Alberta, Saskatchewan to lead economic growth as oil patch recovers, report says

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After a difficult two-year adjustment to a collapse in the oil market, the Canadian economy looks set to take another turn this year, as oil-heavy western provinces bounce back while real estate-primed growth in Ontario and British Columbia heads into a policy-driven cooling, a leading think tank said Monday.

The Conference Board of Canada's quarterly provincial outlook report predicted that Alberta will emerge from its two-year recession to retake the mantle of Canada's provincial leader in economic growth this year, with forecast growth of 3.3 per cent, as the battered oil sector has begun to recover from its severe slowdown. Saskatchewan, whose own slumping energy sector also contributed to a recession, is expected to grow 2.5 per cent, the country's second-fastest pace.

"The difficulties in the resource sector are slowly starting to dissipate, leading to a gradual turnaround in capital spending and exploration," the report said. "After two years of chopping away at their spending budgets, energy companies have put the axe away."

But the two provincial economies that led the country during the past two years – B.C. and Ontario – are expected to moderate, with growth drifting back toward the middle of the provincial pack over this year and next. Both provinces face headwinds from new taxes and other government measures aimed at cooling their red-hot housing markets, which have been a major source to growth in the past couple of years, and both are considerably exposed to protectionist trade risks from the United States. (B.C.'s huge forest-products sector, in particular, already faces a serious threat from new U.S. duties on softwood-lumber exports announced last month.)

The Conference Board's assessment echoes the general tone of the outlooks over the spring from the country's big banks. Bank economists generally expect a modest recovery in the resource-driven regions and segments of the economy, together with a boost from federal infrastructure spending, to pick up the slack from a moderating housing sector. They see Alberta rebounding from its recession, though most outside the Conference Board haven't pegged Alberta as the growth leader. The prevailing theme has been an overall improvement in economic growth nationwide (the Conference Board is pegging national real GDP growth at a healthy 2.3 per cent in 2017, up from 1.2 per cent last year), with less disparity among the provinces.

"Canada's regional growth landscape is looking less rugged this year, with the gap between the best and worst performers expected to narrow," Bank of Montreal senior economist Robert Kavcic said in the bank's provincial outlook report earlier this month.

A big part of that story is the turnaround in Alberta, where the economy suffered "its worst recession in more than a half-century" over the past two years, the Conference Board said. However, it said Alberta's economy is "improving from a weak starting point": Even with the strong growth that the think tank has projected, the province's real GDP will still be more than 4 per cent below its levels of 2014, before the oil shock hit. That's evidence that even with a strong 2017 rebound, Alberta's economy will still be far from back to normal.

"Broader economic conditions beyond just GDP (e.g. the housing market, commercial real estate and interprovincial population flows) will continue their adjustment, and face a much more subdued recovery than that experienced after the Great Recession," Mr. Kavcic said.

Meanwhile, the Conference Board is calling for growth in B.C. to slow to 2.5 per cent this year from a country-leading 3.7 per cent last year, and for Ontario to dip to 2.3 per cent from 2.6 per cent.

Economists believe the slowdown in the housing market will have the biggest impact this year in B.C., where the hot Greater Vancouver market was already showing signs of slowing before the provincial government introduced a foreign-buyers tax last August, a measure that appears to have deepened the slowdown. A similar tax introduced in Ontario last month for the region in and around Greater Toronto is also expected to have some dampening effects in a market that most economists feel is due for a cooling off anyway, given the growing affordability problems that will eventually weigh on demand.

"There will be a modest slowdown from the housing sector, [but] it's not indicating a collapse," said Royal Bank of Canada assistant chief economist Paul Ferley. He added that despite the growing U.S. trade fears under the protectionist-leaning administration of President Donald Trump, both Ontario and B.C. have benefited from the strengthening U.S. market and a weaker Canadian dollar that have helped exports, "and that's going to continue."