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Op-ed from Alberta Central’s Chief Economist Charles St-Arnaud

As 2021 comes to an end, many are eager to turn the page on another year tainted by the pandemic. But while COVID continues to torment on the economic front, not all has been a let down. 2021 showed a brighter picture for Alberta’s economy with a 6.2% increase in economic growth in 2021, after contracting by 5.9% in 2020. This was supported by a recovery in consumer spending and a sharp turnaround for the energy sector and even the labour market has almost fully reversed pandemic losses. However, the biggest economic story of 2021 is that of the “before and after” of the value of oil. Making a U-turn in 2021, the value of oil produced in Alberta exceeded levels seen during the pre-2015 boom years, with oil production value estimated to have reached about $10 billion in October, about 30% higher than the previous record in 2014.

And what we’re expecting in 2022 is even better. Growth is forecasted to remain robust at 4.2%, with the level of economic activity expected to finally surpass its 2014 peak early in the year.

This significant positive terms-of-trade development for Alberta is having some visible positive impact. The higher value of oil produced in the province can be credited for more than half of the reduction in the fiscal deficit in 2021-22. The positive tailwind to the energy sector and the economy from this development will continue into 2022, leading to higher wages, improved profitability, and increased capital expenditures.

Already, many actors in the industry are expecting the level of investment in the energy sector to reach the level seen just before the pandemic. This would be a significant bounce back in spending in 2022 and a major contributor to growth next year. However, this is not a return to the boom years. Instead, energy producers remain focused on repairing their balance sheets, improving profitability and tackling the challenges of decarbonization, climate change and energy transition.

While expectations regarding the impact of higher oil on the broad economy need to be tempered, it will nevertheless be a tailwind to growth, supporting wages, household income, consumer spending, the housing market and positive spillovers to other industries. In addition, the labour market will continue to improve, with the unemployment rate expected to ease to 6.5% by year-end, its lowest since 2018.

2022 will also see inflation staying high for most of the year, mainly the result of the sharp rise in energy prices globally, pushing gasoline and utilities costs higher, and global supply chain issues. With inflation resulting primarily to global factors and supply shocks rather than demand, the Bank of Canada (BoC) will face a trade-off between fighting inflation and risking stalling the recovery by increasing interest rates.

It will need to increase its policy rate to prevent high inflation from becoming permanent.  As such, with the recovery continuing, we believe the BoC will start to increase its policy rate in April and increase rates a total of four times in 2022, bringing them to 1.00% by year-end.

While the outlook for next year is positive, we always have to be aware of risks. Higher interest rates are likely to be a headwind on Canadian growth, especially consumer spending. Households have continued to accumulate debt during the pandemic, but declining interest rates lowered the cost of servicing it. As rates increase, households will face a rise in their debt-service ratio, requiring a reduction in discretionary spending. Albertans are particularly sensitive to interest rates, being the most indebted households in Canada.

The pandemic could also surprise us again. The Omicron variant’s emergence is a concern and could lead to a setback to the recovery. Not much is known about the new variant, and its impact on the outlook will depend on its severity and whether vaccines continue to offer protection. Nevertheless, we believe that a high vaccination rate and proof of vaccination will help prevent the re-imposition of stringent restrictions.

Despite those risks, Albertans can be optimistic regarding the province’s economic prospects for 2022. We’re getting there.

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