In this week’s The Seven…

• On a slower track - Canada’s economy 
• Alberta’s tariff exposure - It depends
• Natural Gas - Short-term pain, medium-term gain  
• Going modular - Addressing Canada’s housing supply crunch
• Alberta’s trade with Mexico
• A lift from Swift - Concert goers boost Toronto economy
• Next week: Labour Force Survey 
• Interesting Fact: COP29 - What is Article 6?
• Chart of the Week: What’s your exposure? U.S. exports by province

After wrestling inflation back to 2%, a new challenge has arrived in Canada—a geopolitical one.

The week kicked off with another tariff threat from President-Elect Donald Trump. It may be easy to dismiss this as posturing—a starting point for negotiations on border security. But we think it should be taken seriously, if not literally. Trump campaigned on an America first agenda and border security and he is tying these issues together.

We don’t intend to publish a new forecast based on every social media post (impossible and misleading). But this threat raises a new risk that we’ll need to incorporate.

As fearless participants in the forecasting arena, our task is to weigh all the upside and downside risk (we run low and high scenarios to account for uncertainty). Our view is that the low case we published in October to capture geopolitical uncertainty does not go far enough. If Trump does what he says, and it lasts through next year, our low scenario of only 1.2% real GDP growth in Alberta (relative to a base case of 2.8%) is too optimistic. We are in the process of developing that scenario for our December forecast.

Per capita declines continue - Canada’s economy in the third quarter

Canada’s economy has entered this period of trade uncertainty in a weakened state. The labour market has softened over the last year, and now today’s GDP report shows that third quarter output slowed to only 1.0% (annualized). That’s weaker than the Bank of Canada’s October forecast of 1.5%, but close to our recent tracking.

Canada’s economy is growing slower than the population. Per capita GDP has been trending lower since mid 2022. In contrast, U.S. GDP growth has been resilient, and per capita GDP is rising stateside.

One of the concerning aspects of today’s report is the composition of growth. Consumer spending and government spending rose last quarter, but business investment (on structures and machinery and equipment) fell again. This component of GDP is down 2.3% over the last year, and has fallen 19% from the peak in Q4 2014.

Canada’s growth over the last decade has been fueled by consumer spending, government spending, and (until recently) housing. The decline in business investment does not bode well for much-needed labour productivity gains in Canada.

All this raises an important point, which I raised this week in an Edmonton Global panel discussion. Regardless of U.S. politics or what Trump may or may not do, there are repairs needed at home to reverse Canada’s per capita decline in GDP and labour productivity. I participated in Canada’s Productivity Summit in Calgary, where many ideas were discussed, such as: boosting business investment, removing internal trade barriers, encouraging commercialization and scaling of start-ups, increased competition, expanding trade corridors, streamlining regulations and faster project approvals.

Alberta’s tariff exposure - It depends

In my post earlier this week about Trump's tariff threat, I highlighted that the key question is the treatment of oil and gas. As shown in our Chart of the Week below, Alberta’s higher dependency on U.S. exports, relative to other provinces, is entirely driven by oil and gas at 28% of the province’s GDP last year compared to 6% for all other exports to the U.S.

We had good reason to believe that energy would be tariff exempt. Higher tariffs would flow through to the U.S. consumer, via higher refined product or natural gas prices—directly at odds with Trump’s plan to slash energy bills in half.

But Trump’s statement, and subsequent reports from ‘sources’, suggest that he really meant all products. If that happens, the tariff, in our view, would fall mainly on the U.S. consumer (via higher prices), while a portion may eat into refinery margins and a wider light-heavy differential for Canadian producers. But duration is key, and the longer it's in play, the more likely production is impacted.

Other large Alberta sectors that would be impacted include agriculture, chemicals, wood products, and industrial machinery. These industries would see lower demand for their products, partly offset by a weaker loonie that would follow the tariffs. Of course, it’s unlikely that Canada would accept tariffs without retaliating (as it did in 2018)—such retaliation would raise costs for business and consumers in Canada.

Fueling AI with natural gas

It’s short-term pain for medium-term gain in the natural gas sector.

