Burning Questions: Will Canada's most oil-dependent provinces bounce back next year?

Burning Questions: The pandemic has left a multitude of unknowns in its wake. In a year-end series, the Financial Post explores some of the most intriguing. CALGARY — While most Canadian provinces are expecting either U-shaped or V-shaped economic recoveries next year, the country’s oil-producing regions are bracing for a bleaker outlook illustrated by a less exciting letter of the alphabet. An L-shaped trajectory could be in store for Alberta and Newfoundland and Labrador, Canada’s two most oil-dependent provinces, which experienced sharp economic contractions during the COVID-19 pandemic and are now expected to be the slowest provinces to recover from the shock. “Newfoundland and Alberta won’t get back to pre-COVID levels until 2022 at the earliest. If there’s an area that’s struggling with more of an L-shaped recovery, it’s oil and gas,” said Derek Burleton, vice-president and deputy chief economist at TD Economics. “It’s going to take a while to see investment spending bounce back and make a real improvement in performance.” The beginning of the coronavirus outbreak this year coincided with an oil-price war between Russia and Saudi Arabia, which flooded oil markets with millions of barrels of crude at a time when major economies were locking down to prevent the spread of the virus. In other words, a massive expansion of oil supply precisely when oil demand was contracting at its fastest rate in history. As a result, while Canadians in other provinces are planning for a return to normal — or close to normal — in 2021, residents in Alberta and Newfoundland and Labrador expect the scars of the pandemic, oil price crash and resultant recessions to last throughout next year and into either 2022 or 2023. Indeed, those two provinces are dragging down Canada’s overall expected real GDP growth next year. After a 5.8 per cent fall in real GDP in 2020, RBC Economics forecasts Canada’s economy to expand by 5 per cent in 2021 — clawing back some of its coronavirus-induced losses. By contrast, RBC Economics expects Alberta to post the sharpest economic contraction in the country in 2020 with an 8.3 per cent decline in real GDP, followed by a recovery of 4.5 per cent GDP growth in 2021. Newfoundland and Labrador experienced a more muted 4.6 per cent drop in real GDP this year but is also expecting the smallest economic recovery of any province next year at just 2.8 per cent, according to RBC estimates. Burning Questions: Will the meal kit craze, sparked by lockdowns and kitchen fatigue, last? Stocks will do well, tech will still lead and more fearless investing predictions for 2021 Frances Donald: What factors will drive Canada’s economy? David Rosenberg: Sorry, 2021 won’t bring as much relief as markets appear to be telling us The economic shocks to Alberta and Newfoundland and Labrador are particularly tough as they came at a time when both provinces were expected to shake off the previous oil-price shock of 2014 and return to substantial growth in 2020, said Robert Hogue, senior economist with RBC. Hogue doesn’t expect Alberta to recover to pre-pandemic levels of economic activity until 2023 — and even those 2019 levels are a steep drop from a peak in 2014. “There’s so much frustration and in some cases, people are getting into fairly desperate situations. That frustration is not a surprise given how deep and how long this downturn has been,” Hogue said. Saskatchewan, which sits atop a massive light oil formation and is the second largest oil-producing province in the country, also posted a sharp contraction of 4.7 per cent of GDP but is expected to make a full recovery, posting 4.7 per cent real GDP growth, in 2021 thanks in part to its rebounding mining and agriculture sectors, RBC Economics forecasts. While the worst of the economic downturn is behind Saskatchewan, there are still downside risks in both Alberta and Newfoundland and Labrador, which are reflected in the negative trends associated with both provinces’ credit ratings, said Travis Shaw, senior vice-president, public finance at ratings firm DBRS Morningstar. “We’ll hear the provinces and some economists talk about ‘when is GDP going to return to pre-COVID levels’ but even at that point, when the broader economy returns to pre-COVID levels, provincial finances aren’t going to look like what they looked like in pre-COVID times,” Shaw said. Neither will the two provinces’ labour markets. Alberta’s unemployment rate jumped from 6.9 per cent in 2019 to 11.4 per cent this year, and RBC Economics expects that jobless rate to average around 9.6 per cent in 2021 and 7.2 per cent in 2022. In Newfoundland and Labrador, the situation is more dire. Unemployment rose in 2019 from 11.9 per cent to 13.8 per cent in 2020 and that rate is expected to hold steady through 2021 and decline only slightly to 13.1 per cent in 2021. In both provinces’ labour markets, newly started major projects in 2020 initially provided some hope for economic expansion this year. Those hopes have since been dashed as those major projects have been cancelled. In Newfoundland, Husky Energy Inc. announced in the summer it was putting its offshore West White Rose oil project under review and directly asked the federal government for assistance to ensure the oil platform, 60-per cent complete at the time, wasn’t scrapped completely. Earlier this month, Husky secured a $41-million handout from Ottawa to complete work on parts of the project. Husky did not respond to a request for comment on whether it was required to finish the oil project as a condition for taking the funding. Similarly in Alberta, Pembina Pipeline Corp. indefinitely suspended work on a $5-billion propane-to-plastics petrochemical facility with joint-venture partner Petrochemical Industries Company, a company owned by the state of Kuwait. Pembina did not respond to a request for comment on how many people were working on the petrochemical facility at the time work was cancelled. Thousands of additional layoffs at major Calgary-based oil and gas companies including Suncor Energy Inc. and Imperial Oil Ltd. are expected to offset any potential improvements in the province’s labour market next year. Consolidation in the sector such as Cenovus Energy Inc.’s purchase of Husky would also likely lead to redundancies. TD’s Burleton said the two provinces show the challenges in the energy market over the past five years will now be compounded by the coronavirus pandemic-induced recession. “Just as the economy was getting back on its feet, it was hit by this second huge shock and there will undoubtedly be some longer-term impacts in terms of scarring,” Burleton said. Financial Post • Email: gmorgan@nationalpost.com | Twitter: geoffreymorgan http://feedproxy.google.com/~r/FP_TopStories/~3/uI2r_RDqcw8/burning-questions-will-canadas-most-oil-dependent-provinces-bounce-back-next-year