Alberta Economy Fall 2012 - Strange Days Indeed

Alberta author and Economist Todd Hirsch speaks to ATB crowd

Chris Davis, Pincher Creek Voice

Economist Todd Hirsch
C. Davis photo

Author, Speaker, and ATB Senior Economist Todd Hirsch gave a presentation titled "Alberta Economy Fall 2012 - Strange Days Indeed" at Heritage Acres' Summerview Hall on Friday, September 21.

Hirsch has a solid background in economics, with a BA Honours degree in Economics from the University of Alberta, a Master's degree in Economics from the University of Calgary, almost a decade teaching Economics at the University of Calgary, as well as working at Canadian Pacific Railway, the Canada West Foundation, and the Bank of Canada before moving to ATB.  Alberta Venture magazine recognized him as one of Alberta's 50 Most Influential People in 2011, and he provides economic commentary for CBC, CTV, the Globe and Mail, and other news sources.  In February of 2012 he co-authored his first book with Robert Roach, 'The Boiling Frog Dilemma: Saving Canada from Economic Decline'.  Roach is currently the Vice President of Research for the Canada West Foundation.

The Boiling Frog Dilemma posits that it will be the entrepreneurs in the Canadian economic mix that will drive growth in this country and enhance our position in the global economy.  Hirsch is a strong believer that knowledge and creativity builds wealth.


The event itself began with a roast beef buffet provided by Barry's Cooking.  Dylon Barber blessed the meal, and then Hirsch leaped into his succinct and humour-laced presentation.

"If you follow the economic news, there are a lot of really crazy things going on right now in the global economy," he said.  "They are affecting Canadian economy, and Albertan economy too."

A column of Hirsch's that received a fair bit of attention in the national press was the tale of the restaurant that forbade cutlery of any kind because the chef had a "vision", causing a dilemma when the group of four wanted to quarter a sandwich to share (link).  Hirsch used the story as an allegory for the present global economic situation.

"It was a very strange situation.  It was kind of a bizarre situation at this restaurant, in the same way the global economy is facing some very improbable and kind of strange situations.

A tiny country like Greece has the potential to drag down the entire global economy through a chain of events.  It lurks out there, as a possibility."

He mentioned the possible impact of the upcoming U.S. presidential elections, and said "China is propping up the whole global economy ...and even growth there is starting to slow down."

"Strange, almost improbable situations, almost as strange as the sandwich that just wouldn't be cut."

"Another comparison I want to make," he continued, "Had we had... a tool, we could have gotten by.  This would have solved all the problems."

"Central banks around the world right now, the policy tool that they normally have is no longer available.  Normally, when economies are in this kind of slow down, central banks rush to the rescue, and they start cutting interest rates.  There are no more interest rates left to cut.  Federal reserves are at essentially zero, and they've been there for almost three years."

"Interest rates are going to remain at zero until 2015."

"So, central banks don't have the proper policy tool that would do the job the best."

Another comparison:  "We had to improvise (in the restaurant).  We used this olive pick ...to mash and divide the sandwich.  It was not the ideal instrument, but it eventually did the trick.  Central banks they don't have that interest rate tool available, so they are using other tools."

Quantitative Easing: "The basic premise is that the Federal reserve is injecting cash into the U.S. economy to try and get people spending, and to try and resuscitate spending in the economy."

"Well, it's not working.  They've gone through two rounds of Quantitative Easing.  They've announced a third round, tweaking it a little bit.  So far, they haven't gotten quite the desired effect."

"We had in our sandwich story a lot of uncooperative people playing a major role in the story.  We had a server who wouldn't bring us a knife, we had an executive chef that would not take the sandwich and get it cut.  We had conflicting visions about what was going to happen.  The executive chef had a vision for his restaurant, but it ran counter to what we as customers would have it be."

"So you have these competing visions.  In the same way, right now in the global economy a lot of  the problems are because you have leaders of countries, and leaders of central banks, that have competing visions about what should happen."

"Some countries favour austerity, some favour a growth economy."

"They are probably both partially right, but you have some conflict there."

Hirsch mentioned that competing U.S. Presidential candidates have very competing views of how the U.S. should deal with their deficit and debt situation.

"One wants to reduce spending, the other wants to increase revenues. Again, they are probably both partially right, but you've got very conflicting viewpoints."

"Those are the four ways that the sandwich story sort of summarizes the global economy right now."