A new publication by ATB Capital Markets makes the case that a ‘secular’ driven demand for natural gas.

Natural gas prices have struggled this year. Warm winter weather and swelling inventories have pushed Alberta AECO prices near$1/GJ for much of 2024, though prices have since rebounded to around $2/GJ.

But prospects are set to improve. As the ATB Capital Markets report notes, there are two thematic elements driving demand in the medium to longer term:

1. North American LNG - Next year, Canada’s first LNG export terminal will be up and running, increasing natural gas demand and providing exposure to Asian pricing. Adding to the West Coast LNG mix is Woodfibre LNG and Cedar LNG.

2. AI data centers - To power the AI revolution, more baseload electricity will be needed.  The report notes that while most of the projects on the North American drawing board are renewable, natural gas will also need to play a critical role given the intermittency that comes from renewables.

In summary, ATB Capital Markets sees an additional 20+ bcf/d in incremental gas demand in North America by 2030—roughly split between new electricity generation and LNG.

As Canada’s largest natural gas producer, Alberta is well positioned. The report also sees opportunity for the development of data centers in Canada, particularly in Alberta, with lower natural gas cost, cooler temperatures, more abundant water supply and ‘attractive market composition’.

A lift from Swift

On a lighter note (and who couldn’t use that right now), it seems that Taylor Swift did more than just entertain fans in Toronto last week. Her concerts provided a lift to the Toronto economy, with the Canadian Chamber of Commerce reporting 300,000 fans arriving in Toronto and a total economic boost of $280 million.

Next Week - Labour Force numbers for November

Can Alberta make it two months in a row? The province recorded solid job gains (+13.2K) last month, leading all provinces, but momentum has slowed overall and the unemployment rate has ticked higher over the last year. We’re looking for another job gain, but also strong population growth that will keep Alberta’s unemployment rate above 7% for the rest of  the year.

The Bank of Canada will be watching this final jobs report before their December 11 announcement. We have changed our call from another 50-basis point cut to a 25-basis point cut given somewhat hotter inflation data and now tariff threats. But a jumbo cut cannot be ruled out, especially if the labour report comes in soft.

Interesting Fact…Article 6

COP 29, the annual international summit on climate change, wrapped up in Baku, Azerbaijan last week. The focus was on the deal to commit $US300 billion annually for developing countries to address climate change and mitigation. I was also paying close attention to movement on Article 6 of the Paris Agreement.

Article 6 creates a framework for an international carbon market. As a major global energy producer, Canada (and Alberta) naturally has higher per capita emissions. But if Canada didn’t produce these products, they would be produced somewhere else, potentially under lower environmental and social standards. The emissions could simply move elsewhere. As COP29 President Mukhtar Babayev said, “the atmosphere does not care where emissions savings are made.”

But what if Canada could get carbon credits for displacing higher emissions elsewhere, for example, by shipping LNG to China and displacing coal? That’s what a global emissions trading regime under Article 6 would help accomplish.

I’m not qualified to give the ins and outs of this new agreement, but let’s just say that significant progress was made at COP29 on the ‘operationalization’ of the regime with new rules and guidelines developed. It will be an important area to watch.

Chart of the Week: What’s your exposure? To U.S. tariffs

Our Chart of the Week shows U.S. exports as a share of economic output, or GDP, by province. Alberta is near the top, and this is driven by oil and gas.

Alberta also imports from the U.S., but not near as much.* Total two-way trade between Alberta and the U.S. was $182 billion, comprising $156 billion in exports and $26 billion in imports.

The main destinations of Alberta’s U.S. exports are Illinois, Washington and Texas - together accounting for over $90 billion in sales (for context, Alberta’s second largest country market was China last year at $5.5 billion).

Bottom line: How the Trump administration treats energy remains key to how Alberta fares under a new tariff regime relative to other provinces.

*U.S. products also make their way to Alberta after landing in other parts of Canada.

Answer to the previous trivia question: Male turkeys are called toms.

Today’s trivia question: What is the official name of Mexico?