The most recent renegotiated NAFTA has reason for celebration across the country. While the agreement still needs to be ratified by all three countries, it sends a positive message to investors and businesses alike.
Eighty billion dollars’ worth of exports and 120,000 jobs in the Canadian auto and auto part manufacturing sector hinge on NAFTA – the announcement of a revised North American trade deal provided much needed reassurance to that sector.
Steel and aluminum tariffs imposed by the US under Section 232 of the Trade Expansion Act remain in place and are unlikely to be removed any time soon. The US is the top steel importer globally with nearly 17% of those imports coming from Canada. Ninety percent of Canadian produced steel is exported to the US, so the imposition of tariffs not only makes Canadian steel manufacturers less competitive, but it adds considerable volatility in construction and infrastructure costs.
The Canadian steel market pales in comparison, where our imports are only a quarter of the American’s imports. Most flat plate material, a major component of steel buildings, is US produced. Buildings and infrastructure account for 50% of all steel consumption so the imposition of steel tariffs has a major impact on construction costs North American wide.
The discount on Western Canadian Select (WCS) continues to cost Canadian oil producers billions of dollars, with the price gap continually widening – last October the price gap was US $11.71, it is now almost US $46 a barrel. US refinery shut-downs have reduced demand and further delays to the Trans Mountain Pipeline will not provide any immediate relief. Future energy capital spending and government revenue is at stake if Alberta producers cannot find an efficient method of transporting crude.
ATB noted a $64 million drop in non-residential construction from the first to the second quarter of 2018. The 10-year average value for non-residential building permits has been approximately $530 million per month, peaking at around $700 million during the economic boom. The graph to the right revealed that we have been well below that average for the last two years. In the short term, commercial construction is expected to remain flat until real estate inventory is absorbed. Over the next decade the key drivers of non-residential construction will be institutional and commercial. With the uncertainty over pipeline expansion and future oil prices, Industrial construction will likely remain depressed. While Alberta’s economy continues to diversify, over the next five to ten years it will not be enough of a contribution to offset the decline in energy production.
In the past six months, exports and manufacturing shipments have been 11% higher than the first half of 2017 and that trend is expected to continue. Despite the gap between WTI and WCS, energy sector investment is forecasted to increase by 3.2%. There have been mixed real GDP forecasts for Alberta ranging from 2.4-2.7 for 2018 and 2019, with economists adjusting rates to reflect economic uncertainties. One thing is for sure, we are slowly climbing out of the 2015-2016 deep recession.
To access ATB’s August 2018 Alberta Economic Outlook: https://read.atb.com/economics/alberta-economic-outlook-august-2018