U.S. economy treading water

Hirsch said troubling times were likely to continue for the U.S. economy. "They are treading water.  Treading water is better than being ten feet under the waves, but treading water isn't getting them that far.  Normally, about a year or two after the US comes out of a recession, there's an enormous growth spurt, usually led by cuts in interest rates.  This time they are just kind of flat lining.  Their unemployment rate is probably going to stay stubbornly high right now.  It's about 8% nationwide.  Households are still busy paying off debt, so they're not spending.  The government is going to have to deal with their deficit and debt situation so that's not going to be an area of growth.  The only area of growth is business spending. They are fearful of 'where is the demand for the product going to come?'  It's a catch 22 I think the U.S. is in for another year, or several years of this treading water.

Is the Canadian economy improving?

The Canadian economy grew at an annual rate of 1.8% in the second quarter of 2012. "Jim Flaherty, the Finance Minister, came out and said 'This is fantastic news Canada is the fastest growing economy in the G7,"  Hirsch said.

"Which is true, it's just that the other G7 nations are remarkably low-bar comparisons at the moment," Hirsch explained.  We are growing, but we are the best of a bad lot of countries in the G7.  It's better than a recession, but growth is a little sluggish.  Central Canada is performing sluggishly with smaller niche manufacturers doing ok, but the larger more traditional ones are having a harder time."

"The good news out here in Western Canada though, is that our economy is performing actually quite well, Alberta and Saskatchewan particularly."

"Provincially, oil and the energy sector in general is the main driver of the provincial economy.  A lot of direct and indirect employment is provided by what happens with these energy prices.

Hirsch said that he believes, but will not guarantee, that oil will likely continue to trade in the $80 to $100 per barrel range (U.S. dollars).

"We will see the oil prices bounce around, I think we are going to see a lot of Gravol being popped by some of these oil executives, as we will see some volatility in oil prices."

Hirsch said if the price for oil falls below $80 a barrel (U.S.) to the $70-$60 range "Then it's a different equation altogether for Alberta, with a lot of projects being cancelled or delayed."

Optimistic about Agriculture

"After 30 years of watching agriculture prices decline, I think we are going to see it reverse," Hirsch said.  "We're already starting to see this.  World demand for agricultural products is rising.  I think agriculture, more than a lot of sectors, has embraced some amazing technologies that improve efficiency and improve productivity.

Consumers confident

"I see not much other than optimism," Hirsch said of consumer confidence trends.  "Retail sales are still doing very, very well."  According to Hirsch economic growth in Alberta is getting close to that of China.

What's most likely this fall, in Alberta and in Canada?

"I think Alberta's economy will grow more slowly in 2012 than we grew in 2011," Hirsch said.  "Faster is not always better.  Growth is moderating to 3 to 3.5 percent."  He said that too-rapid growth tends to cause problems.  "At 5% growth you start facing problems like labour, housing and rental shortages."

"Overall, Alberta's economy is very stable."

Question period

At the conclusion of his presentation, Hirsch entertained questions from the audience, some of which are excerpted below.

Interest, Inflation, and Mortgage rates

"I don't really see them (interest rates) going any where," he said,  "Because the Federal Reserve in the States are saying interest rates are staying at zero."

"The bank saw new inflation rates out this morning and there is not a whiff of inflation in the Canadian economy.  I think we are in for probably another 12 to 18 months of generational low for mortgage rates.

China's effect on our economy

"The whole Nexus is in high focus right now, not just in Canada, but internationally, people are watching this deal," Hirsch said.  "Harper and other officials have been wooing the Chinese market for years trying to get them to invest, then China says, 'Your right, Canada is a great place to invest.  It's so good, we're going to buy one of your largest oil companies'. I think there are some reasons to hesitate.  There is some concern.  They might be buying these assets more for strategic reasons and political reasons than economic reasons.  I'm not saying we need to be afraid of the Chinese, that is not the mood at all.  I think we need to have a good look at it before we rush into it."

Where should the government of Alberta be investing?

"To be honest, I think the very best investments we can make are in education, not health care, and that is a tough message for a lot of Albertans to hear.  Once you use health care spending, it's gone.  It's not an investment.  But every dollar you put into education, that's where we are investing.  That's where we are going to get bright creative thinkers. We need creativity and innovation.  From a policy side that's where I say we are going to get the best returns."

The importance of community and creativity

"Fewer and fewer problems are going to be solved by our governments.  Increasing creativity has to come at a community level.

The effect on the Canadian economy of a Party Quebecois government in Quebec

"I don't think it's going to have any effect at all.  For one reason: they are a minority government.  They were tired of the liberals. They had 9 years. I think they just wanted a change.  The markets didn't blink."

Related links and sources:
Todd Hirsch website
CanadaWest Foundation, Robert Roach
I'm sorry but we will not cut your sandwich
Jim Flaherty re Canadian economic growth, second quarter 2012