Take a gravol. The economy could get bumpy

We are livng in an era of uncertainty

July 8, 2012

CALGARY, AB, Jul 8, 2012/ Troy Media/ – In certain fields of study – anthropology and philosophy, for example – scholars speak of a place of ambiguity and disorientation that occurs when a person or a culture transitions from one place to another.

From the Latin word limen (meaning ‘a threshold’) comes the phrase ‘the liminal space.’

Arriving at this threshold, established thought processes and traditions may be reversed or dissolved. Future outcomes once taken for granted may be thrown into doubt. Uncertainty can lead to anxiety.

In July 2012, Alberta’s economy is in a liminal space. There is a sense of uncertainty – something is going to happen, but no one is sure what it will be or when it will arrive.

Troubles in Europe are at the heart of much of this economic apprehension. Last week, the European Central Bank dropped its benchmark interest rate in another attempt to shore up confidence. Other central banks, including the People’s Bank of China and the Bank of England also took action. The worries stemming from a possible financial crisis in Europe has spread around the world.

Oil prices – a bellwether of the health of the global economy – have been rocked in recent weeks. While some of the steep losses were recouped last week, prices remain volatile as investors are feeling unsure.

Here’s where Alberta fits into this global ‘liminal space’ and enters its own stage of economic uncertainty.

In the second half of the year, there are three possible scenarios facing Alberta’s economy – all of them hinging on the global price of oil.

The first scenario is one which sees another major global economic recession, probably triggered by a shock such as Spain or Greece defaulting on government debt and a panic-induced run on European banks. This would hurl the global economy into another credit crunch in which no one wants to lend to anyone else for fear of ending up with an insolvent client. This would kick out whatever health is left in the bedraggled U.S. economy. China would get sucked down as well, and global oil prices would spiral towards US$50 per barrel – or lower. That’s the worst case scenario for Alberta.

A second scenario would see political leaders in Europe doing whatever it takes to avert a financial crisis, even if that results in some unhappy voters in the next election. Up until now there have been plenty of meetings, handshakes and photo-ops – but very few concrete steps toward solving Europe’s problems. Certainly, there are no easy fixes. But a prescription of tough fiscal medicine, growth policies, and some kind of pooling of credit across countries (Euro-bonds) are needed. If this comes together, Europe’s economy has a better chance of survival and nervousness will subside. The U.S. and Europe will still be saddled with plenty of debt, which will no doubt slow growth over the next 10 years. But Asia will not succumb to any major global downturn. In this scenario, oil prices will steadily climb back to the US$100 mark – or higher. This is the best case for Alberta.

Because natural gas prices are so weak at the moment, Alberta finds itself almost solely at the mercy of strong oil prices. The fact that oil finished 2011 at the US$100 per barrel mark was the primary driver of the 5.2 per cent real GDP growth last year, even with the heavily discounted prices Alberta producers have been receiving. Other non-energy sectors in the province (agriculture, forestry, tourism, to name three) are providing solid support to the energy sector at the moment. But a major global downturn would bat down food and forestry prices as wel land international tourism receipts would suffer.

But the third and most likely scenario is neither collapse nor solutions in Europe, but simply more talking. That will give way to more volatility and more anxiety. The liminal space – that uncomfortable threshold of not knowing what will happen next – will continue.

Economic indicators will be batted up and down, providing no clear direction from one day to the next. Oil prices will rally one day and slump the next, and the size of these swings will cause headaches for economic forecasters. Alberta energy companies planning their next capital projects will be particularly queasy.

So take a gravol Alberta. The liminal space in the second half of 2012 could produce some nausea for most of us.

Troy Media columnist Todd Hirsch is Senior Economist with ATB Financial.

This column is FREE to use on your websites or in your publications. However, Troy Media, with a link to its web site, MUST be credited.

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One Response to "Take a gravol. The economy could get bumpy"

  1. Contrapreneur   July 9, 2012 at 7:24 am

    “Could” get bumpy? No — “will” get bumpy.