The weakness in crude oil prices will weigh on the national growth outlook, upset the regional growth mix, depress the loonie, and push back rate hikes, say economists with CIBC World Markets Inc.
In a new report the economists examine the impact of the drop in oil prices in a new report, observing that the move “is an unprecedented development for the Canadian economy.” While energy prices have dropped this sharply before, CIBC says that this was generally due to demand-led corrections, “in which broader U.S. or global recessions did much of the economic damage to Canada.”
This time though, the U.S. economy is accelerating, and it will get a further boost from cheaper oil, CIBC notes. Indeed, it says that the price drop is driven by the supply side, which should keep oil in the US$70/barrel range for the coming year.
Under that assumption, CIBC is trimming its real gross domestic product (GDP) forecast for 2015 by 0.5% to 2.2%. Although, it says that the hit to nominal GDP will be more than 2%, and that “the half-point off national real growth also masks a much deeper dent into real and nominal growth in the oil-producing regions of the country.”
“Behind that national picture, there are regional and sectoral stories that will play out for at least a year if not longer, raising the stakes for policy makers and investors who had grown accustomed to good news from the oil patch,” the report says, noting that “oil’s deep dive will leave a notable mark on prospects in a handful of provinces in 2015.”
At the same time, the stronger U.S. economy, cheaper energy, a weaker loonie, and low interest rates, will boost the fortunes of manufacturing-intensive provinces, such as Ontario and Québec.
Moreover, amid weaker inflation expectations, CIBC says that the Bank of Canada may take longer to start hiking rates. “Since lower crude prices are a net benefit to the U.S., and a net hit to Canada, we see an even longer gap in the timing of the first rate hike, with the Fed raising rates as early as next March, and the Bank of Canada pushed back one quarter relative to our prior forecast into Q4 2015.”
In this environment, it also sees the loonie bottoming at 81 cents US in the next few quarters. And, it calculates that Canadian governments stand to lose between $10 billion and $13 billion in revenues as a result of lower oil prices, with the federal government accounting for about $5 billion of that hit.
Ultimately, the energy price drop won’t last, CIBC says, noting that the world will eventually need oil from costlier sources including Canada, Brazil, and offshore sources, “suggesting a return to something north of US$80/bbl in the years ahead.”