Last Wednesday, senior economist Todd Hirsch of Alberta Treasury Branch met with the Olds and District Chamber of Commerce over breakfast to discuss Alberta's current position in the global economic machine.
His presentation, entitled “Alberta in 2011: A Lot of Moving Parts,” was inspired by a piece of advice he was given while he was growing up.
“If you're looking for a piece of electronics or piece of equipment, try to find something with very few moving parts. Because it's going to be those moving parts that wear down, and that's going to give you problems.”
Right now, Hirsch says the global economy is just like a complex piece of machinery with many moving parts,
“We feel it of course here in Alberta. We're not isolated from what happens.”
Hirsch listed the earthquake in Japan and the subsequent nuclear disaster at Fukushima as the first moving part.
Because of the perceived instability of nuclear power, Hirsch says President Obama may soon change his tune about meeting power demand with a nuclear supply.
“Nuclear is seen as a much more favourable option because of low carbon emissions. But because of the situation in Japan, I think there's going to be a greatly reduced appetite for nuclear energy in their region.”
He said that in the next couple of years, Albertans could potentially see natural gas becoming the happy middle ground between nuclear and coal power, because both coal and nuclear are seen as potential hazards.
Development of natural gas power in the US would bring prices up here, and this would be very favourable for Albertans.
The rebuild in Japan is also placing upward prices on Alberta lumber, says Hirsch.
The second moving part is the ongoing drama in the Middle East.
“I think there's a simmering unhappiness or tension in the Middle East, which could spread to other countries.”
Hirsh says if it does, the price of crude oil is more difficult to predict.
“Higher oil prices are probably not in the best interest of Alberta.”
With every spike, oil prices are just as likely to come crashing back down again.
He says the further away it gets from the fundamental supply and demand price (somewhere around $60-$70 a barrel), oil prices are driven more by speculators and fear about what's going on in the Middle East.
“When I saw these oil prices lately going from $80, to $90, and then to $113 a barrel, you certainly get a little bit nervous wondering ‘How high are these prices going to shoot up before they come crashing down?'
“I think oil producers would prefer to have prices a little bit lower but more stable, than spiking up with no sense of what's going to happen.”
A third moving part is food price inflation.
“All around the world, food price inflation is making the headlines, and it's causing a lot of worry.”
Canada is blessed, said Hirsch, to be a land of plenty.
Canadians (on average) spend less than nine per cent of their earnings on food, so there aren't too many Canadians who will go home hungry because of the rising costs.
He says because of the high food prices, record planting is occurring globally this year.
Despite the high prices bringing Albertans a bigger return, Hirsch says the input costs (fertilizer, fuel, feed) are also high, and it's squeezing farmers' margins of profit.
The fourth, fifth and sixth moving parts are the fragile US economy and its poor housing market, the European economy, and the Canadian dollar.
“When we're seeing turmoil in places like Europe and the US, it does affect the Canadian dollar.”
Hirsch said he was listening to the radio on his drive to Olds, and announcers were talking about the Canadian dollar being weak at 2.11 cents above par.
“It's pretty funny how quickly we adjust to what we think the Canadian dollar should be at.”
But in general, there is more strength in store for the Canadian dollar, he says.
“There's actually a lot of things working in Canada's favour at the moment. Things global currency investors really like.”
Our commodities and exports are a big draw, and with the exception of natural gas, most Canadian commodity prices are doing very well, he says.
“They like governments that are in good fiscal shape. Compared to the other G8 countries, Canada, our federal government, and our economy are in good shape.”
Chances are good that Canada will move back to a balanced budget within five years time due to our governmental stability.
“No other government is close to balancing its budget. We're the model of fiscal responsibility.”
“The other reason we're looked upon favourably right now is we're so wonderfully boring in our politics.”
Although most wouldn't consider boringness an asset, Hirsch says global commodity and currency traders find this very appealing.
“We just came out of a federal election and the biggest thing that we were arguing about is the census long-form questionnaire.”
“All of these moving parts leave Alberta in a pretty good spot. It's hard to find a place in the developed world that is in better shape than Alberta is.”
“We're seeing interprovincial migration returning to positive numbers for Alberta. The labour market is reasonably balanced. We've got 5.9 per cent unemployment, down from 7.7 per cent during the recession.”
“But even at 7.7, if that's as bad as it got, this province has seen much, much worse.”
Hirsch recalls the unemployment rate being 12.6 per cent in 1984, the year he graduated from high school.
His presentation concluded with a humorous anecdote about the unpredictable nature of economics.
“Economic theory can only get you so far in understanding what's going on in the global economy. But there are so many other moving parts right now, that it's not always going to help you.”
Examples of this are the unpredictable world events like Japan's quake that theory simply can't account for, he says.
Upcoming events for the Olds and District Chamber of Commerce include a garden party on Thursday, June 2 at Canadian Tire Garden Centre, where nursery specialists will be offering advice on perennial care and designing planters.
Also coming soon is the fourth-annual Bankers, Barristers, Bean-Counters and Brokers Golf Tournament at the Ponoka Golf Club on June 15.
