The Twenty-Four
The Weekly Wrap, March 1, 2024
Below potential - business investment lagging in Canada
By Mark Parsons, ATB Economics 1 March 2024 6 min read
In this week’s ATB Economics Weekly Wrap…
- National GDP - higher and lower
- Alberta venture capital - weathering through
- Real estate outlook - multi-family gains
- Oil and gas investment - stable intentions
- Crude by rail - higher for now
- Interesting Fact: Forever young - some fun demographic stats
- Chart of the Week: Sluggish business investment in Canada
Economic output not keeping up with population
Canada’s real GDP improved in the fourth quarter, but economic output per person continued to decline.
The latest GDP numbers show that the national economy eked out modest growth in the fourth quarter of 1.0% (annualized) compared to a 0.5% contraction in the previous quarter. The growth was led by higher exports, but was accompanied by a decline in business investment (see the Chart of the Week).
While Canada has avoided a technical recession (two quarters of negative growth in a row), real GDP last year rose at its slowest pace (1.1%) since 2016 outside the pandemic year of 2020. Moreover, on a per capita basis, real GDP per capita is estimated to have decreased for the fifth time in the last six quarters.
This report won’t change the Bank of Canada’s stance next week, with another hold expected. While anemic growth is dampening inflation pressures, the Bank will be waiting to see if this translates into softer CPI readings before pivoting to lower rates. We maintain our call for a June rate cut.
Real GDP per Canadian has been on a downward trajectory
Alberta venture investment shy of 2022 record
Venture capital investment has held up relatively well in Alberta over the past two years amid challenging conditions.
According to a new report from the Canadian Venture Capital Association (CVCA), total venture capital investment fell for the second straight year in Canada, down by 34% to $6.9 billion, reflecting “a cautious approach amid economic slowdown and high interest rates.”
After hitting a new record in 2022, Alberta venture capital investment last year dipped 8% to $707 million. Edmonton-based Jobber had the largest deal, valued at $134 million, while Calgary-based geothermal tech company Eavor Technologies secured $124 million.
Multi-family gains
Increased activity will be concentrated in the multi-family home segment in Alberta’s two largest cities, according to CBRE’s latest forecasts.
It’s a bit of a mixed bag for the real estate sector in 2024, but the theme of population-driven growth and stretched housing affordability continues to prevail.
According to the latest Canada Real Estate Market Outlook by CBRE, multi-family housing starts will pick up further this year, particularly in Calgary, but not enough to keep pace with surging demand. Rents are poised to increase further. The multi-family vacancy rate is projected to fall from 1.4% to 1.2% in Calgary and from 2.4% to 2.2% in Edmonton.
In the industrial segment, leasing activity in Calgary is expected to ease after a run-up from 2021 to 2023. Edmonton’s industrial activity is expected to be more resilient this year, with a small decline in the availability rate supported by energy-related activity in the area.
Office vacancies remain high, but are showing signs of improvement in the Calgary market. Downtown vacancies are expected to edge down to 27.9%, below the 30% mark for the first time since 2020. In Edmonton, downtown office vacancies are expected to stay near 2023 levels, inching up to 23.5%.
Modest growth in oil and gas capital spending
Two recent reports point to relatively stable spending in the Canadian oil and gas extraction sector following a strong increase in 2023. While market access is improving, the sector remains ‘cautious’ and ‘disciplined’.
The Canadian Association of Petroleum Producers released their 2024 CAPEX Forecast, calling for $40.6 billion of oil and gas investment in the Canadian upstream sector, up from $39 billion last year. Most of that investment ($29 billion) will take place in Alberta, where capital intentions are expected to hold fairly stable. Sluggish natural gas prices will weigh, but market access from TransMountain Expansion (2024) and CoastalGas link to LNG Canada (2025) will provide a lift. CAPP also cites ‘uncertainty around proposed emissions policy’ leading to cautious investment.
In another report, Statistics Canada released the results of its Capital and Repair Expenditures Survey, pointing to a larger increase in oil and gas extraction spending to $42.4 billion this year. In Alberta, investment intentions for 2024 are $29.1 billion, up from $27.6 billion last year and the highest level since 2015.
Our December Alberta Economic Outlook projected a 10% increase in oil and gas investment in Alberta this year. We will be tempering that growth forecast in our March outlook, mainly due to sluggish natural gas prices. But we’re also looking at higher oil production, which should neutralize the impact on provincial GDP.
A note of caution: these are guide posts, and there are differences in the timing of these surveys. The Statistics Canada survey was conducted over an extended period of September 2023 to January 2024.
Chugging along - crude by rail picks up steam in late 2023
It’s not near the record, but volumes of crude oil exported by rail in Canada gained momentum in the latter part of 2023.
Canadian crude by rail exports hit 157,000 barrels per day in December, up 24.5% from the same month in 2022. The second half jump came alongside a rise in oil production and limited pipeline capacity with the Trans Mountain Expansion (TMX) pipeline expansion still under construction. Crude by rail exports reached their highs during the market access and price differential crisis in late 2018, and just before COVID disruptions in early 2020.
With the (TMX) coming online this year, crude by rail volumes are expected to scale back and the light-heavy price differential forecast to narrow.
Canadian crude by rail exports averaged 157,000 barrels per day in December 2023
Interesting Fact: You may have noticed ATB Economic’s mild obsession with demographics. There are two reasons for this. First, demographics explains a lot. David Foote famously argued that it explains “two-thirds of everything” in his classic book Boom, Bust and Echo. The second reason is that population growth is breaking records and is one of the main stories of 2023 and 2024. Last week we highlighted the age structure of migrants (very young). This week, we look at the age of the population as a whole.
Alberta’s median age in 2023 was 38.1, second among the provinces after Manitoba (37.5) and well below the national median of 40.6. Using a different measure of age, Alberta is the youngest province. The share of people aged 65+ in Alberta is 15.1% vs. 18.9% nationally. Notice the reference to the provinces. The territories are much younger than the provinces on both median age and 65+ share.
One more thing. Statistics Canada recently reported that millennials outnumbered baby boomers for the first time on record last year. In Alberta, that happened a decade ago in 2014 (see chart).
Why is Alberta’s population so young? It mainly boils down to persistently high levels of migration relative to other provinces with newcomers tending to be relatively young.
Millennials outnumber boomers in both Alberta and Canada
Chart of the Week: Canada’s sluggish levels of business investment
As we’ve previously discussed, Canada’s labour productivity has been on a downward trend since mid-2020 and sits roughly where it was in late 2014.
There are many potential sources of Canada’s languishing productivity, but one of them is weak business investment: it’s significantly lower in real terms than it was in 2014, prior to the big drop in energy investment.
Looking at the last decade, business investment has been lagging the overall economy. In the fourth quarter, real investment in machinery and equipment and non-residential structures fell by 2.5% to the lowest level since early 2021 and still well below 2014 levels. The longer term picture improves slightly with intellectual products added to the investment mix, but overall investment still lags the overall economy, as shown in the Chart of the Week.
Consumer spending has helped offset the weakness over the last decade. However, it too has slowed and is expected to remain weak in 2024 as debt servicing costs continue to climb.
Weak business investment is hurting Canada's productivity
Answer to the previous trivia question: The month of March and the planet Mars are both named for Mars, the Roman god of war.
Today’s trivia question: Although not the first person to use it, who is credited with popularizing the moniker “generation X?”
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