Canada can survive Donald Trump, and Alberta can escape its resource curse

This is the first in a series of columns about the new Alberta economy.

A shoeshine in Calgary cost $10 when Tom O’Gorman, a portfolio manager at Franklin Templeton Investments, arrived from Wall Street in 2010; New York prices!

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Not anymore. You can get your Oxfords polished and buffed for a mere $5, a deflationary spiral triggered by the similarly large collapse in the price of oil since the autumn of 2014.

Calgary’s office towers are either 30, 40, or 50 per cent empty, depending on who you talk to. The exact vacancy rate — 25 per cent downtown in the fourth quarter, according to Avison Young Real Estate Alberta Inc. — doesn’t really matter.

The point is the same: Canada’s fourth largest city, which represents a fair chunk of the country’s third-biggest provincial economy, is struggling in a way that the 12 million people who have joined the Canadian population since the previous oil price shock in the early 1980s have never seen.

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Way up north in Bonnyville, a town of about 6,000 that serves the oilpatch, there were 31 foreclosures in 2018 compared with four in 2015, according to Serina Parsons, executive director of the local chamber of commerce. The number of business licenses dropped 15 per cent to 633 over the same period. The community is shrinking. There are many others like it.

Vancouver-based OK Tires Store Inc., one of North America’s biggest tire retailers, recently announced plans to invest $100 million in new and improved distribution centres across Canada over the next five years. Alberta doesn’t factor in to the company’s plans, at least for now. The first facility will be built in Quebec, which has a record low unemployment rate, a balanced budget, and a noticeable degree of confidence. Ontario, Newfoundland, and Manitoba will follow.

I don’t think the East realizes how bad it is here Glenn Street

“It’s soft in Alberta, for sure,” Jim Caldwell, the company’s chief executive, said in a telephone interview. “It’s flat. The oilpatch is struggling. Companies are trying to extend the life of their tires, or are going down-brand.”

The province has only added about 30,000 jobs since the end of 2014, according to Statistics Canada. The jobless rate was 6.9 per cent in March, compared with a national average of 5.8 per cent. The economic recovery from the recession caused by the 2015 oil shock slowed to an annual growth rate of 2.5 per cent in 2018 from 4.4 per cent in 2017, according to the Alberta government.

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“I don’t think the East realizes how bad it is here,” said Glenn Street, who runs one of North America’s biggest makers of mascots in Calgary.

“I don’t see a lot of positive things happening if there isn’t an oil-and-gas industry,” he said. “What’s going to take its place?”

Maybe nothing. But there are ideas.

I spent a few days in Calgary and Edmonton last week, interviewing a dozen people, none of whom were directly involved in the oil-and-gas industry. That was by design. Nuance doesn’t travel well. The idea was to assess whether there’s more to Alberta’s economic story than pipelines, which is all most of us non-Albertans have heard about for the past couple of years. And of course, there is.

“There are a tonne of things going on and none of them have anything to do with oil and natural gas,” said Tara Kelly, chief executive of Calgary-based Splice Software, a provider of customized automated messages and one of Canada’s fast-growing companies

We’re a capitalist society, which implies that we embrace the power of creative destruction. But the past couple of years has exposed us as weak capitalists. The trade wars, the global shift away from carbon, and digitization are fundamentally changing the economy. As Stephen Poloz, governor of the Bank of Canada, has noted, we have spent a lot of time obsessing over the destruction that those structural shifts are causing.

That suits various industry lobbies and unions, who are paid by their members to fight for the status quo. But it obscures all the creative things that are happening, as entrepreneurs — who tend to ignore headlines — create the new wave of companies that will employ thousands, improve productivity, and generate wealth. Canada can survive Donald Trump, and Alberta can escape its resource curse

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“In an economy, you often go after the low-hanging fruit,” said Brad Johns, a partner in the Calgary office of Yaletown Partners, a venture capital firm that also has outposts in Vancouver, Toronto, and Montreal. “When the economy changes, you have to do something different. We are doing that now.”

There are some Albertans who seem to think they would be better off as their own country. Maybe, but only because the province has enjoyed the benefits of being a member of a stable, diversified economy for more than a century.

Places that are overly reliant on resources tend to be poorer; the booms never quite outweigh the busts, but the good times are so good that no one ever gets around to doing anything unrelated to harvesting that resource. Alberta has a decent social safety net, good universities, and options outside of oil and gas because its place in Canada kept the resource curse from fully taking hold.

Photo by Jason Franson/Bloomberg

Still, Alberta shows signs of affliction. “From the beginning of my career, all I heard was that we are only about oil,” said Christopher Micetich, founder and chief executive of Edmonton-based Brass Dome Ventures Ltd., who made his name in pharmaceuticals. “I learned to keep the lights on with no support.”

Politicians finally are taking economic diversification seriously, if only because they realize they no longer can rely on royalty payments and the largesse of oil-and-gas companies

The next generation of Alberta entrepreneurs will benefit from more attention. The duration of the current oil bust appears to be changing the province’s psychology. There still is hope for natural gas, but there is an acceptance that the glory days of oil are over. Politicians finally are taking economic diversification seriously, if only because they realize they no longer can rely on royalty payments and the largesse of oil-and-gas companies. The families that got rich off booms past are asking questions about investing in startups that specialize in artificial intelligence, health services, and other areas that have no connection to bitumen. Petrochemical engineers are retraining to become software engineers.

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“I think there is a massive wave coming,” Micetich said. “That old mentality doesn’t change overnight.”

Caldwell of OK Tires reckons Alberta’s soft patch is cyclical. At Street Characters, the boss’s pessimism about the province’s prospects doesn’t apply to his own business. It is shipping handmade mascots at a pace of about four per week at a unit price of $3,000 to $8,000, mostly to the United States. That’s as well as the company has ever done in its 32-year history. Success has management thinking about spending a little more on marketing to grow even faster.