The negative effects of the oil price slump have hit hard and fast in Canada’s oil-producing provinces. The Province of Alberta alone faces an estimated revenue loss of $7 billion and a 9% cut in public spending. Energy-related job cuts and large decreases in capital spending are pushing the unemployment rate up.
Correspondingly, Canada’s economy as a whole has slowed. An annualized real GDP growth rate of around 1.5% is expected in the 1st Quarter of 2015 and an outright temporary decline is possible in the 2nd. The CAD continues to drop in tandem with the price of oil, but it should stabilize in the mid-80 cent range by the fall. The collapse in oil prices is also producing a deflationary psychology, even among non-energy prices. The consumer price index (CPI) inflation rate has declined to 1.0% and is headed lower. A brief period of negative CPI inflation is coming.
On the bright side, there will be positive offsets in oil-consuming provinces, which will benefit from cheaper energy, a more competitively priced CAD and connections with an accelerating U.S. economy. Continuing economic acceleration in ON and BC – already Canada’s retail sales growth leaders – will widen their y/y percentage growth performance gap with Alberta, which should be visible in the 2015 housing market. House prices could drop by as much as 10% in Calgary, Edmonton and St. John’s in 2015, but economic conditions in most provinces are likely to remain favourable for demand and residential construction. The housing market will be a strong indicator of the impact of the oil slump on Alberta’s economy.
South of the border, oil production continues to increase, despite a falling rig count. The resulting low prices have been highly positive for growth and jobs. More than 1 million payroll jobs have been created in the U.S. in the three months ending in January. Openings are running at their highest level since 2001 and voluntary quits are up, signaling increased confidence in the job market. Discretionary spending is also increasing as consumer buying power is boosted by a strong USD.
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