Global slump could hit Canada hard
‘It will feel like a recession,’ one executive says as tremors throw markets into a tailspin
Global commodity prices are tanking and they’re bringing Canadian markets down with them, though experts say certain provinces are going to feel the pinch more than others.
“It’ll feel like a recession, depending on where you live in the country,” said John Stephenson, chief executive of Toronto hedge fund Stephenson & Co. Capital Management.
He said everything from oil to metals to lean hog prices are dropping as weaker growth globally weighs on demand — a downward trend that took its toll on the world’s stock markets Monday.
“Virtually everything is down in price — and significantly down, not just a little bit,” Stephenson said.
Petroleum is a good example. Canada’s energy producers, already hurt by the Saudi decision last fall not to cut production, which precipitated the slump in oil, were hit again Monday when the benchmark price for North American oil dropped to a fresh six-year low, closing at $38.24 (U.S.) a barrel. (By comparison, the price was $105 a barrel in June 2014.)
Petro-powered provinces such as Alberta, Saskatchewan and Newfoundland and Labrador will be hit hard, while the man- ufacturing heartland of Ontario and Quebec could get a boost from the lower Canadian dollar, said Robert Kavcic, senior economist at BMO Capital Markets.
At today’s prices, many Canadian oil producers are losing money on every barrel they extract from the ground, Kavcic said.
“It’s getting to be a lot tougher in the energy sector now,” he said. “You could actually start to see some production scaled back.”
The latest drop in oil prices has Todd Hirsch, chief economist for ATB Financial, a provincial Crown agency based in Edmonton, predicting a mild recession for Alberta this year and a sluggish recovery next year. As recently as June, he had forecast the province would avoid such an economic decline.
“Since that time the situation has changed pretty dramatically,” he said.
Hirsch said the fall in oil prices earlier in the year was just an oversupply issue, but now crude is also being hit with a potential drop in demand as China’s economic boom starts to show cracks.
The Shanghai Composite Index tumbled 4.33 per cent to 3,071.06 near midday, heading for the lowest close in eight months.
Stephenson said commodities will drop further as investors realize how slow the Chinese economy is actually growing. He estimates the country is growing at 3 per cent, compared with Beijing’s official figure of 7 per cent.
“Its weakness is really problematic to the global markets,” Stephenson said.
Kavcic does see some brightness in the picture. While China’s economy is wavering, the U.S. economy is showing continued strength, with good consumer spending and an uptick in residential construction.
He said the strong U.S. housing market has increased demand for our lumber, one of the few Canadian commodities doing relatively well.
U.S. strength has also helped Canada’s manufacturing sector, which he said is improving despite the drop in spending by the energy industry. Manufacturing is getting a boost from the low Canadian dollar.
“When you consider the Canadian dollar, plus U.S. demand combina-
Crude is being hit with a potential drop in demand as China’s economic boom starts to show cracks
tion, plus the benefit of lower energy costs though the manufacturing production chain, you probably end up getting a net positive,” Kavcic said.
Kavcic said BMO expects to see 2per-cent growth for Canada’s economy as a whole in the second half of the year and through 2016 as dramat- ic cuts in the energy sector start to level off and other sectors improve.
“The better outlook in Ontario and Quebec and the export sector, and still decent consumer spending and housing environment should be enough to keep us out of a full-scale prolonged recession.”