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CALGARY, June 25, 2009 – Alberta's economic boom quickly went bust after oil prices collapsed late last year, and housing and consumer activity followed suit, according to the Provincial Outlook report from BMO Capital Markets Economics.

“Real GDP will likely contract 2.7 per cent this year, with an above-average 2.2 per cent recovery likely in 2010,” said Robert Kavcic, Economist, BMO Capital Markets.

As is usually the case, other economic indicators in Alberta hinge on the direction of oil prices, and the current picture is about as bad as it has been since the early-90s. “The unemployment rate has surged above 6 per cent, retail sales have plunged more than 12 per cent year-over-year in the largest decline on record, and housing markets have suffered a painful retreat,” noted Kavcic. “That said, if the recent rebound in oil prices persists as forecast, these indicators will begin to recover as we move through 2010.”

The collapse in energy prices, combined with high input costs and tighter credit conditions put the brakes on energy-sector development over the past six months. Indeed, cancellation and delay announcements point to investment activity in the oil sands that is about half last year's level, contributing to an expected 14 per cent decline in overall capital spending intentions in the province this year. Meantime, the Petroleum Services Association of Canada is forecasting a 43 per cent decline in drilling activity in 2009, largely due to still-low natural gas prices.

However, two factors will likely support Alberta's energy sector as we move into 2010. First, a global economic recovery should continue to support already robust commodity price rebounds. At the same time, input costs in the province have fallen sharply thanks in part to a significant slackening of the labour market, pulling the break-even price on marginal oilsands projects down to about $60 from nearly $100 at the height of the boom.

The Province of Alberta is forecasting a $4.7 billion deficit this fiscal year, after an estimated $1.4 billion shortfall in fiscal 2008/09—the first deficit in 15 years. Deficits are forecast for the next two fiscal years before the budget returns to surplus in fiscal 2012/13, but underlying the figures in fiscal 2010/11 and beyond is a commitment to take $2 billion in additional corrective action (ie: spending cuts or tax increases if revenues don't improve). Capital spending will actually decline slightly this fiscal year, though the four-year Capital Plan was increased by 4.5 per cent to $23.2 billion; the province has already been engaging in hefty infrastructure spending, a legacy of the boom years.

The complete report can be found at www.bmocm.com/economics.

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