Global economic growth has slowed as oil and commodity prices continue to drop and the world deals with Monday’s synchronized stock market sell-off.
In both the U.S. and Canada, the panic selling of stocks has created a rush into government bonds, pushing bond yields and mortgage rates down – good news for the improving housing markets in the U.S. and in Canada’s oil consuming provinces. Single-family starts in these areas are now providing important momentum.
Employment, cheap energy, a low CAD and low interest rates are also benefiting key provinces like Ontario, B.C. and Quebec, where consumer spending, residential renovation and stronger non-energy exports are expected to improve economic prospects this fall. The manufacturing and tourism industries are likewise improving.
In contrast, the resource sector is struggling; the current Canadian economic downturn is localized in resource-producing provinces. Reduced rail shipments of crude oil to the U.S. and the significant downtrend in conventional oil production in Alberta are causing economic and employment weakness in the province. Investment in the oil and gas sector contracted by 40% this year, and with oil producers around the world continuing to increase output to maintain cash flow, the price of WTI may decline to $10-20 per barrel in the current price cycle.
This has not had the same impact on the U.S. economy. As a net oil importer, the collapse in prices is providing a net benefit to consumers and manufacturers. The U.S. job market continues to approach full employment and there are early signs of a pick-up in wage growth. July retail sales were better than expected.
China and the EMEs, global growth drivers since the financial crisis of 2007-2009, have lost momentum. China’s decision to unpeg its currency from the USD gives the hint of a desperate policy response to a serious debt and over-capacity problem. It also adds strength to the USD and is a big negative for internationally traded commodities, putting downward pressure on emerging market currencies (and the CAD).