The Bank of Canada is adding the downward drift in prices for oil and other commodities to its catalogue of threats to economic growth.
In a one-page statement on his latest interest-rate decision Tuesday, Governor Mark Carney mentioned oil or commodity prices four times. To many economists and analysts, this was a clear hint of growing concern as oil prices, while still historically high, inch downward to $80 (U.S.) a barrel – considered an unofficial breaking point at which investment in energy projects could stall, putting jobs at risk.
Mr. Carney, who left his main interest rate at 1 per cent Tuesday and will release a full quarterly forecast on Wednesday, noted that the "sizable reduction" in commodity prices owing to slower global growth is keeping inflation in check and could mean cheaper gasoline well into next year. However, he also cut his 2012 and 2013 projections for the economy, in part because the consumption and business investment he is counting on to drive growth will be held back by "the effects of lower commodity prices on Canadian incomes and wealth."
Oil still costs close to $90 a barrel on global markets, a far cry from a low of $35 reached during the thick of the 2008-2009 financial crisis. Still, prices are down 10 per cent from the start of 2012, as demand from big emerging markets like China cools off, and as anxiety linked to the European debt crisis pushes investors away from commodities and toward relatively risk-free securities such as the U.S. dollar.
Should oil fall below $80 a barrel, the current slowdown in energy-related investment could turn into a freeze.
"That $80 threshold seems to be an important mark," said Mark Chandler, head of Canadian fixed-income and currency strategy at RBC Dominion Securities, citing oil-and-gas analysts who recently returned from visits with exploration firms in Alberta's oil patch. "If prices stayed at [current] levels, you'd still be at the high-water mark for a lot of projects, so maybe it's not that damning. But there's not as much cushion as there was before."
Indeed, in mid-May, Réal Cusson – a senior executive with Canadian Natural Resources Ltd. – told The Globe and Mail that companies would flirt with trouble if the price of crude dipped to $85, which explains why some, such as Calgary-based producer Crescent Point Energy Corp., have already started to put off drilling projects.
Plus, with so many households invested in energy stocks linked to a healthy commodities sector, the impact on Canadians' incomes is already being felt. Economists warn this could more than offset the break consumers are getting from slightly lower gasoline costs.
"This adds more uncertainty about growth forecasts for Canada," said Stéfane Marion, chief economist at National Bank Financial in Montreal. "If you think commodity prices remain under pressure, then it's obviously a situation where consumption and business investment are likely to disappoint over the next few quarters."
Since 2009, Mr. Marion noted, Canadians' gross domestic income has grown about 60 per cent faster than gross domestic product, about 3.8 per cent a year versus roughly 2.4 per cent a year. That's mainly because of the "wealth effect" from higher commodity prices as they boosted average incomes, spurring investment, hiring and consumption across the country.
That helps explain why, while families benefit at the gas pump and manufacturers in Central Canada get a break on their expenses, economists view the overall impact of what Mr. Carney said could be "persistently lower oil prices" – based on futures prices – as a negative.
Mr. Carney will likely shed more light on this in his forecast and at a press conference in Ottawa late Wednesday morning. On Tuesday, though, he offered a teaser of sorts, cutting his economic growth projections for 2012 and 2013 to 2.1 per cent and 2.3 per cent, respectively, from his April prediction of 2.4 per cent in each year.
And he moved back the time line for when the economy will be back at full capacity, to the second half of 2013 from the first, another sign he sees little urgency to raise interest rates.
With files from reporters Carrie Tait in Calgary and Ora Morison in Toronto