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High gasoline costs like ‘tax hike’ as Canada-U.S. price gap swells

These are stories Report on Business is following Thursday, May 22, 2014.

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The toll of the pump
The high cost of gasoline is rippling through the Canadian economy.

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The gap between Canadian and U.S. pump prices has swelled to what National Bank of Canada says is now a record, with elevated costs diverting consumer spending.

The higher-than-normal seasonal increases "acted as a tax hike in Q1, leaving less cash for households to spend on other items," said National Bank senior economist Krishen Rangasamy.

"Note that the gasoline share in total retail spending was close to record highs in the first quarter, in sharp contrast to the declining share seen south of the border," he added in a research note today.

"In fact … the gap between Canada and the U.S. was the largest ever in Q1."

Senior economist Sal Guatieri of BMO Nesbitt Burns puts that gap, in U.S.-dollar terms, at about 30 per cent.

"Although U.S. gasoline prices have risen 10 per cent this year, they remain within the relatively narrow band established in the past three years," Mr. Guatieri said earlier this week.

"Canadian drivers haven't been as lucky of late, no thanks to a weaker loonie," he added.

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Overall consumer spending was "soft" in the first quarter of the year, said Mr. Rangasamy. That's partly because of a jobs market that has been "far from stellar," but also because of high gas prices.

One of the reasons for that fat price gap is that eastern Canadian refineries import pricier Brent oil, compared to the U.S. Western Texas Intermediary.

Sales slip
Canadian consumers indeed pulled in their horns in March, putting the retail sector on hold as the first quarter ended.

Retail sales inched down 0.1 per cent across the country, Statistics Canada said today, largely because of declines at car dealerships and clothing stores.

Gas stations and food outlets posted gains, however.

In straight volume terms, sales slipped by 0.2 per cent, falling in seven of the sectors measures, or 59 per cent of across all of them.

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The March decline put a stop to the overall increases seen in January and February.

"Note that both building material sales (-0.4 per cent) and clothing (-1.4 per cent) were down significantly, suggesting cooler-than-normal weather in March may have played a role," said Nick Exarhos of CIBC World Markets.

RBC posts solid results
Royal Bank of Canada today reported a solid second-quarter profit of $2.2-billion, with earnings climbing in all three of its biggest units.

RBC benefited from big boosts to the bottom line of its wealth management and capital markets arms, as well as better results in personal and commercial banking, The Globe and Mail's Tim Kiladze reports.

The bank's $2.2-billion profit amounted to $1.47 per share, 15 per cent more than the same period in 2013. Adjusted for non-cash items, earnings per share of $1.49 beat analyst expectations of $1.44.

TD profit climbs
Toronto-Dominion Bank reported its second straight $2-billion quarterly profit, with strong earnings from both its Canadian and U.S. operations.

Instead of relying on one unit to drive earnings growth, TD benefited from boosts to many bottom lines, including its Canadian retail operations, its wealth management business and its U.S. personal and commercial banking arm, Mr. Kiladze writes.

TD's core earnings amounted to $1.99-billion, or $1.04 per share, up 17 per cent from the year prior. After stripping out one-time items, TD made $1.09 per share, handily beating analyst expectations of $1.02 per share.

Debt and taxes
Moody's Investors Service is warning some of Canada's provinces to get their act in gear lest their credit ratings face further pressure.

Moody's, one of the world's major agencies, didn't single out any province in a new report released yesterday, pointing out that seven are in deficit.

But its debt-to-revenue measure puts Ontario at the top of the naughty list.

Ontario, of course, is in the midst of an election campaign that pits the Liberals against the Conservatives as to who forms the next government.

The governing Liberals have presented a credible budget for these uncertain times, though it misses their original short-term target, forecasting a $12.5-billion shortfall, while still pledging to balance the books in line with the longer-term plan.

They also plan a jobs fund, billions in infrastructure spending and a focus on social services.

The Tories, on the other hand, promise to balance the books far earlier, slash public sector positions and create a million jobs over an eight-year period, the latter being a wonderful catch-phrase but about as unrealistic as election promises come.

Both parties should take note of the latest from Moody's, which puts net debt as a percentage of revenue at 237.7 in the 2014-15 fiscal year, the highest in the country.

Not only the highest, actually, but far and away above the next in line, Quebec, at 189.5.

The lowest is Alberta, at 31.9.

Alberta and British Columbia are alone among the provinces in holding a triple-A rating with Moody's, the former deemed "stable" and the latter "negative."

"Most Canadian provinces maintained their ratings and stable credit outlook through the financial crisis and subsequent slow recovery," Moody's said in its report.

"However, the continued accumulation of debt and difficulty in returning to balanced budgets is increasing negative credit pressure for some provinces."

Moody's noted that several of the provinces are reluctant to cut spending growth much more. Health care, in particular, is going to be a big issue.

"With populations aging in many provinces, health care will continue to be an expense that we will monitor carefully in terms of pressure it applies on fiscal outcomes."

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