Signs point to recovery

A pair of Red Deer economists see reason for optimism in recent economic indicators. Mike Drotar, vice-president treasury with Servus Credit Union, and Patrick O’Meara, who teaches in and co-ordinates the financial services diploma program at Red Deer College’s Donald School of Business, said the recent run-up in the equity markets is encouraging.

Mike Drotar

A pair of Red Deer economists see reason for optimism in recent economic indicators.

Mike Drotar, vice-president treasury with Servus Credit Union, and Patrick O’Meara, who teaches in and co-ordinates the financial services diploma program at Red Deer College’s Donald School of Business, said the recent run-up in the equity markets is encouraging.

The Toronto Stock Exchange has gained 35 per cent since its early March low, with the energy index up 50 per cent and banking sector equities jumping 59 per cent, pointed out Drotar.

“Historically, the stock market is a leading indicator by about eight months, on average, as to when things are going to start picking up,” he said.

O’Meara agreed that the markets have climbed “astonishingly fast” and echoed Drotar’s assessment that this could reflect a broader economic recovery.

The price of oil is also up 92 per cent from earlier this year, said Drotar, and Imperial Oil Ltd.’s announcement on Monday that it is proceeding with its Kearl oilsands project near Fort McMurray as encouraging.

“That may be a very good sign for the economy that the industry is starting to see some light at the end of the tunnel,” confirmed O’Meara.

With emerging economies like China’s continuing to enjoy reasonable growth, Drotar even sees the possibility of a commodity boom.

“We’re definitely looking at $80 oil at a minimum within three years, and moving towards triple digits.”

This, and confidence in the Canadian economy, should push the loonie up, he said.

“I could see it going to par by Q1 of 2010.”

A high Canadian dollar would, however, contribute to the “tremendous devastation” of Ontario’s manufacturing sector, said O’Meara.

He wonders if that, and the ailing manufacturing areas in the U.S. and Europe could slow the demand for energy.

O’Meara also expressed concerns about Canada becoming dependent on commodity exports to the detriment of value-added products like manufactured goods.

And the American movement toward cleaner energy might also be reason for worry, he said.

“It really does depend on what kind of energy bill and energy policy happens in the United States.”

And despite the recent surge in oil prices, natural gas — which accounts for the majority of conventional drilling in Alberta — isn’t likely to experience an increase in price for some time, said Drotar.

He and O’Meara also pondered the adverse impact of the “unprecedented” monetary and fiscal stimulus being applied to economies around the world.

“It’s difficult to say what damage that is going to do in the future,” said Drotar.

In the United States, he noted, individuals and corporations are trying to get their debt under control, and the American government will eventually have to follow suit.

“That means less spending and less economic growth as a result.”

O’Meara described a possible situation where government spending will drive up interest rates and make it too costly for private sector borrowing and spending to occur.

As for the housing sector, Drotar anticipates a migration of Canadians into Alberta as the energy industry recovers. That should stimulate demand for real estate.

“If the equity markets, investor confidence and energy prices all stay up, and there’s that momentum building, I can see major spikes and a recovery in the housing market in 2010, 2011.”

O’Meara thinks the real estate market will remain relatively stable as people “sit back and take stock.”

Ultimately, he added, the future of Alberta’s economy will depend on the stabilization of oil prices, which in turn will be influenced by economic conditions in other countries.

“There are a lot of moving parts right now that will have to play themselves out over the next 24 months.”

However, O’Meara believes the “wall of money” being injected into global economies will promote that demand and stability — to the benefit of Alberta.

“I think we’ll see a steady economy,” he said. “Unemployment may be a little bit higher than it has been, but not much.”

Drotar is pleased with what he sees happening, and said it now appears the economic crisis could be “relatively short-lived” and have a “mild negative impact” in Alberta.

“Alberta’s probably the best place to be right now, with the resource plays.”

hrichards@bprda.wpengine.com

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