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Boom, Bust or Status Quo

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The dynamics of booming economies every boom begets its bust. ... Catalysts for the down turn things that will go bump in the night ... Whither the Economy? ... – PowerPoint PPT presentation

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Title: Boom, Bust or Status Quo


1
Boom, Bust or Status Quo?
  • IPAC Edmonton Region Conference
  • April 3, 2008
  • Glenora Club, Edmonton, Alberta
  • Dr Michael Percy
  • Alberta School of Business

2
The Short Presentation
  • There will be a bust the only issue is whether
    there is a hard landing or a soft landing

3
The Long Version
  • The dynamics of booming economies every boom
    begets its bust.
  • Drivers of the Alberta Economy good news we are
    driven by capital investment bad news we are
    driven by capital investment
  • Catalysts for the down turn things that will go
    bump in the night

4
Attributes of Current Expansion
  • Longest continuous expansion in Alberta history
    can date it from 1993
  • Little evidence in Alberta of Dutch Disease
    notwithstanding a dollar near parity and rising
    nominal wages relative to the rest of the country
  • Different drivers over life of expansion
  • Export-driven consumer driven then investment
    driven
  • Current expansion quite different in context to
    expansion and collapse 1973 1981-82 period
  • Macro context currently quite different in terms
    of nominal interest rates and inflation
  • Key similarity importance of capital investment
    as share of real GDP

5
Whither the Economy?
  • We not only concur that growth in the Alberta
    has passed its peak in the current cycle but that
    the risks of a hard landing have been rising (in
    our view they are as high as 20-25). Yet we
    stick by our recent view that the economy will be
    able to pull off the elusive soft landing, with
    real GDP growth still holding at 3 per year on
    average in 2007 and 2008 and nominal income
    growth expected to remain the positive territory
  • (TD Economics Provincial Economic Forecast,
    September 28, 2006, page 3)

6
Percentage Real GDP Growth (1997 chain linked
dollars) (Statistics Canada 13-016-XIE)
7
Gross Fixed Capital Formation and Inventories as
a share of Alberta GDP (Chained (1997)
dollars) Statistics Canada 13-016 XIE
8
Inventory of Major Alberta Projects, February
2008 (projects over 5 million recently
completed, currently under construction or are
proposed to start within 2 years)
  • Value of Projects 257.2
    Billion
  • Oilsands 165.8
  • Infrastructure 17.2
  • Institutional 13.1
  • sub-total 196.1
  • (76.2)

www.alberta-canada.com/statpup/albertaConstruction
Projects/)
9
Net Migration to Alberta
10
The Dynamics of a Booming Regional Economy
  • Its all about how a real shock generates an
    increase in real demands ?leads to capital and
    labour flows into the region ? then expectations
    based on inflation and expected returns begin to
    drive economic decisions ? at some point
    expectations driving investment are not realized
    and excess capacity and unemployment begin to rise

11
Critical Drivers
  • Expectations regarding energy prices
  • International economy
  • Energy security of supply
  • China
  • United States

12
Policy Environment Facing Oil Sands
  • Generic fiscal regime
  • Managing regional growth
  • Wood Buffalo
  • Capital Region and upgrader alley
  • Oil as the new tobacco industry social
    licence
  • Bitumen Exports
  • Environmental issues
  • Carbon emissions, storage and sequestration
  • Water
  • Natural gas

13
Oil Sands Break Even
  • Sharp rise in break even in light of
  • Rising material costs
  • Rising labour costs and skill shortages
  • Conventional wisdom now says 55 barrel WTI is
    now break even

14
Why Soft Landing Still More Likely?
  • Continuing positive impact of NFTA
  • Impact of operating expenditures of oil sands
    plants currently in operation
  • Continuing focus on energy security of supply
  • Balance sheets of business and provincial
    government
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