The aftershocks of the commodities price collapse, already plucking $1,800 a year out of Canadians’ pockets, could persist for more than two years and permanently impair the economy.
That’s the conclusion of the Bank of Canada, based on the central bank’s latest economic modelling.
The full impact of the hit to Canadian incomes is “gradually building” and will get worse before it gets better, Deputy Governor Lynn Patterson warned in a speech in Edmonton on Wednesday.
“We expect it to become the dominant source of drag on the economy by 2017,” Ms. Patterson said. “As their wealth and income decline, households will likely restrain their spending and we will see lower, but still positive consumer growth.”
The bank’s “best guess” is that full adjustment to the collapse in the price of oil and other commodities will take “longer than two years,” she said.
“It won’t be easy and it will take time,” she added.
The days when crude was selling for more than $100 (U.S.) a barrel and commodities dominated Canada’s exports and investors may be gone for a long time, Ms. Patterson suggested.
She said it’s “highly unlikely” that oil will regain its 2014 highs “in the coming years.”
Nonetheless, Mr. Patterson said the risk on oil prices is “tilted to the upside” in the medium term.
The same goes for the commodity sector’s share of Canadian exports and investments, which topped-out in 2014 at 50 per cent and 56 per cent, respectively. By 2020, commodities’ share of exports investment will sink to 40 per cent, remaking the economic landscape.
“Canada’s economy is diverse and dynamic enough to achieve, in time, a new balance of economic growth,” she said.
The bank says it will revise its forecast of future economic growth to take into account the various fiscal measures in the March 22 federal budget, including billions of dollars in new infrastructure spending. The bank is currently calling for GDP growth of 1.5 per cent this year and 2.5 per cent in 2017.
That’s already markedly stronger than the 1.4-per-cent growth for 2016 and 2.2-per-cent for 2017, predicted by Finance Minister Bill Morneau in his budget.
Ms. Patterson did say that Canada may be adjusting to the economic shift “more quickly than we have historically.”
Signs of adjustment are everywhere. The movement of workers out of Alberta and the cheaper Canadian dollar, now at about 77 cents (U.S.), is a help. She said tourism is booming and a record numbers of films are being shot in British Columbia, while the weaker dollar is making non-commodity exports much more competitive.
“We are already seeing shifts in migration patterns,” Ms. Patterson pointed out. One of the main beneficiaries is Ontario, which saw the largest inflow of migrants from other provinces since 2002. Meanwhile, the flow of commuting workers, from Atlantic Canada and elsewhere, has fallen sharply, she said.
The overall impact of the commodities price collapse knocks a percentage point off GDP. But there is a wide divergence in the effects across the country. Nearly 70,000 jobs have vanished in the three main energy-producing provinces – Alberta, Saskatchewan, and Newfoundland and Labrador – pushing the jobless rate up by 2 to 3 percentage points.
But elsewhere in the country – most notably Ontario, Quebec and British Columbia – unemployment is flat or declining.Report Typo/Error