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Boom, Bust or Status Quo


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

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

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

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

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
  • 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

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)

Percentage Real GDP Growth (1997 chain linked
dollars) (Statistics Canada 13-016-XIE)
Gross Fixed Capital Formation and Inventories as
a share of Alberta GDP (Chained (1997)
dollars) Statistics Canada 13-016 XIE
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
  • Oilsands 165.8
  • Infrastructure 17.2
  • Institutional 13.1
  • sub-total 196.1
  • (76.2)
Net Migration to Alberta
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

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

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
  • Bitumen Exports
  • Environmental issues
  • Carbon emissions, storage and sequestration
  • Water
  • Natural gas

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

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