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Alberta Recession Coming to an End - BMO

CALGARY, Alberta, June 22, 2010 — After a deep commodity-price-induced recession, the Alberta economy has started to bounce back, according to the Provincial Outlook report released today by BMO Capital Markets Economics. After contracting 5.1 per cent in 2009 – the sharpest decline since at least 1982 – the energy sector is expected to lead the way to growth of 3.6 per cent this year and a further 3.9 per cent in 2011.

“The combination of falling energy prices and a more taxing royalty regime cut investment activity in the sector by about half in 2009, and in the wake of the downturn, the province saw net out-migration for the first time in 15 years,” said Robert Kavcic, Economist, BMO Capital Markets. “The recession did have one positive effect: the cooling of cost pressures – particularly for labour and raw materials – which were running out of control late in the boom. Now, lower costs, a rebound in oil prices and a reversal of past royalty increases by the Alberta government have improved the economics in the energy sector. Activity is already beginning to pick up, with recent investment announcements, including $2.5 billion for the BP/Husky Sunrise Project, a $1.5 billion expansion of Surmont and an expansion of the Horzion Mine. Oil sands output is expected to reach 2.1 million barrels/day by fiscal 2012/13, or 40 per cent more than last year’s level.”

Larger excesses, built up late in the commodity boom, should keep growth in Alberta slightly below its Western neighbours in the coming year. For example, Calgary’s office vacancy rate hit 14.9 per cent in the first quarter this year – up from 7.9 per cent a year ago – and ample new supply like Eighth Avenue Place and the Bow will be coming on the market in the next 18 months. Employment also remains 2.4 per cent below peak levels, while the unemployment rate has yet to make a decisive move lower.

The government of Alberta is projecting a $4.7 billion deficit for fiscal 2010/11, after an estimated $3.6 billion shortfall in fiscal 2009/10. The budget is projected to return to a $505 million surplus in fiscal 2012/13. Note that royalty reductions, announced after the budget, are expected to cost $700 million per year by fiscal 2012 and 2013, which would more than negate the small surplus. Alberta will draw from its Sustainability Fund to cover its deficits, which will shrink from $15 billion to $2.8 billion by fiscal 2012/13.

News source: BMO Financial Group


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