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glen hodgson

The sharp decline in oil prices are creating winners and losers across different sectors and regions of the Canadian economy. The net result, however, is negative; the Conference Board of Canada now expects that Canada will have a hard time growing by 2 per cent in 2015.

Let's start the analysis close to the ground, with oil consumers and producers. The largest negative impact will be felt by firms in the Canadian oil industry, their suppliers and their employees. Oil producers have seen their sales price essentially cut in half over less than six months, although a depreciating loonie has helped to mitigate a bit of the impact on business revenues in Canadian dollars. But with revenues way down, producers will move to protect their bottom lines by cutting costs and resizing their operations.

In many cases, this adjustment will mean reduced investment spending in 2015 and layoffs. Indeed, the business adjustment has already begun for suppliers to the oil industry; manufacturing sales in Alberta fell 3.8 per cent in November from October, although these sales were still higher than a year ago. The oil industry's adjustment will be starting from a high level but pain will be felt across the supply chain and by the industry's work force.

Job losses, however, will not be confined to Alberta. Other parts of the country supply the oil industry with materials, services and workers. As the impact of lower prices flows through the industry, through lower investment and layoffs, other provinces will begin to feel these effects.

On the other side of the coin, the many consumers of oil products are quickly getting the benefit of lower prices – at the gas pump and elsewhere. Gasoline prices have fallen by more than a third since last summer, freeing up an estimated $1,400 a year for a typical family (more than $20 a week) that can be redirected to other uses. This small positive income effect will help support consumer confidence in oil-consuming regions.

The collapse of oil prices will have sharply differing effects on the regions. Alberta is Canada's largest oil producer by far and will experience the largest drop in real gross domestic product. The Conference Board's most likely scenario is for the province to slip into recession in 2015 and GDP to decline by about 1.3 per cent.

Newfoundland and Labrador, as well as Saskatchewan, will also face a slowdown in 2015 against previous expectations, although to a lesser degree than Alberta. We expect that Newfoundland and Labrador's very high dependence on oil royalties will have a severe impact on its provincial budget.

Ontario, Quebec and other oil-consuming provinces will benefit, mildly, from weaker oil prices. Stronger U.S. economic growth and a weaker loonie will help to boost export demand. It is worth emphasizing that the U.S. economy is a net winner from lower oil prices. Despite significant increases in domestic oil production over the past five years, the U.S. still imports about half the oil it consumes. As a result, lower oil prices will reduce import costs and help to fuel an already-strengthening U.S. economic recovery, adding 0.4 per cent to growth in 2015. However, this projected boost to U.S. growth is lower than it would have been a few decades ago, because America has become much more efficient in how it consumes energy.

An even more robust U.S. growth outlook will help to build demand for Canadian exports. Unfortunately, many Central Canadian industries are not ready to fully seize the opportunity. Years of weak investment and lack of attention to innovation mean that manufacturers are facing constraints on their productive capacity. Stronger business investment growth will be needed to take full advantage of the U.S. recovery.

In addition, services concentrated in Central Canada that are part of the oil industry supply chain will feel the negative effects of producers who have lower demand for their goods and services. As a result, manufacturing export gains in Central Canada will not make up for the impact of lower oil prices on the national economy.

The Conference Board now forecasts that Canada will once again have tepid growth of just 1.9 per cent this year, almost half a percentage point lower than our forecast last fall when oil prices were just beginning to slip. When the business, consumer and regional impacts are tallied, the overall impact of the oil price shock is clearly negative – due to the reality that we are a large net exporter of oil and are now earning much less revenue from those exports. The benefit to the winners is small; the losers are losing big.

Glen Hodgson is senior vice-president and chief economist at the Conference Board of Canada.