Canada’s Economic Balance Tilting West February 18, 2011 – Todd Hirsch – ATB Financial 

It’s been ongoing for decades already, but the westward drift in Canada’s economic centre of gravity will gain even more momentum in 2011. Here are the top ten reasons why. 

10. Better fiscal environment: Saskatchewan is running a surplus. BC and Manitoba are close. And while Alberta is still running a pretty hefty deficit, the province is debt free and has plenty of savings to dip into. Ontario, on the other hand, is in some trouble. It’s not comparable to Greece (as some commentators have suggested), but big spending cuts and/or tax increases will eventually hit the province—and probably Quebec, too. 

9. Agriculture: It doesn’t happen too often, but crop farmers in western Canada may actually be smiling this spring. If moisture conditions hold up (and the snow pack this winter suggests they will), it could be a very good year for wheat, barley and canola growers. Prices are stellar. 

8. More diversified exports: The western provinces are somewhat more oriented towards China, India and the emerging economies than are points east of the Manitoba- Ontario border. This is especially true in BC, which sent only 45% of its exports to the US in 2010 (compared with 80% from Ontario). Even the Prairie Provinces, with all their energy exports piped south of the 49th parallel, sent slightly less to the US (78%). With the emerging economies leading global growth, the broader trade diversity in the West will be a solid benefit. 

7. The soaring loonie: related to #8 above, the higher Canadian dollar will be a disproportionately painful kick in the face to central Canadian exporters whose bread and butter is the US market. The story is really not so much about the loonie but about the US Greenback, the depreciation of which few think is quite over just yet. 

6. Fort McMurray: The oilsands have generated more than their fair share of controversy and problems, but the largest engineering projects on the face of the earth have taken on a life of their own. That is lifting not only the fortunes of northeastern Alberta, but the manufacturing heartland of central Alberta as well. A new upgrader near Edmonton is set to be built. 

5. Conventional oil drilling: not to be outdone entirely by the glow of the oilsands, western Canada’s conventional oil drillers are having a great year too. Forecasts for wells drilled have been revised upward for 2011. Prices well above $US 80 per barrel certainly help. But improved technologies in horizontal drilling— many of which were developed in Alberta—are giving new life and adding reserves to oil fields drilled decades ago. 

4. Non-oil resources: with the exception of natural gas, almost all of Canada’s natural resources are enjoying high prices in 2011. The world needs ‘em, and western Canada’s got ‘em! That will boost activity in potash, base metals, and even forestry. 

3. Jobs, jobs, jobs: Through the recession, employment in Saskatchewan and Manitoba didn’t even drop, and with the recovery in 2010, job creation has picked up. BC’s hit a soft patch post Olympics, and Alberta suffered the worst hit (proportionately) during the downturn. But through thick and thin, unemployment rates across western Canada remain lower than in central or Atlantic Canada. That will help pull job seekers to the West. 

2. Growing cities: they may not be the size of greater Toronto or Montreal, but western Canada’s urban municipalities are showing some of the fastest growth rates in the country. Saskatoon took the top spot as the fastest growing population in Canada, and two other western Canadian cities—Vancouver and Regina—placed #2 and #3. 

1. A global glow: with the surge in mergers, acquisitions, and equity sales for Canadian energy companies, Calgary is gaining tremendously in global investment banking. According to a study by one large global financial player, Canada now ranks fourth in the world (behind the US, UK and Japan) in terms of generating investment banking fees. Toronto still accounts for the lion’s share of that. But the big growth has been in Calgary as big players like Barclays Capital, Credit Suisse, and Citigroup scoop up talent and office space. 

All of this will put western Canada on top of the national growth chart in 2011—and indeed in an enviable position among most of the global economies.

Housing’s Golden Decade 

RE/MAX re-leased a report this week on Canada’s major residential real estate markets and how they’ve per-formed over the past decade. With the average price of houses increasing between 126% and 164% in both of Alberta’s major cities, it almost goes without saying that investing in your home was an extraordinarily good investment over the past ten years. 

The report sees both of Alberta’s major cities creeping into a sellers’ market in 2011 (i.e. sales occurring faster than new listings). But despite the pick-up in sales activity prices aren’t expected to deviate far from the cur-rent average. The report also noted there could be a bit of a surge in activity as homebuyers attempt to qualify for mortgages before the new mortgage insurance rules are adopted. 

With mortgage rates headed higher and Alberta’s wage growth rate set to decline, affordability will certainly be more of an issue over the next decade. The past ten years saw the provincial average weekly wage index increase by slightly over 50% and the average mortgage rate drop by over 2 percentage points. Although wages are not expected to fall back much, rates are heading higher and this will reverse some of these affordability trends and limit upside potential to the housing market.          

 We believe that the central Alberta market will mirror Edmonton and Calgary’s markets although the timing could vary slightly. 

And the investment value of real estate in central Alberta has certainly been very similar to that identified in Calgary and Edmonton.

Alberta Housing is Moderately Affordable!  ATB Financial – Jan 28, 2011 

According to the 7th annual Demographia International Housing Affordability Survey, Edmonton is the country’s most affordable large city, followed closely by Ottawa and Calgary.  This pronouncement might turn some heads, but the rebound in the housing market was actually stronger in Canada’s other major centres – especially in Toronto and Vancouver. Average housing prices in Montreal might be lower, but so is average household income. 

The survey compared the ratio of median family income to average housing price for cities in the English speaking world. This measure is different from other surveys which take interest rates into account and look at the monthly percentage of income used to service a typical mortgage. 

The authors wanted to focus on home values instead of monthly outlays, as over the life a mortgage interest rates can change considerably but the price paid for the house stays constant. 

Edmonton and Calgary recorded ratios of 3.5 and 4.0, which are both substantially below Vancouver, where the typical home is 9.5 times the household income. A ratio of under three was considered affordable, which was the historic average. 

Strong GDP Growth in November – Todd Hirsch – Senior Economist, ATB Financial 

While economic expansion in Canada got off to a good start at the beginning of 2010, growth petered out through the summer and early fall. But new data this morning suggest growth started to ramp back up toward the end of the year. 

The total value of all goods and services produced in the Canadian economy in November expanded by 0.4% month-over-month, the highest rate of increase since March of last year, and twice the increase posted in October. That surprised economists, who had been forecasting a gain of only 0.3%, which still would have been respectably strong growth. 

The monthly GDP data are compiled only at the national level. However, one of the strongest components of growth in November was oil and gas extraction (+2.4%). Although not exclusively an Alberta industry, strong growth in energy bodes well for this province. 

Other national sectors that did well in November include wholesale (+1.5%) and retail trade (+1.4%), both of which suggest Canadian consumers are feeling increasingly confident. Monthly losses were posted in manufacturing (-0.8%) and construction (-0.4%). 

The stronger-than-expected growth in November should lift overall fourth quarter growth to the range of 2.0-2.5%. That’s still in line with the 2.4% projection by the Bank of Canada for all of 2011. Therefore, today’s positive GDP report is unlikely to prompt the Bank of Canada to raise rates sooner.