These are stories Report on Business is following Monday, Dec. 1, 2014.
There’s upside in the downside.
The collapse in oil prices since the summer will affect Canada’s economic growth, the value of its exports, and the revenues of various Canadian governments. But it’s also a plus for the global economy.
Let’s try to put a real number to that:
The outlook for the global economy is “much brighter” with Brent crude at $70 (U.S.) a barrel, just shy of where it stands today, compared to June’s $110, said Julian Jessop of Capital Economics in London.
“Roughly speaking, the $40 fall in the price of oil represents a transfer of annual income of around $1.3-trillion from oil producers to oil consumers, equivalent to 1.7 per cent of global GDP,” Mr. Jessop said in a report today.
“Of course, oil producers are spenders, too, so the net effect on world demand will be much smaller,” he added.
“But on plausible assumptions about the relative propensities to spend global GDP could easily be between 0.5 per cent and 1 per cent higher as a result of the decline in oil prices.”
Of course, some countries and sectors will still be “big losers,” he added.
More money in the pockets of Americans as energy costs tumble, just as an example, will help juice the U.S. economy, which is also a win for Canada.
“Let’s not forget that there are many winners from what is effectively a positive supply shock,” said senior economist Robert Kavcic of BMO Nesbitt Burns, adding that consumers are “the clear and immediate beneficiaries” of the plunge in crude.
“Average gasoline prices in the U.S. have cratered by $2.80/gallon, down almost 25 per cent since early July,” he said in a research note.
“For someone filling up an average-sized tank once a week, that’s roughly a $50/month tax cut – better than a sharp stick in the eye.”
Pump prices have also declined in Canada, dipping below $1 a litre in at least some cities, though still well above that mark in others.
“While the positives can take time to develop, make no mistake that periods of lower oil prices have consistently proven to be a powerful tonic for global growth over the past 40 years,” added Mr. Kavcic’s colleague at BMO, chief economist Douglas Porter.
There will obviously be a hit if the oil slump is prolonged, and Mr. Porter sees provincial outlooks “shifting before our eyes” where economic growth is concerned.
“Oil producers Alberta, Saskatchewan and Newfoundland will likely sag back to the national average (or even below) in 2015, while Ontario and Quebec, to a lesser extent, will benefit from a stronger U.S. economy, a lower dollar and, yes, lower energy costs.”
All in all, said Mr. Kavcic, there’s a “small net negative” for Canada, but we benefit in certain ways.
That lower dollar, of course, is partly due to the slump in oil, and that’s expected to continue at this point. Mr. Porter estimates that the currency loses between 3 cents and 5 cents for each $10 drop in the price of oil.
Not only that, but the lower currency helps build in some protection for Canada’s oil companies.
“The extent of the impacts on Canada’s economy in [the fourth quarter] and beyond will clearly depend on how low prices go and for how long they will be sustained at a lower level,” said economist Jonathan Bendiner of Toronto-Dominion Bank.
“While we don’t rule out further declines, we expect prices to have in the mid- to low-US$70s through the first half of 2015, before gradually creeping back up towards the US$90-per-barrel mark by the end of 2016.”
Mr. Bendiner agreed with Mr. Kavcic that, depending on where everything washes out, the hit to Canada’s economy should be “relatively small,” with economic growth next year at about 2.5 per cent.
He cited Friday’s reading by Statistics Canada, which put third-quarter growth at 2.8 per cent, annualized, as evidence of “solid momentum” outside of the oil patch, notably where exports are concerned.
“U.S. growth should remain decent, helping to keep this trend intact.”
Today, oil slipped again, and then recovered.
The Canadian dollar, in turn, touched a low point of 87.28 cents U.S. and a high of 88.36 cents. It sat at 88.29 cents this afternoon.
Other currencies, particularly Russia’s ruble, were crushed again.
Toronto stocks, hurt amid the oil drop, fell. As did others amid weak economic data from Asia and Europe.
“Note that energy makes up 22 per cent of the TSX even after the recent slide, precisely the weight of consumer discretionary and staples in the S&P 500, the sectors that arguably stand to benefit most,” Mr. Kavcic said.
“Inversely, energy is just over 8 per cent of the S&P 500, or roughly in line with the share of consumer stocks in the TSX. This is not a new revelation by any means, but just serves to highlight that, in this oil price environment, the deck is stacked heavily in favour of U.S. equities and against those in Canada.”
- Oil hits five-year low, tumbles below $65
- 'Dinged' and 'pinched': A long oil rout would sideswipe Canada
- Jeffrey Jones, Jeff Lewis and Carrie Tait: As oil skids toward $65, companies forced to recalculate
- Eric Reguly: Why oil prices will bounce back ... eventually
- Wabush woes: Labrador mining town reels from a China slowdown
A busy week
Amid all this, it’s going to be one busy week.
“Let me put it this way,” said senior BMO economist Jennifer Lee. “What is not out this week?”
It started with the manufacturing purchasing managers indexes released today, which so far have investors in a sour mood.
From there, central bankers take centre stage, starting in Australia, then India, Brazil, Canada, Britain and the euro zone.
“So far, the fourth quarter hasn’t started too well for Japan, China and the euro zone, and it is not likely that November will change that perspective,” Ms. Lee said today.
“Even in the U.K., where there is actually growth and talk of tightening sometime in 2015, the quarter started on a weaker note. And that weakness will be the topic of discussion for the central banks that are holding policy meetings this week.”
The Bank of Canada won't do anything, of course, but markets will be closely watching its statement after the collapse in oil.
“Lower oil prices are a negative development for the economic backdrop and CAD and will play into the tone of the BoC’s statement,” said senior currency strategist Camilla Sutton of Bank of Nova Scotia, referring to the Canadian dollar by its symbol and Wednesday’s Bank of Canada decision.
And, as The Globe and Mail’s Tim Kiladze reports, Canada’s big banks begin reporting fourth-quarter results tomorrow, when Bank of Montreal kicks it off.
- Asia, Europe factory activity slackens despite price cuts
- Canadian manufacturing index holds steady at highest level of year
- Eric Reguly: Mario Draghi: Will the master of QE teasing finally make a move?
- Tim Kiladze: After a record run of profits, Canada's Big Six banks brace for shift
Moody’s cuts Japan
Abenomics suffered another blow today as Moody’s Investors Service cut Japan’s debt rating by one notch.
The move comes just about two weeks before Prime Minister Shinzo Abe, whose economic program is named for him, heads into an election.
“This is a classic case of how appeasing rating agencies can at times result in misguided economic policy,” said Derek Holt of Bank of Nova Scotia.
“Moody’s is disturbed that the second sales tax hike from 8 per cent to 10 per cent just under a year from now has been postponed in the wake of the economy’s harsh response this summer and Prime Minister Abe’s election call,” he said in a research note, referring to round two of a tax hike that ate into economic growth.
“It’s not so clear to me how Moody’s would have responded to a completely crippled economy and the negative feedback effects on government revenues (like 1997’s hike, only perhaps worse) had Japan gone ahead and stuck to plans to hike the tax again,” he added.
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