Lower oil prices dampen Canadian growth outlook, TD says
Despite dim prediction, economists say some regions will benefit from lower energy prices
TD Bank has downgraded its outlook for the Canadian economy, predicting low oil prices will present a challenge for the rest of the year.
First quarter growth will be particularly anemic, coming in an annual rate of 0.5 per cent, the bank’s chief economist Craig Alexander estimated in a report released Tuesday.
The knock-on effects of low oil prices will be few for the next few quarters, the report predicted, but growth should accelerate in the last half of the year.
TD is estimating Canada's annual growth will be 1.9 per cent this year, down from the two per cent it predicted in January and less than the 2.1 per cent estimate from the Bank of Canada.
"We've had to mark down our growth forecast slightly. Back in December we thought the Canadian economy would grow at about 2.2 per cent this year. We've had to lower that to about 1.9 per cent to reflect the drop in oil prices," TD chief economist Craig Alexander said.
As negative as the headlines may be, Canada will weather the storm from the oil shock.- Craig Alexander, TD chief economist
But he said the news is not all bad.
"There is no question that the oil price shock is going to be a negative to the Canadian economy," he told CBC News. But it won't sink it.
"As negative as the headlines may be, Canada will weather the storm from the oil shock and the reason for this is that there is an awful lot more to the Canadian economy than just the energy sector," Alexander said.
TD Bank is working on the assumption that oil prices will head still lower – to about $40 US a barrel before recovering to around $65 US a barrel in 2016.
Lower oil prices are leading to reduced levels of business investment, softer corporate profit and lower income levels, especially for Canadians living in oil-producing provinces.
Joblessness to rise
TD estimates unemployment will rise to seven per cent by the end of the year, up from 6.8 per cent in the latest data from Statistics Canada.
There are layoffs not just in the oil and gas sector, but also in services and businesses that supply the sector.
The hit from oil will be tempered by the effects of a weak Canadian dollar, low interest rates, growth in demand from the U.S. and energy savings for consumers, TD said.
"About one quarter of Canada's exports are energy, the other 75 per cent are other things," he said.
"Energy rich provinces like Alberta are going to feel the pain quite acutely," Alexander said. "But in actual fact much of the rest of the country is going to benefit from lower oil prices because they're going to benefit from a strong U.S. economy and they're going to benefit from a weaker Canadian dollar."
Non-energy exports on rise
Non-energy exports are already on the rise and capacity utilization in the manufacturing sector is already at pre-recession highs.
But it will take time to rebuild capacity among manufacturing exporters, Alexander said. That may not happen in 2015 in time to fully offset the losses in investment in oil and gas.
As a result income growth will be sluggish, giving consumers little extra spending power to help boost GDP.
Canadian households may be saving about $800 annually on their gasoline and heating costs, but they're spending about $600 of it on more expensive groceries and consumer goods because of the weak Canadian dollar, TD said.