In this week’s ATB Economics Weekly Wrap…

• Still foggy in the U.S. - More inflation progress needed to convince Fed 
• Next week - Canadian inflation data!
• Wildfire watch - oil and gas production risks
• Hammering home - Alberta residential construction heats up; resale market remains tight
• New report on interprovincial migration - coming Tuesday
• Interesting Fact: Alberta’s labour force surges
• Charts of the Week: Getting real (and nominal) about…provincial GDP per capita

The inflation watch continues. U.S. inflation progress has been painfully slow, which should keep the U.S. Fed on hold longer than the Bank of Canada. We get the much anticipated inflation report for Canada this Tuesday ahead of the June 5 rate decision.

Why have so many people moved to Alberta? We discuss this in detail in a new report coming out this Tuesday. The motivation behind the paper was a scatter plot, which left me scratching my head. Stay tuned.

In other news, we watch for potential wildfire economic impacts and dig into provincial GDP per capita.

U.S. Fed will remain cautious despite some modest ‘core’ progress

On Tuesday, the U.S. Federal Reserve Chairman Jerome Powell remarked: “We did not expect this to be a smooth road, but these [inflation readings] were higher than I think anyone expected.”

Fast forward to Wednesday, and the inflation data for April showed some progress, but far from anything that could point to victory.

Annual CPI inflation clocked in at 3.4%, down from 3.5% in March. Not much to get excited about.

The core measures of “underlying inflation” showed some progress. The non-energy and food CPI rose 0.3% in April versus the 0.4% reading in March, the first monthly deceleration in six months. Still, the year-over-year core reading is running too hot for comfort at 3.6%.

In a case of ‘bad news is good news’,  U.S retail sales in April stalled, falling short of expectations. The U.S. consumer has refused to quit amid higher rates. It seems that higher rates are (finally) taking their toll on the consumer, which should take some inflationary heat out of the economy.

Bottom line: This week’s data renewed some hope that past rate hikes are finally doing the trick. But the Fed will want to see a whole lot more before its first pivot. As for markets, June is basically off the table for the first cut, July is doubtful, and the greatest odds are priced in for September.

Wildfire season poses a near term risk to energy production

Wildfires have been a more common occurrence in recent years, and this year looks to be no different.

The community of Fort Nelson and area in northeast B.C. and parts of Fort McMurray Alberta are under evacuation orders. While the outcome is far from certain (some recent rain will help), we know that fires can take a heavy personal toll, destroying property and uprooting lives.

The near term impact on the economy will depend on what is disrupted and how much.

Last year, the impacts mainly flowed through Alberta’s largest export - oil and gas production. In the month of May, and early June, production was temporarily curtailed or shut-in, primarily natural gas and natural gas liquids. At one point in May, about 300,000 barrels per day of crude oil equivalent was off line. Fortunately, conditions improved, and the decline was limited. National oil and gas GDP declined about 4% in May and fully recovered by July. All in, the disruption to production shaved less than 0.1% from Alberta GDP growth last year.

But impacts could be much higher. The 2016 wildfires in Wood Buffalo provide an indication of the downside risk. The 2016 fires hit the major production center in Alberta’s oil sands region, temporarily shutting in as much as 1.5 million barrels per day of oil production. That year the drop in oil and gas GDP was a staggering 15% in May. The  estimated impact to Alberta’s annual GDP that year was a reduction of 0.6 percentage points.

As for this year, it’s too early to predict the impacts. Producers have taken proactive measures to minimize impacts, and some have built in fire risk into their production guidance. But the situation can change quickly, and we’ll be monitoring any impacts as the situation unfolds.

Related to the dry conditions, producers noted in the ATB Capital Markets Energy Sector Survey that potential water shortages pose a modest (exploration and production - E&P - companies) to significant (energy services companies) risk to upstream operations. ATB Capital Markets attributes the diverging views, in part, to the highly regionalized nature of drought conditions: energy services companies operate across the Western Canada Sedimentary Basin, while only certain E&Ps would be impacted.

Charts of the Week:  Getting real (and nominal) about provincial GDP per capita

Canada’s economy is eking out modest growth, but declining in per capita terms. This has ushered in a national conversation about Canada’s productivity woes, with a noteworthy and timely “break the glass” speech from Senior Deputy Governor of the Bank of Canada Carolyn Rogers.

What about the provinces? Economic growth has struggled to keep up with population growth across the country. All provinces, including Alberta, have witnessed declines in their per capita output.

With all these recent changes, how does Alberta stack up against other provinces on GDP (gross domestic product) per capita?

Before we dive into that, what do we mean by GDP? There are two main metrics - both are important.  

• Real GDP is the quantity of Canadian economic output holding prices constant (in this case 2017 dollars). It strips out fluctuations in the price of what we produce – things like wheat, crude oil, manufactured goods and professional services. Real GDP is used for another metric - labour productivity, which measures the quantity of what is produced per hour worked (i.e. real GDP per hour). Real GDP is what’s most widely reported. You may have heard the Canadian economy grew by 1.1% last year - that’s referring to real GDP.   
• Nominal GDP, on the other hand, is a measure of the value of what we produce in current dollars. For this reason, it’s probably more relatable to most (you don’t file your taxes in 2017 dollars). Nominal GDP is a measure of income earned from the production of goods and services in an economy. It’s also a broad measure of the government’s tax base. The federal and provincial governments earn revenue by taxing components of nominal (not real) GDP. 

Alberta and Saskatchewan generate by far the highest nominal GDP per capita, thanks to strong commodity prices, higher levels of (real) labour productivity and employment rates. This has long been the case for Alberta going back to the early 1980s. Saskatchewan has recently moved closer to Alberta, propelled by higher commodity export values (e.g. oil, potash, crops and uranium). Though the quantity produced per person has declined (i.e. real GDP per capita), the value has increased due to higher output prices. These two provinces are about one-third above the national average on this metric.

As for real GDP per capita, Alberta remains far above all provinces, including Saskatchewan. But the gap between Alberta and the national average has closed significationaly since 2014, prior to the sharp decline in energy investment.

Answer to the previous trivia question: A monkeyboard is the small platform on a drilling rig that the derrickman stands on as pipe is run into or out of the hole.

Today’s trivia question: How many births were there in Canada in 2023?