Higher oil mixed blessing TD report says

Will boost fortunes of West as well as loonie

OTTAWA • The worst oil shock in more than two decades poses a threat to the global economy but is a mixed blessing for Canada, a net oil exporter, the TD Bank says.

It will widen the gap in economic fortunes in Canada by boosting the oil-rich West, especially Alberta, while hammering oil-dependent central Canada, particularly Ontario, the bank said in a forecast yesterday.

“The ... shock has the potential to inflict significant harm on the global economy,” said TD chief economist Don Drummond. “If sustained, elevated energy prices will almost certainly dampen spending in most global economies and could push inflation higher.”

The good news is energy prices, while remaining high, should ease next year, to US$50, the bank said. Also, by early 2007 oil prices will slip back to US$45 a barrel from the current US$65 , and gasoline prices to 70¢ to 80¢ a litre from over $1 a litre in most parts of Canada.

In Canada, higher oil prices will dampen consumer spending but will stimulate investment and pad government revenues, it noted.

They will also boost the value of the loonie, which the bank noted is viewed in world money markets as a “petro-currency,’’ and which it forecast will peak at US87¢ early next year before drifting back to US83¢ as oil prices recede.

The loonie has already eased back to about US85¢ from a 13year peak of about US86¢ last week.

“ The positive benefits from higher energy prices will mostly accrue to the energy-rich provinces of the West, while exportmanufacturers located largely in Central Canada will be left to endure the double whammy of high fuels costs and a stronger dollar,” it said.

As a result, forecast economic growth of 2.9% this year and 3% next will mask sharply diverging regional economies within Canada, it said.

The Western provinces of British Columbia, Alberta and Saskatchewan are forecast to grow nearly 4% this year and next, while Central and parts of Eastern Canada will see growth of less than 3%, it said.

That will leave Canadian policywith the dilemma of how to respond, it added, predicting the Bank of Canada will still increase in its trend-setting target rate for overnight loans to four per cent from the current 2.75%, but only gradually.

The federal government, meanwhile, should use income tax cuts to cushion consumers from the high energy costs, it said.

Finance Minister Ralph Goodale yesterday again rejected opposition demands for a cut in gasoline taxes.

However, he also reiterated the government will use all of its “modest” windfall from soaring energy prices to finance undisclosed measures to ease the soaring energy burden on low-income Canadians.