The recent bounce-back in the price of oil isn't likely to stop investment from continuing to fall in Canada's battered energy sector, Bank of Canada Governor Stephen Poloz says.
That's because the recent recovery in the price of crude, which has risen to near $50 (U.S.) a barrel from less than $30 earlier this year, is stalling, Mr. Poloz said in a speech Wednesday in Whitehorse, Yukon.
"An extended period of oil prices at recent levels is unlikely to lead to greater investment spending in the Canadian oil patch," he added. "Indeed, market intelligence suggests there is further downside risk to investment at these still-low prices."
He said oil prices, which reached more than $100 a barrel in 2014, won't regain those lofty heights in "the foreseeable future."
Oil and gas producers have already cancelled or delayed several major oil sands projects, curtailed drilling and laid off thousands of workers in Alberta, Saskatchewan and Newfoundland.
That has hammered business investment in Canada. In the energy sector alone, investment this year is expected to be 60 per cent below 2014 levels – representing billions of dollars worth of lost economic activity.
U.S. shale-oil producers are successfully cutting costs, allowing them to bring supply back on stream profitably. Mr. Poloz said this boost in oil supplies will keep a lid on further price gains.
On the positive side, the Bank of Canada now estimates that the economic fallout from the massive Fort McMurray fire could be slightly less severe than it initially thought. The central bank says the blaze will knock one to 1.25 percentage points off gross domestic product – the broadest measure of the economy – in the second quarter. It previously estimated the hit would be 1.25 percentage points.
This lost output is expected to be made up between July and September, he said.
The net result is that Canada's economy will be flat or shrink in the second quarter and "show an outsized recovery" in the third quarter, according to Mr. Poloz.
The economy is likely to be "very choppy" through to the end of the summer, he said.
The U.S. Federal Reserve opted again Wednesday to delay planned interest rate hikes. Fed chairwoman Janet Yellen cited the looming British vote on leaving the European Union and a recent slowdown in U.S. job creation for holding off.
Most economists don't expect the Bank of Canada to start raising its key rate until late next year.
Longer term, Mr. Poloz insisted he's optimistic that Canada's economy is on the right track. There is continuing evidence that exports outside the energy sector are coming back, buoyed mainly by the gradually strengthening U.S. economy, he said.
"Many firms are close to their capacity limits, which augurs well for future investment and new job creation," he said. "So while the whole process has been disappointingly slow and uneven, we remain confident that we have the right narrative."
He noted in particular that exports of building materials, furniture and fixtures, as well as pharmaceuticals, are all up strongly and have regained pre-recession levels. Tourist spending in Canada is also way up as more Americans take advantage of the cheaper Canadian dollar and fewer Canadians head south.
Mr. Poloz acknowledged that the recovery from the resource price shock continues to be bumpy. "The process has been uneven, and probably will remain so, but we are making real progress," he said.