‘Mean­ing­ful im­pact’: Poloz

Canada will feel Al­berta’s oil price shock, but it won’t be like 2015

The Beacon Herald - - BUSINESS - KEVIN CARMICHAEL FI­NAN­CIAL POST

It’s be­come tricky for an Easterner to talk about oil.

The an­guish in Al­berta ob­vi­ously is real. And when one of the fed­er­a­tion’s main eco­nomic en­gines fal­ters, the rest of us will feel it. Con­sider the sto­ries of On­tario fac­to­ries that found work sup­ply­ing the oil­patch after the Great Re­ces­sion wiped out de­mand from the United States. The re­verse will be hap­pen­ing now.

“It is al­ready clear that a painful ad­just­ment is de­vel­op­ing for Western Canada, and there will be a mean­ing­ful im­pact on the Cana­dian macroe­con­omy,” Stephen Poloz, the cen­tral bank gov­er­nor, told an au­di­ence in Toronto on Thurs­day.

Ques­tion: When Poloz de­scribes the eco­nomic hit from weaker oil prices as “mean­ing­ful,” what does he mean?

Not what he meant in 2015, when the Bank of Canada twice cut its al­ready low bench­mark in­ter­est rate to off­set the blow from crude’s de­scent from triple-digit prices. The cen­tral bank will feel less pres­sure to take such a dra­matic step this time. The in­dus­try is smaller now, mean­ing its trou­bles will be felt that much less by the rest of the coun­try.

“Given the con­sol­i­da­tion that has taken place in the en­ergy sec­tor since 2014, the net ef­fects of lower oil prices on the Cana­dian econ­omy as a whole, dol­lar for dol­lar, should be smaller than they were in 2015,” Poloz said in his tra­di­tional yearend speech.

It was some­what brave of the gov­er­nor to of­fer a nu­anced as­sess­ment of oil’s role in the econ­omy at such a fraught mo­ment.

Frus­tra­tion with Ot­tawa is ev­i­dent, and war­ranted, given the fail­ures of suc­ces­sive gov­ern­ments to pro­mote the build­ing of a trans­porta­tion sys­tem ca­pa­ble of keep­ing up with the oil­patch’s abil­ity to pro­duce. Poloz aligned him­self with the frus­trated, stat­ing that “more pipe­line ca­pac­ity would cer­tainly help in the long term.”

But sug­ges­tions from the West that oil is the “back­bone” of the Cana­dian econ­omy are mis­placed, at least here in 2018, when ser­vices clearly have taken over as driver of growth in em­ploy­ment and ex­ports. Poloz ob­served that oil and gas pro­duc­tion now ac­counts for about three and half per cent of eco­nomic out­put, com­pared with six per cent in 2014. That sug­gests that the oil-price shock could slow in­ter­est-rate in­creases, but it prob­a­bly won’t prompt pol­icy mak­ers to veer in a to­tally new di­rec­tion.

“A lot has hap­pened since our Oc­to­ber MPR,” Poloz said, re­fer­ring to the Mon­e­tary Pol­icy Re­port, which con­tains the cen­tral bank’s quar­terly as­sess­ment of eco­nomic con­di­tions. “But let us not for­get that these de­vel­op­ments have come against a back­drop of an un­em­ploy­ment rate at a 40-year low and in­fla­tion close to tar­get, con­sis­tent with an econ­omy that has been op­er­at­ing close to ca­pac­ity.”

Poloz spoke a day after he and his deputies opted to leave the bench­mark in­ter­est rate un­changed at 1.75 per cent. Most ex­pected that out­come; how­ever, few traders were ready for the cen­tral bank’s shift to a more cau­tious stance.

Lit­tle went as the cen­tral bank thought it would this fall. The acute weak­ness in prices for Cana­dian heavy oil spread to lighter blends, caus­ing the pain in Al­berta to spread. Data was poorer than ex­pected, sug­gest­ing growth slowed ahead of the fourth quar­ter. Trade ten­sions be­tween the U.S. and China be­gan to sap global de­mand for ex­ports.

The darker mood at the cen­tral bank spooked in­vestors, who bailed on bets that pol­icy mak­ers would raise in­ter­est rates again in Jan­uary. The value of the dol­lar plunged.

“The tone of the data has not been good,” the gov­er­nor said at a press con­fer­ence after his speech, re­in­forc­ing the new con­sen­sus that chang­ing con­di­tions will cause pol­icy mak­ers to de­lay their plan to take in­ter­est rates higher.

Poloz said in his speech that blow­back from the U.S.-China trade war rep­re­sents the big­gest risk to Canada’s out­look. He also in­di­cated sur­prise at Statis­tics Canada’s lat­est re­vi­sion of gross do­mes­tic prod­uct, which left the econ­omy one-per-cent smaller than pre­vi­ously thought. That could al­low the cen­tral bank to let the econ­omy run hot­ter for longer be­cause there is less risk of stok­ing in­fla­tion.

Still, oil dom­i­nated the most re­cent round of pol­icy de­lib­er­a­tions, Poloz said. He told re­porters that he would be talk­ing to en­ergy ex­ec­u­tives and oth­ers to get a bet­ter un­der­stand­ing of how the gap be­tween Cana­dian and world oil prices will af­fect hir­ing and in­vest­ment plans.

The cal­cu­la­tion won’t be straight­for­ward. Oil work­ers will be los­ing their jobs, but the econ­omy is stronger than it was at the end of 2014. In the­ory, those men and women needn’t be stranded be­cause StatCan data shows there are more than 500,000 un­filled jobs in Canada.

Still, Poloz re­fused to di­min­ish the shock, even if the econ­omy looks like it might be bet­ter able to han­dle weaker oil prices than in the past. “One per cent of the econ­omy is 100 per cent of the econ­omy for some peo­ple,” he said.

The bot­tom line from the Bank of Canada’s lat­est com­mu­ni­ca­tions is that in­ter­est rates likely are on hold for at least a few months longer, as pol­icy mak­ers di­gest an un­ex­pected bout of turmoil. So some good news for Al­berta, which could use a lit­tle ex­tra stim­u­lus.

CP FILES

Oil and gas pro­duc­tion now ac­counts for about three and half per cent of eco­nomic out­put, com­pared with six per cent in 2014.

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