Canada will feel oil­patch pain

The Prince George Citizen - - Money - Andy BLATCH­FORD

OT­TAWA — The hit from low oil prices in Western Canada will re­ver­ber­ate across the na­tional econ­omy – but should have less cross-coun­try bite than the cri­sis of 2015, the head of the Bank of Canada said Thurs­day.

The 2015 oil-price crash con­trib­uted at the time to a slight, tech­ni­cal re­ces­sion and prompted the cen­tral bank to cut in­ter­est rates to boost Canada’s econ­omy – twice.

Even with the lat­est col­lapse in oil prices, gov­er­nor Stephen Poloz in­sisted Thurs­day that he ex­pects in­ter­est-rate hikes will still be needed over time. The cen­tral bank has been grad­u­ally rais­ing rates for more than a year, thanks to the stronger econ­omy.

The ar­rival, how­ever, of fu­ture rate in­creases will likely be more grad­ual than many ob­servers had pre­dicted just a few days ago. Mar­ket watch­ers, many of whom had ex­pected the bank to in­crease the rate again in Jan­uary, are now pre­dict­ing a slower pace fol­low­ing the con­cerns ex­pressed by Poloz in re­cent days re­gard­ing re­cent eco­nomic de­vel­op­ments.

On Wed­nes­day, the bank left the rate un­changed at 1.75 per cent as it un­der­lined fresh neg­a­tives, such as the re­cent drop in oil prices.

In ex­plain­ing the rate de­ci­sion Thurs­day, Poloz ap­peared less in­clined to make a move any time soon.

“The cur­rent level of in­ter­est rates re­mains ap­pro­pri­ate for the time be­ing,” Poloz said Thurs­day in a speech at an event hosted by CFA So­ci­ety Toronto.

“We con­tinue to judge that the pol­icy in­ter­est rate will need to rise... The pace at which this process oc­curs, of course, will re­main de­cid­edly data de­pen­dent.”

The bank said Wed­nes­day the tim­ing of fu­ture in­creases will now de­pend on sev­eral fac­tors – the per­sis­tence of the crude slump, the abil­ity of cor­po­rate in­vest­ment to pick up its pace and how much room the over­all econ­omy still has left to grow without stok­ing in­fla­tion.

The bank raised its key in­ter­est rate tar­get at its Oc­to­ber meet­ing – its fifth in­crease since the sum­mer of 2017.

But much has changed in just six weeks.

In the speech Thurs­day, Poloz said the data since Oc­to­ber has been “on the dis­ap­point­ing side” and that the econ­omy has less mo­men­tum head­ing into the fi­nal three months of 2018 than the bank be­lieved it would.

Poloz pointed to an un­ex­pected de­cline in busi­ness in­vest­ment over the sum­mer as a key de­vel­op­ment – but he said the dive in oil prices has been the most-im­por­tant “new shock.”

“It is al­ready clear that a painful ad­just­ment is de­vel­op­ing for Western Canada, and there will be a mean­ing­ful im­pact on the Cana­dian macro-econ­omy,” he said.

“That said, 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.”

He said oil and gas pro­duc­tion now makes up just 3.5 per cent of Canada’s econ­omy, com­pared with six per cent in 2014. In the years that have fol­lowed the last slump, the sec­tor has ad­justed its cost struc­tures, wages and em­ploy­ment lev­els, Poloz said.

Poloz also said that in 2015 about 30 per cent of all busi­ness in­vest­ment in Canada was in the oil and gas sec­tor, while to­day it’s only around 18 per cent. That means in­vest­ment had farther to fall a few years ago.

Look­ing at the pos­i­tive side, Poloz said the lat­est oil-price slump has ar­rived at a time when Canada’s econ­omy is run­ning close to full tilt and the un­em­ploy­ment rate is at a 40-year low.

He added he re­mains hope­ful busi­ness in­vest­ment will re­bound now that much of the uncer­tainty sur­round­ing North Amer­i­can free trade has eased with the new agree­ment be­tween the United States, Mex­ico and Canada.

The cen­tral bank, he said, will also be watch­ing for signs the econ­omy can still grow without fu­elling in­fla­tion. Poloz pointed to re­cent down­ward re­vi­sions to gross do­mes­tic prod­uct data that sug­gested there’s still some room for non-in­fla­tion­ary growth.

Mov­ing for­ward, the bank will scru­ti­nize the re­sults of its quar­terly sur­vey of busi­ness ex­ec­u­tives, to be pub­lished Dec. 21, for clues on cor­po­rate sen­ti­ment. Poloz said the bank will also meet with lead­ers in the en­ergy sec­tor, as it did fol­low­ing the oil-price col­lapse in late 2014 and early 2015.

In a news con­fer­ence Thurs­day fol­low­ing his speech, Poloz was asked about the chances a rate cut could be needed to deal with the lat­est oil slump.

“I’m just not go­ing to com­ment on that for now,” he said. “We have to do our work in or­der to un­der­stand the shock bet­ter and what its mag­ni­tude ac­tu­ally is.”


Stephen Poloz re­turns to the Bank of Canada af­ter hold­ing a press con­fer­ence at the Na­tional Press The­atre in Ot­tawa in Oc­to­ber.

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