The continuing international oil price slump is creating a widening economic gap between Canada and the United States. While it continues to act as a substantial stimulus to the U.S. economy – increased disposable income, a stronger USD, lower inflation, near-full employment levels and an expected multi-year housing recovery – its effect on Canada will be a net negative.
In recent years, our economy has relied heavily on energy as its key economic driver, with growth momentum coming from a small number of oil-producing provinces. Alberta, Saskatchewan and Newfoundland now face fiscal restraint, government belt-tightening and credit/default risks. Housing demand has been disrupted by cost-cutting, hiring freezes, layoffs, reduced wages, rising unemployment and declining confidence. The federal government, also a beneficiary of the formerly booming oil and gas industry, will have to rein in spending. Depending on how long the oil surplus lasts, one or more zero growth quarters could be possible.
In contrast, oil-consuming provinces will experience growth. Cheaper energy will combine with the lower CAD to increase competitiveness. Lower production costs will increase profits, output, and investment in Ontario’s manufacturing sector and in British Columbia, where lumber and building products are expected to see a strong increase in US-based demand. This, however, will not be enough to offset the effect low oil prices are having on the country as a whole.
Internationally, both oil and non-oil countries are struggling. Europe appears to be headed toward a lengthy period of stagnation, as reflected in the European Central Bank’s decision to implement quantitative easing. High and rising debt could be a serious headwind for China’s growth, despite being the world’s largest net importer of oil and receiving a big windfall from lower oil prices. Similarly, the “fragile eight” (Argentina, Brazil, Chile, India, Indonesia, Russia, South Africa and Turkey) also have elevated leverage cycle vulnerabilities.
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