term solution to the dearth of housing.
One reason for the rapid increase in the cost of building new homes in Alberta is that house construction is dwarfed by non-residential construction activity. At $26.5 billion, spending on non-residential structures is over twice the $11.5 billion housing sector. This is typical of other oil-producing provinces like Saskatchewan and Newfoundland, but the reverse of the rest of Canada: in Ontario, for example, housing is three times the size of non-residential structures. The huge profits and financial reserves that firms possess in Alberta put them in a commanding position to bid scarce construction resources away from the housing sector.
Another consequence of Alberta’s oil boom was a sharp improvement in the provincial government’s finances. Its budget surplus jumped to $7.4 billion in fiscal 2005-2006 (on a national accounts basis). Royalties from oil and gas more than doubled from $5.8 billion in 2002 to $12.8 billion last year, mostly from natural gas. Meanwhile, the elimination of all public debt reduced the cost of debt servicing by nearly $1.5 billion in the past decade.
Governments have invested rapidly in the infrastructure needed to try to keep up with economic and population growth. Since 1999, government capital spending in Alberta has doubled in volume, easily the most in Canada.
A tight labour market…
Over the last decade, Alberta has consistently had Canada’s strongest labour market, averaging annual job gains of 3.1%. But now it has moved ahead of all North America. It has the highest share of its population employed of any province or state, and the lowest unemployment rate.
Alberta’s unemployment rate fell to 3.9% in 2005, equalling its record lows of the early 1980s. It has since fallen further, averaging 3.4% so far this year, easily the lowest in Canada (Manitoba is next). When adjusted to a comparable basis with the US (which excludes 15 year olds), Alberta’s 2.9% unemployment rate in June was the lowest of any province or state in North America, while it had the highest employment rate at 71.7%.7
Alberta’s employment is unique in Canada in several ways. It had the largest share of jobs in the goods-producing sector at 27.3% in 2005, reflecting the size of its mining and construction industries. The large presence of these industries is also reflected in the preponderance of men holding jobs: at 76.1% in 2005, it was easily the highest in Canada. Conversely, it has by far the smallest share of jobs in public administration at 3.5%.
Not too surprisingly, job growth since 2002 has been led by mining (including oil and gas), which has jumped by 30,000 (or 33%) over the last three years (and 71% since 1999). As a result, it is now the sixth largest employer in the province, up from 12th in 1999. In the northeastern part of the province (which includes the oilsands), one in every five workers is employed by the oil and gas industry. Together with a 19,000 increase in construction, these two industries accounted for nearly half of all job growth since 2002. This does not include the side-effect of the energy boom on industries such as finance, business services and transportation (up 35,000 since 2002). Nor does it include the indirect effect of more household spending on the retail and real estate industries, which grew by 26,000.
This impressive history of Alberta’s job growth makes last year’s slowdown more exceptional. After peaking at 4% in 1998, employment gains moderated to 3% in 2001. Despite the boom in the oilpatch starting in 2003, job growth has progressively slowed from 2.8% in 2003 to 2.4% in 2004 and 1.5% in 2005. Last year’s increase was the smallest since 1993, a testament to the difficulty in finding labour. A pick-up in the labour force allowed job growth to accelerate significantly to 3.7% so far in 2006.
…leads to shortages and rising costs
There are several manifestations of Alberta’s labour scarcity. The Survey of Business Conditions found that one-quarter of Alberta’s manufacturers reported shortages of unskilled labour, up dramatically from just 2% as recently as 2003. Partly this reflects labour in relatively low paying areas such as farming, manufacturing and accommodation and food being siphoned off by the booming construction and mining sectors.
Alberta’s tight labour market is reflected in its hourly wage rate. Initially, the start of the boom in 2003 slowed average wage growth, presumably as people entering the labour force took lower-paying jobs. But after four years of growth, Alberta now leads the country at $20.94 an hour, passing Ontario, which has traditionally had the highest wages. Hourly earnings in Alberta have risen by over 7% just in the past 12 months ending in June, including an increase of over 10% in Calgary. This reflects both wage hikes and jobs shifting to high-paying sectors, as the trend of hours worked has been flat despite the conversion of many part-time into full-time jobs (part-time jobs are defined as less than 30 hours a week).
Alberta’s population has grown faster than any other province every year since 1996 (when BC led growth). This increase reflects large inflows of migrants from other provinces and rising births (it is the only province where births have increased in absolute terms since 2000). Alberta attracts relatively few immigrants from abroad–they gravitate mostly to Toronto, Vancouver and Montreal.
Alberta has been the most successful province in attracting migrants from elsewhere in Canada. Since 2000, inter-provincial migration has been a critical source of labour for Alberta. It directly provided 110,000 (or 43%) of Alberta’s 250,000 population growth from 2000 to 2005 (not including children these in-migrants had after arriving).
