Alberta’s move to force cuts to oil production in the province is clouding an already modest outlook for Canadian economic growth in 2019.
Several of Canada’s big banks – Bank of Montreal, Toronto-Dominion Bank and National Bank of Canada – issued research notes Monday, all saying that the planned production cuts, announced by Alberta Premier Rachel Notley on Sunday, will take a bite out of the country’s overall economic output next year.
The economists predicted the cuts would shave about 0.2 percentage points off 2019 real gross domestic product growth, which had been forecast at about 2 per cent. However, they said the production cuts will be felt much harder in the first quarter of the year, when they first come into force – and they will have a much harsher effect on Alberta’s economy.
“It will put a serious dent in the GDP forecast to start 2019,” wrote Bank of Montreal economists Benjamin Reitzes and Robert Kavcic. The bank slashed its projected first-quarter growth rate to a thin 0.7 per cent annualized, from 2 per cent previously.
Bank of Montreal also cut its Alberta 2019 GDP growth forecast in half, from 2.4 per cent to 1.2 per cent.
“We had already assumed that [oil and gas sector] capital spending budgets would be scaled back next year given the weak price environment, but the production cut adds a new layer of downside,” Mr. Reitzes and Mr. Kavcic said.
On Sunday, Ms. Notley announced her government would impose temporary cuts of 325,000 barrels a day, or 8.7 per cent of the province’s oil output, to help alleviate a supply glut that has built up in the province owing to severe transportation backlogs. The oversupplies have resulted in severely depressed prices for Alberta crude, which has been trading at deep discounts to benchmark U.S. prices, and has prompted growing public outcry for governments to take action.
TD Bank economists Brian DePratto and Omar Abdelrahman predicted that Alberta’s growth could be “between 0.6 percentage point and 1.3 percentage points lower than previously anticipated” as a result of the production slowdown. The bank had been projecting 2.4-per-cent growth for the province next year.
“All negative impacts will be heavily front-loaded in the year,” they said.
However, economists said the drag on growth will ease as the year progresses. The Alberta government plans to reduce the size of the cutback significantly after three months, and plans to remove the production restrictions entirely at the end of next year. Meanwhile, additional shipping capacity should help reduce excess oil inventories.
“The Alberta government anticipates having an additional 120,000 barrels per day of rail export capacity through its purchases of rail cars and related facilities by [2019 year end]. As well, takeaway capacity should be improved via Enbridge’s revamped Line 3 pipeline,” the TD economists said.
National Bank senior economist Krishen Rangasamy, who cut his 2019 GDP growth projection from 2 per cent to 1.8 per cent, noted that the oil cuts aren’t the only factor weighing on the forecast.
“The outlook for next year … has become darker amidst the loss of momentum for the global economy and the resulting decline in commodity prices,” he wrote. He added that a weaker-than-expected savings rate among Canadian consumers, revealed in last week’s third-quarter GDP report, means that consumer spending “is also more vulnerable than first thought.”