The sources of migration to Alberta have spread across the country as word has circulated about its wealth. In 2000, 59% of people moving to Alberta came from Saskatchewan and BC, provinces contiguous to Alberta. Last year, their share fell to 46%. Instead, people increasingly moved long distances: one in five in 2005 came from the Atlantic provinces and Quebec, up from 15% in 2000, mostly after the boom took-off in 2003. Ontario’s share rose to nearly one in four.
In addition, only Alberta posted net interprovincial in-migration in every year over the past decade. In fact, Ontario in the late 1990s and BC in the last two years were the only provinces to sustain a significant inflow even for a short period of time. And interestingly, the largest move to Alberta (43,089 people) was in 1998, despite the crash in oil prices that year. Net in-migration slowed after 2002 even as the economy boomed. While gross inflows remained constant, there was a pick-up in out-migration in recent years.
Alberta has the youngest as well as the fastest growing adult population, with 57% of people in Alberta less than 45 years old last year. Ontario was next at 54%, while most of the other provinces were near 50%. Partly, this reflects more births, but mostly it is because migrants tend to be relatively young.
While Alberta’s population has expanded, labour force growth has been hampered by a falling participation rate. After peaking at 73.5% in 2003, the participation rate retreated to 72.7% last year, the same rate as in 1999. The decrease was widespread among youths and adults, men and women.
The drop was unusual for Alberta, which traditionally has had the highest participation in Canada. Whatever the cause, it may be short-lived, as there are signs that the ongoing boom is attracting people back to the labour force in 2006.
Labour shortages make it important to better integrate people who are often on the fringe of the labour market, notably recent immigrants and Aboriginal people. For example, in 2001 the share of recent immigrants in Alberta (less than 5 years since entering Canada) holding a job was about 65%, over 5 full percentage points below all other groups.
Alberta has done slightly better than the other western provinces in integrating Aboriginal people into the labour force. In fact, the participation rate among Aboriginal people (70.6%) was higher than the overall national average, although it remained below the rate for non-Aboriginal people in Alberta (72.8%). Much of this gap reflects the lower educational attainment of Aboriginals.
After languishing through most of the 1980s and 1990s, output per hour worked in Alberta began to improve significantly in 2000. Since then, it has risen 4%. This upswing reflects a number of factors, notably the surge of business investment that began in the late 1990s and which continues into 2006. As a result, each employee now has 20% more capital stock to work with than in 2002. The rising cost of labour encouraged firms to invest more and alleviate the shortages of manpower. These gains have offset the declining productivity of conventional oil and gas wells, as the Western Canadian Sedimentary Basin passed its peak output.
While the boom has brought unbridled prosperity to Alberta, some worrisome long-term effects have emerged. Most notably, rural Alberta has one of the highest rate of high school drop-outs in the country at about 25%, presumably spurred by the promise of attractive pay for relatively unskilled work. However, this leaves these youths ill-prepared to deal with the consequences of a slump in the industry.
The supply of workers in Calgary and Edmonton
In both Calgary and Edmonton, the labour markets have been very strong. In July 2006, the unemployment rate in Calgary was 3.7%, very similar to the 3.8% rate in Edmonton.
While labour demand is robust in each city, labour supply conditions differ. First of all, population growth in Calgary is stronger than it is in Edmonton, a situation that has existed for a number of years. In 2005, the population of Edmonton was estimated at 1.016 million people, up 1.3% from the year earlier. In Calgary, the population increased 2.1% to 1.060 million.
Furthermore, there have been differing trends in the share of the population engaged in Alberta’s economy. In Calgary, labour force participation rates are the highest in Canada, and have bucked the national trend toward lower participation. In Edmonton, labour force participation has fallen in the last couple of years.
How can labour force participation be falling in Edmonton in an environment of strong economic growth? There are many possible answers to this question. Nation-wide, there is a trend toward lower participation, driven mostly by an aging population. Comparing Edmonton’s age profile to that of Calgary, it is clear that the impact of boomers retiring will hit Edmonton sooner than it will in Calgary.
However, the aging of the population does not explain the entire decline in labour force participation in Edmonton. On average over the twelve months from July 2005 to July 2006, labour force participation has also been lower among many groups, but most notably for youths 15 to 24 years of age, whose participation in labour market is often voluntary, or contingent upon parental income.
Alberta’s surging economy over the last four years has been unprecedented in this country’s economic history. Fuelled by investment from soaring energy exports, this China-like growth has lifted average incomes in Alberta to nearly twice the national average. And growth has not been confined to blue-collar workers in the oilpatch: Calgary has surpassed Vancouver as the third largest seat of corporate headquarters in Canada.
The benefits of this growth are obvious. Alberta boasts the strongest labour market in North America and the highest wages in Canada. Retail sales are growing at an unprecedented pace. The provincial government has re-paid all of its debt. The rapid pace of growth, however, is leading to growing shortages of labour and housing.
The Alberta juggernaut has made it the envy of the rest of Canada. But other Canadians have benefited from the Alberta boom: its insatiable demand has pulled in more people and goods and services from the rest of the country, making the Alberta advantage increasingly Canada’s advantage.